1031 exchanges and value-add, explained by someone who does them.
Sell an investment property, roll the gain into the next one, and put the money to work where the upside is. Here's how the timeline works, what trips people up, and how I help you find a replacement property that fits.
The 1031 basics
A 1031 exchange lets you sell real estate held for investment or business use and defer the capital gains tax by buying other investment real estate. The rules are strict, so the clock and the paperwork matter.
Identify
From the day your sale closes, you have 45 days to identify, in writing, the replacement properties you might buy.
Close
You have to close on the replacement within 180 days of the sale (or by your tax return due date, if that comes first).
Qualified intermediary
Sale proceeds go to a qualified intermediary, not to you. If you touch the money, the exchange can fail.
Investment for investment
Real estate held for investment can go into almost any other investment real estate: a duplex into a fourplex, land into a rental, and so on. Your own home doesn't count.
How an exchange runs with me
I plan the replacement before you list, so the 45-day clock isn't a scramble.
- Plan before you listTalk to your CPA about the gain and what you need to buy to defer all of it. We set a target price range, area and property type.
- Line up the qualified intermediaryThe exchange agreement has to be in place before your sale closes.
- Start the search earlyI pull on-market and off-market options (including my Deal Room) and underwrite each one: rents, repairs, financing and exit.
- Identify within 45 daysMost people name up to three properties as backups, so one falling through doesn't sink the exchange.
- Close within 180 daysInspections, appraisal and financing are timed so you close with room to spare.
Where value-add fits
An exchange is a good time to trade up into a property with upside, if the rehab plan is realistic. I started out renovating houses, so I look at the roof, foundation and mechanicals before I look at the pro forma.
Trade up in units
Roll a single-family or duplex into a fourplex or small multifamily for more rent per dollar and spread-out vacancy risk.
Under-rented properties
Leases well below market are the most common upside. I check market rent with RentCast and real comps, not guesses.
Cosmetic, not structural
Paint, floors, kitchens and baths pay back faster than foundations and sewer lines. I'll tell you which is which on the walkthrough.
Debt matters too
To defer all the tax, you generally replace the debt you paid off as well as the value. Your CPA and lender should check the numbers.
Common mistakes to avoid
- Selling before the qualified intermediary is set up.
- Waiting until after closing to start looking, then rushing the 45-day list.
- Taking cash out at closing. Cash you receive (called boot) is generally taxable.
- Buying something that cash flows on paper but needs a roof, a sewer line and a furnace in year one.
- Assuming a vacation home or a fix-and-flip qualifies. Ask your CPA.
This page is general information, not tax or legal advice. 1031 rules have exceptions and details that depend on your situation. Talk to a CPA or tax attorney and a qualified intermediary before you sell. Blake Park is a licensed REALTOR® with Reafco Real Estate, not a tax advisor.