1031 Exchange Rules and Information

Our goal is to help investors stay educated by providing straightforward, unbiased 1031 exchange information for 2024 by providing:

1031 tax-deferred exchanges allow investors to defer paying capital gains tax by reinvesting funds from property sales back into their real estate portfolios. Section 1031 Exchanges are a key tool educated investors use to benefit from existing tax regulations and preserve and grow investment capital in any economic cycle.

Important Questions About Your Real Estate Investments & 1031 Exchanges

To get the most out of their on-going education, it’s important for investors to ask themselves three important questions about real estate investing:

  1. What are the IRS 1031 exchange rules?
  2. What is my real estate investment timeline?
  3. Have I researched available 1031 exchange information?
  4. Does passive investing make more sense than doing everything myself?

1031 Exchange Rules

  • Seller must never take possession of funds from the relinquished property
  • Replacement property must be like-kind real estate
  • Real estate must be used for investment or business, and not be considered stock in trade or personal property
  • Property replaced must be of equal or greater value to the property being relinquished
  • Title of the relinquished property and the replacement property must be in the same taxpayer name
  • Replacement property must be identified within 45 days of closing on the sale of the relinquished property
  • Replacement property must be purchased within 180 days of closing on the sale of the relinquished property

Article: Three Most Common Ways Investors Blow Their 1031 Exchange

What is My Real Estate Investment Timeline?

A good way of thinking about a timeline for investing in real estate is to consider how important liquidity will be to you 5, 15, and even 30 years or more from now.

Historically, real estate has been an attractive way to build wealth over the long term. The trade-off is that capital invested in real estate is illiquid. Unlike shares of a publicly traded stock, real estate can’t be bought and sold at the push of a button on your computer keyboard.

Because real estate lacks liquidity investors should understand if and when they’ll need to turn their investments into cash and identify a real estate investment timeline accordingly.

Have I Researched Available 1031 Exchange Information?

Owning real estate gives a unique combination of three benefits that many other investments do not offer:

  • First, investment real estate provides two cash flow streams: short-term through the monthly net income and long-term through the appreciation of the real property when it is sold.
  • Second, tax law allows owners of real estate to reduce their annual cash income from the property by deducting a non-cash depreciation expense. This allows investors with positive net cash flow to reduce the amount of taxable income from their real estate investments.
  • Third, Section 1031 tax deferred exchanges allow real estate investors who sell a like-kind property and replace it with another piece of real estate to defer paying the tax on any capital gains resulting from the exchange transaction. In our NASIS 1031 Exchange Guide we illustrate how one investor was able to grow the value of his real estate investment portfolio by nearly 70% by deferring the payment of capital gains tax and reinvesting the sales proceeds in like-kind real estate.

Does Passive Investing Make More Sense Than Doing Everything Myself?

Most people begin investing in real estate in their spare time. They purchase a single-family home, rent it out to tenants, and manage the property themselves. That’s a common example of active real estate investing where the owner does everything.

However, when you’re hands-on it’s difficult to scale up and grow a real estate investment portfolio. Active real estate investing takes a lot of time and also limits the type and quality of property that can be invested in.

Passive real estate investing through an experienced real estate sponsor, like NAS Investment Solutions, can enable an investor to save time and expand the available type and quality of investment. By placing capital in a DST or TIC structured vehicle, investors have access to institutional-grade commercial real estate such as multifamily and student housing, and office, medical, warehouse, and industrial flex income property in both primary and high-yield secondary markets.

NAS Investment Solutions’ investment properties have been professionally underwritten and are managed by a team of professionals that have a wealth of experience in managing hundreds of investment properties across the country. DST and TIC real estate investments can offer an attractive 1031 opportunity, which can be precisely sized to meet the investor’s specific needs, and they can also be employed as part of an investor’s strategy to diversify his or her portfolio.

Frequently Asked Questions

  • What are the advantages of a DST-Structured investment in commercial property?

    There are numerous advantages to investing in a DST structured property offering.

    • The purchase of DST interests is simpler, faster and does not require as many documents as buying sole ownership of a property.
    • Capital Gains are deferred, if investment is for a 1031 Exchange
    • No daily property management obligations that come with sole ownership
    • Ability to create a diversified real estate investment portfolio
    • Cash flow distributions
    • Annual depreciation/tax deductions
    • Appreciation upon sale of the property
    • Upon the sale of a DST property, the investor may engage in a 1031 exchange, even if the DST interest was purchased without 1031 exchange proceeds.
    • A DST is a pass-through tax entity, which is not subject to federal income tax, nor to the Delaware franchise or income tax.
    • Because the DST is the mortgage borrower, the lender does not require individual DST investor guarantees, nor does the lender require investors to submit personal financial information to qualify for the mortgage loan.
    • Investors with interest in a DST property are protected from property liabilities held by the DST. As a result, the maximum pre-tax loss (excluding income tax considerations) is equal to the amount invested in the DST.
  • Are there a minimum and maximum investment amounts to participate in a DST property offering?

    • Yes; $50,000 to $100,000 are typical minimum investment amounts but this may vary from sponsor to sponsor.
    • The maximum amount is contingent on the overall size of the DST offering and the discretion of the DST Sponsor.
  • Are DST-Structured properties commonly used for a 1031 Exchange?

    Interests in Delaware Statutory Trusts are the primary investment method for fractional 1031 exchange investments at this time.

  • Are there any restrictions on a DST-Structured Investment?

    • The IRS places several prohibitions on the power of DST trustees if the Delaware Statutory Trust is to be used with a 1031 tax deferred exchange. There are seven restrictions, sometimes referred to as the ‘Seven deadly sins of a DST’:
      • Once a DST offering is closed there can be no further contributions by current owners, new owners, or beneficiaries.
      • Existing loan terms cannot be renegotiated, nor can new funds be borrowed, by the DST trustee.
      • Sales proceeds from the investment real estate cannot be reinvested by the DST trustee.
      • Capital expenditures can only be made by the DST trustee for normal repair and maintenance, minor non-structural capital improvements, or those required by law (such as items related to zoning codes).
      • Liquid cash held by the DST between distribution dates can only be invested in short-term debt obligations.
      • All cash in excess of necessary reserves must be distributed to investors.
      • New leases or re-negotiations of current leases may not be entered into by the DST trustee.
  • How does an investment in a DST-Structured property differ from an investment in a TIC-Structured property?

    • Like TICs, DSTs have multiple investors that purchase fractional interests and the investors share in the total financial performance of the underlying investment property. However, the primary differences between the two investment structures are:
      • A DST is not limited to a maximum of 35 investors required by Revenue Procedure 2002-22.
      • DST investors (Beneficiaries) are purchasing a beneficial interest in a trust and do not receive deeded property.
      • Beneficiaries in a DST are not necessarily required to form single-member Limited Liability Companies (LLCs).
      • Beneficiaries do not have voting rights or operational control of the property.
      • In a DST structure, there can be no cash calls or additional money invested into the property beyond typical maintenance and certain capital expenditure needs, unlike in TICs.
  • What is a 1031 Exchange?

    A 1031 exchange is a swap of one real estate investment property for another in a specific way that allows for capital gains taxes to be deferred.

  • How a 1031 Exchange is Accomplished?

    There are seven recommended steps common to most Section 1031 tax deferred exchange:

    BEFORE YOU CLOSE ON THE SALE OF THE RELINQUISHED PROPERTY:

    Step 1: Consider retaining the services of a certified public accountant or an attorney with tax deferred exchange experience to assist in planning for an exchange.

    Step 2: Engage a Qualified Intermediary, or “QI,” (also called an Accommodator), being sure to name the QI as the principal in the sale of the relinquished property and in the purchase of the replacement property.

    Step 3: Sell the relinquished property, making sure to include a cooperation clause requiring the buyer to cooperate with the seller’s 1031 exchange, and instruct the escrow officer or closing agent to order exchange documents from the QI.

    AFTER CLOSING THE SALE OF THE RELINQUISHED PROPERTY

    Step 4: Escrow closes on the relinquished property, with the closing statement showing the QI as the seller, and sales proceeds from the relinquished property are sent to the QI and placed in a separate segregated trust account.

    FAILURE TO SEND SALES PROCEEDS DIRECTLY TO QUALIFIED INTERMEDIARY FROM ESCROW WILL RESULT IN INABILITY TO EXCHANGE.

    Step 5: Within 45 calendar days of the close of escrow of the relinquished property the exchanger identifies one or more replacement properties and sends written notice of this to the QI.

    Step 6: The exchanger executes a purchase contract with the seller of the replacement property, making sure the cooperation clause is included in the purchase contract, and naming the QI as the buyer of the replacement property.

    Step 7: Within 180 calendar days of the close of escrow of the relinquished property, the exchanger instructs the QI to transfer funds to close escrow and sends 1031 exchange-related documents to the escrow company, and the sale closes with the closing statement showing the QI as the buyer on behalf of the exchanger.

    • After the replacement property has closed escrow, the QI will send a final accounting statement to the exchanger. The statement will show that funds have come from one escrow directly into another, all without the taxpayer having constructive receipt of the funds.
    • Real estate investors should note that although the qualified intermediary is indicated as the seller and buyer on the purchase contracts, the deed and title are always from the taxpayer to the buyer, and from the seller to the taxpayer.
  • What qualifies as a “like-kind” replacement property?

    • The definition of a qualifying like-kind property is very broad, for both the sold property and the replacement property: real estate used for investment or business purposes. Personal use property is not eligible.
    • Investment real estate (held for either appreciation or for rental) can be exchanged for real property used in a trade or business. Partial interests such as TICs or DSTs, are exchangeable with other types of real property.
  • How is a replacement property identified?

    A like-kind replacement property is identified if it is designated as replacement property in a written document signed by the exchanging party and received by the QI before the end of the 45-day identification period. Every QI uses their own form of documentation. Please consult with your QI to determine the exact procedure they require.


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Estimate the Tax Rate For Your State

Many states impose a tax on capital gains, in addition to the federal tax rate. Each state also has their own methodology for calculating the tax. Our calculator will help estimate the top marginal tax rate for your state.  Select your state from the drop down menu and your state’s taxes will be automatically estimated. The combined rate includes additional federal taxes at the tax rate of 20% based on head of household income over $523,050.

View Rates For All States

The information provided here is for your general informational purposes only. These are only estimates and should not be taken as fact or considered a recommendation or personalized advisory advice. NAS Investment Solutions, LLC has made this third-party information available from sources it believes are knowledgeable and reliable. However, its accuracy or completeness cannot be guaranteed and actual rates may change due to legal or economic conditions.

All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.

California Top Marginal Tax Rate on Capital Gains 33.30%

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State Rate 2024
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Combined Rate 2024
45180 exchange calculator

45/180 Exchange Calculator

We've provided a calculator to help you estimate your 45-Day Deadline for identifying a 1031 Exchange Replacement property and the 180-Day Deadline to have your exchange transaction completed.

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capital gains tax rates by state

Capital Gains Tax Rates by State

This is a reference guide to give to you an idea of the top marginal tax rate for your state as of January 2023. Tax rates are based on state plus federal max rate at 25% for unrecaptured Section 1250 gains.

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frequently asked questions

Frequently Asked Questions

Real estate investing and 1031 Exchanges bring a lot of questions. We've put together a list of those asked most frequently. Have a question not on the list? Contact us and we'll be happy to give you an answer.

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