What Is A 1031 Exchange? (in Real Estate)
The 1031 exchange is one of the most powerful tools an investor can have in their arsenal for building wealth in real estate. It can help you improve your passive income, simplify property and asset management, assist with your estate planning, diversify your portfolio, and so much more. So, let’s dive on in to “What Is A 1031 Exchange?” in the real estate world.
Section 1031 of the IRS Tax Code
The 1031 exchange gets its name from section 1031 of the Tax Codes from the Internal Revenue Service (also known as the IRC). This exchange is more commonly referred to as the “like-kind exchange” whereby you can sell the property that you own, defer capital gains taxes, and transfer that cash into a new property. Essentially, it’s a tax break that allows you to kick the can down the road on paying capital gains taxes, which can be as high as 20% on the gain, and keep that cash in play.
An Example of a 1031 Exchange
Let’s walk through a quick scenario to show you how a 1031 exchange might work.
You bought a shopping center for $250,000 10 years ago and today it is worth $1,000,000. If you sold it and cashed out, you’d be responsible for paying 20% taxes on the gain of $750,000 (today’s value minus your initial basis), which would be approximately $150,000 to the government.
However, you have the opportunity to execute a 1031 exchange and keep that $150,000 in cash in play by identifying a new asset. If you buy the next asset right, you’re getting a return on that cash and snowballing your wealth.
There Are Rules!
It’s absolutely critical that you follow all of the rules of section 1031 of the Internal Revenue Code to ensure that you properly qualify for the tax benefits of a 1031 exchange. These rules include:
Identification timelines
Valuation guidelines
Proper use of a qualified intermediary
And more
The 1031 exchange is great but if you don’t follow these rules to a T, there’s a chance you won’t qualify. Dive deeper into 1031 exchanges here:
Every great investment starts with a plan—and that plan should always include an exit strategy. Whether you’re just entering the world of commercial real estate or you’ve built a strong portfolio of flex space properties, knowing when and how to sell is essential. The right exit can unlock new opportunities, reduce your tax burden, and help you maximize returns on your initial investment.
Flex space, in particular, has become a valuable asset in today’s commercial real estate market thanks to its adaptability and high tenant demand. But markets shift, tenant needs evolve, and your own goals will likely change over time. Maybe you want to 1031 exchange into a larger asset, cash out to diversify your holdings, or simply capitalize on current market highs. Whatever your reason, having a well-timed and well-executed exit strategy is the key to realizing the full potential of your investment.
In this article, we’ll break down the core components of a smart exit plan for flex space investors: identifying the right time to sell, preparing your property, choosing the best sale strategy, and building the right team to get the job done.