Section 1031 Exchange: The “Swap Till You Drop” Strategy
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Tax Tips / Real Estate
Section 1031 Exchange: The “Swap Till You Drop” Strategy
💡 Executive Summary
- Problem: Selling appreciated real estate triggers Depreciation Recapture (25%) + Capital Gains (20%) + NIIT (3.8%).
- Solution: A 1031 Exchange allows you to roll 100% of proceeds into a new “Like-Kind” property.
- Result: Taxes are deferred indefinitely. If you hold until death, the tax liability vanishes completely (Step-up in Basis).
⚠️ THE “TOUCH” RULE
You generally cannot touch the cash. The proceeds from the sale must go directly to a Qualified Intermediary (QI). If the money hits your personal bank account for even one second, the tax shield is shattered.
You generally cannot touch the cash. The proceeds from the sale must go directly to a Qualified Intermediary (QI). If the money hits your personal bank account for even one second, the tax shield is shattered.
Real estate wealth is not built by selling and paying taxes; it is built by “trading up.” The 1031 Exchange is the engine that allows Tier L2+ investors to compound their gross equity, not their net after-tax equity.
🧐 Core Definition: “Like-Kind”
Since 2018 (TCJA), this applies ONLY to Real Estate. The definition is broad: You can swap a rental condo in Florida for a warehouse in Texas, or raw land for an apartment complex.
Since 2018 (TCJA), this applies ONLY to Real Estate. The definition is broad: You can swap a rental condo in Florida for a warehouse in Texas, or raw land for an apartment complex.
Performance Simulation
Growth Over 20 Years (Starting $2M)
Sell & Pay Tax (Reinvest Net)
Tax Erosion Drag
$6.5M Net
1031 Exchange (Deferral)
Full Compounding
$11.8M Net
The Critical Timeline (No Extensions)
| Deadline | Action Required | Consequence |
|---|---|---|
| Day 0 | Sale Closes (Funds to QI) | Clock Starts |
| Day 45 | Identification Period | Must list potential properties |
| Day 180 | Exchange Complete | Must close on new property |
“Defer, Defer, Die. It sounds morbid, but it is the most efficient tax strategy in the real estate playbook. Your heirs receive the property at current market value, tax-free.”
🔗 Related BMT Playbooks (Internal)
🛡️ Passive 1031: DSTs for “Hands-Off” Investing 📉 The End Game: Understanding Step-up in Basis ✅ Alternative: QSBS for Business Exits (Not Real Estate)🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 1031 (Exchange of Real Property) 🏛️ IRS Pub 544: Sales and Other Dispositions of Assets ⚖️ Regulation: Treatment of Deferred Exchanges (The 45/180 Rules)
BMT designs for tax reality, not theory.