What is a 1031 Exchange?
September 17, 2019

What is a 1031 Exchange?


As a commercial real estate brokerage firm in Brooklyn, we work with many buyers and sellers searching for a 1031 exchange. IRC Section 1031 allows an investor to sell a property, reinvest the money from the sale into a new property and defer the capital gains tax from the sale.


A 1031 exchange allows an investor of a commercial property or any investment, rental, or vacant land used in business or as a source of income, to sell the property and reinvest the acquired funds toward the purchase of a similar or like property in order to defer all capital gains taxes. 1031 buyers must keep in mind that the exchange must happen within a structured, time-sensitive process, the purchased property must be of an equal or higher value to the sold property, there must not be any cash received, and there can be no debt relief to avoid the income tax.

1031 Exchange Key Facts

  • A seller must use an intermediary entity to handle the buying and selling transactions.
  • A 1031 exchange is only applicable for investment or business property, not personal use property.
  • The property owner has 45 calendar days, post‐closing of the relinquished property, to identify in writing and deliver to the seller/intermediary up to three potential replacement properties that are similar.
  • To qualify under a 1031 exchange, the intermediary on the seller’s behalf must also purchase all replacement properties within 180 calendar days following the closing sale of the relinquished property.


  1. Simultaneous – Allows investors to sell and close on a replacement property in the same day.
  1. Delayed – This is the most common scenario. Delayed 1031 exchanges allow investors to sell their investment property first and find a replacement property within a 45-day period.
  1. Reverse – The seller would buy the replacement property first and then sell their original property. These exchanges need to be an all-cash purchase.
  1. Construction/Improvement – If an investor buys a property that’s worth less than the original sale, they can use the rest of the money from the 1031 exchange to improve the property you want to buy. Investors must keep in mind that the residual funds will be taxed.

A 1031 exchange gives the investor a tremendous increase in purchasing power and provides the benefits of leverage, diversification, management relief, and increased cash flow/income.

  • Leverage – Investors can take advantage of the 1031 tax-deferred exchange to acquire a more valuable investment property. By utilizing the money, they would have paid to the IRS in taxes, they can increase their down payment and acquire a more expensive replacement property. Thus, leveraging their cash and continuing to build wealth through real estate investment.
  • Portfolio Diversification – Investors can sell one larger property to acquire numerous smaller properties at potentially flatter prices or relocate investment properties to another area of the country with faster appreciation.
  • Management Relief – Investors that own several rental properties are often faced with the burdens of intensive management and costly maintenance-which often leads to increased headaches! An investor can increase profits and decrease time and effort by exchanging out of high maintenance rental properties and consolidating into an apartment building or NNN leased investment.
  • Increase Cash Flow – Investors can exchange raw land which produces no income for an improved property which can be rented to create positive cash flow.
  • Exchange from a fully depreciated property into a higher valued property that can be depreciated further.

Want to know more about 1031 exchanges? One of the best ways to find out about deals that would work for your potential 1031 exchange is to work with a commercial real estate agent in Brooklyn. Brokers keep up with all the market trends for their neighborhood and asset types they concentrate in and connect you to a property on the market fitting your needs. If you’re interested in a 1031 exchange in Brooklyn, be sure to give us a call at 718-768-7688 or Matt Cosentino, an expert on 1031 exchanges.