What is a 1031 exchange and who can use it?

A 1031 exchange is a tax-deferral strategy that may allow investors to defer capital gains tax by exchanging one investment or business-use property for another. It generally does not apply to primary residences.

What are the key deadlines in a 1031 exchange?

The 45-day identification period and the 180-day exchange period both start from the sale (closing) date of the relinquished property. Replacement property must be identified within 45 days and acquired within 180 days.

What are the 3-property, 200% and 95% identification rules?

Investors must satisfy one identification standard: the 3-property rule (identify up to three properties of any value), the 200% rule (identify any number of properties as long as total value does not exceed 200% of the relinquished property’s value), or the 95% rule (identify any number/value but acquire at least 95% of what was identified).

Why is a Qualified Intermediary required?

A Qualified Intermediary (QI) holds the sale proceeds so the investor does not take constructive receipt of the funds. The QI agreement must generally be executed before the original property closes.

What is “boot” and when can it create tax liability?

Boot is value received that is not like-kind replacement property, such as cash taken out or certain debt reductions not offset with cash. Boot can trigger taxable gain even if the exchange is otherwise completed.

How to Use a 1031 Exchange to Defer Taxes and Grow Your Real Estate Portfolio

In New York City and across the U.S. real estate market, the 1031 Exchange is widely regarded as one of the most powerful and legally sanctioned tax-deferral strategies for investors seeking asset upgrades and portfolio expansion. When structured properly, a 1031 Exchange allows investors to redeploy capital into higher-quality or larger-scale properties while deferring capital gains taxes—supporting long-term, compounding growth.

A 1031 Exchange, as defined under Section 1031 of the U.S. Internal Revenue Code, allows real estate investors to defer capital gains taxes by reinvesting proceeds from the sale of an investment or business-use property into another qualifying property.

Rather than triggering a taxable event upon sale, investors can preserve capital and continue compounding their real estate portfolio—making the 1031 Exchange a core strategy for long-term asset growth.

The 1031 Exchange Process

1. Sale of the Relinquished Property

The investor sells the original investment or commercial-use property.

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2. Proceeds Held by a Qualified Intermediary (QI)

All sale proceeds must be transferred directly to a Qualified Intermediary.

The investor may not take possession or control of the funds at any time.
The QI agreement must be executed before the original property closes.

↓ (45-day clock begins)

3. 45-Day Identification Period

Within 45 days of the sale closing date, the investor must formally identify replacement properties in writing.

The identification must comply with one of the IRS-approved identification rules.

↓ (180-day clock runs concurrently)

4. 180-Day Exchange Completion Period

Within 180 days from the closing date of the relinquished property (not from the end of the 45-day period), the investor must:

Complete the purchase and closing of the replacement property
Fully comply with all exchange and funding rules

Failure to meet any timing, identification, or fund-handling requirement will result in the exchange being disqualified, triggering standard capital gains taxation.

Replacement Property Identification Rules

During the 45-day identification period, the investor must satisfy one of the following rules:

Three-Property Rule
- No limitation on total value
- Identify up to three replacement properties
200% Rule
- Identify any number of properties
- Total combined value may not exceed 200% of the relinquished property’s sale price
95% Rule
- Identify any number of properties with no value limit
- Must acquire at least 95% of the total identified value

Key Requirements and Considerations

Eligible Property Use
- Both the relinquished property and the replacement property must be held for investment or income-producing purposes
- Primary residences do not qualify
A 1031 Exchange applies only to investment or business-use properties.
Value and Debt Requirements
To fully defer taxes:
- The purchase price of the replacement property must generally be equal to or greater than the sale price of the relinquished property
- The new mortgage debt must be equal to or greater than the old mortgage balance
Boot and Taxable Gain
Any reduction in purchase price or debt not offset by additional cash investment may be treated as boot, which can trigger partial taxation.
Cash Contributions
If the replacement loan amount is lower, investors may contribute additional cash to maintain full tax deferral eligibility.

The 1031 Exchange is highly sensitive to timing, fund control, and procedural compliance. Even minor missteps can invalidate the exchange and result in immediate tax liability.

Investors are strongly advised to plan in advance and work closely with experienced real estate professionals, CPAs, and Qualified Intermediaries who are familiar with Internal Revenue Service regulations and exchange mechanics.

At Acre, our experienced brokerage team collaborates with long-standing accounting partners to help clients structure and execute 1031 Exchanges efficiently and compliantly. By aligning transaction strategy with tax planning, Acre supports investors in upgrading assets, scaling portfolios, and navigating complex exchanges with greater confidence.

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