In real estate, a 1031 exchange is a swap of one investment property for another that allows captial gains taxes to be deferred.
IRS Section 1031 has many moving parts that real estate investors must understand before attempting its use. An exchange can only be made with like-kind properties and IRS rules limit use with vacation properties. There are also tax implications and time frames that may be problematic. Still, if you're considering a 1031—or are just curious—here is what you should know about the rules.
In a typical Internal Revenue Code (IRC) §1031 delayed exchange, commonly known as a 1031 exchange or tax deferred exchange, a taxpayer has 45 days from the date of sale of the relinquished property to identify potential replacement property. This 45-day window is known as the identification period. The taxpayer has 180 days (shorter in some circumstances) to acquire one or more of the identified properties, which is known as the exchange period. Property(ies) actually acquired within the 45-day identification period do not have to be specifically identified.
The rules can apply to a former primary residence under very specific conditions.
What Is Section 1031?