How Smart Investors Defer Taxes with a 1031 Exchange
For real estate investors nearing retirement — especially those who’ve owned property for years — the idea of selling can come with a sense of dread. Not because the market is bad. Not because the deal isn’t right. But because of one unavoidable reality: taxes.
When you sell investment property, you don’t just cash out and walk away. You face capital gains taxes, depreciation recapture, and potentially tens or even hundreds of thousands of dollars lost to the IRS. That’s where a powerful strategy known as the 1031 exchange comes in.
Named after Section 1031 of the Internal Revenue Code, this provision allows you to sell a property and reinvest the proceeds into a similar (or “like-kind”) property — without paying taxes on the sale. If done right, a 1031 exchange lets you defer taxes, preserve your full equity, and keep your investment dollars working for you.
This isn’t a new loophole. Section 1031 has been part of the tax code for more than 30 years and has been used by both individuals and corporations as a legitimate strategy to grow and reposition their real estate portfolios. And in recent years — as property values have surged — the value of deferring taxes has become even more significant.
Let’s look at the numbers: Say you sell a property for $1 million and owe 30% in combined taxes. That’s $300,000 gone — money you can’t reinvest. But if you use a 1031 exchange, that entire $1 million can be rolled into another property, letting you earn returns on the full amount.
Of course, the IRS doesn’t offer this benefit without a few strings attached.
To qualify for tax deferral, you have to meet strict timelines and procedures. You must identify your replacement property within 45 days of the sale, and you must close within 180 days. You also have to reinvest all the proceeds, and you can’t touch the funds directly — they must go through a qualified intermediary.
The complexity of the process is one reason why it’s estimated that over $10 billion in 1031 exchanges fail every year. Investors often miss deadlines, choose the wrong replacement property, or try to manage the process alone.
But there’s a better way.
In 2002, new legislation introduced broader use of shared ownership models like Delaware Statutory Trusts (DSTs). These allow investors to place their 1031 proceeds into institutional-grade real estate without managing the properties themselves. For property owners looking to exit active ownership but still receive monthly income, DSTs offer a clean, compliant, and stress-free path forward.
At ICON1031, we guide investors through every step of the exchange process — from initial planning to DST selection — so they can make confident, tax-smart decisions.
If you’re considering a sale, don’t let taxes steal your momentum. A 1031 exchange might be the key to unlocking your next chapter — with more income, less stress, and smarter investing.
Where Did 1031 Exchanges Come From?
The rule gets its name from Section 1031 of the Internal Revenue Code, which outlines the process and timeline investors must follow to complete what’s known as a like-kind exchange.
The rule has been on the books for more than 30 years. Over that time, individuals, businesses, and institutional investors have all used it to defer taxes and reallocate their real estate holdings without getting hit with a major tax bill every time they sell.
So What Counts as “Like-Kind”?
Good news — you don’t need to exchange a strip mall for another strip mall. In most cases, any investment property can be exchanged for any other investment property, as long as both are held for business or investment purposes. You can sell a rental home and invest in a commercial office building or trade land for apartments — it’s surprisingly flexible.
Why Do People Use 1031 Exchanges?
The biggest reason is simple: tax deferral.
When you sell a property, you typically owe taxes on both:
The capital gain (how much it appreciated in value), and
The depreciation recapture (the tax benefit you claimed over the years for wear and tear)
That can take a huge bite out of your profits — often 20%–35% or more depending on your situation.
By doing a 1031 exchange, you keep all that money working for you. That means more buying power, bigger investments, and faster portfolio growth.
But There’s a Catch…
The IRS doesn’t hand out tax deferrals without a few strings attached.
To qualify, you have to follow some very specific rules:
You must identify the replacement property within 45 days of your sale
You must close on that replacement property within 180 days
All the proceeds from the sale must be reinvested — you can’t pocket any of it
And you must use a qualified intermediary (you can’t touch the money directly)
If you miss any of those steps, the IRS treats your sale as taxable.
That’s why it’s estimated that over $10 billion in 1031 exchanges fail every year — either due to missed deadlines, bad advice, or simply not understanding the rules.
A Smarter Way to Exchange
The good news? You don’t have to go it alone.
At ICON1031, we help you navigate the 1031 process from start to finish — and offer alternatives like Delaware Statutory Trusts (DSTs) when direct property swaps are too complex or time-consuming.
It’s never been more important to make your real estate dollars go further. If you’re planning to sell, a 1031 exchange may be your smartest move yet.
