How a 1031 Exchange Works: A Simple Guide for Real Estate Investors

By Mark Hanna, CCIM

At SVN | Hanna Solutions Commercial Real Estate, we’re committed to helping our clients build long-term wealth and make informed investment decisions. One of the most effective strategies for real estate investors is the 1031 Exchange—a powerful tool that allows you to sell an investment property and defer capital gains taxes by reinvesting into another like-kind property.

Here’s a simple breakdown of how it works and how we can help.

📜 A Brief History of the 1031 Exchange

The 1031 Exchange is named after Section 1031 of the Internal Revenue Code, enacted in 1921. Its original purpose was to encourage reinvestment and stimulate economic activity by giving investors the opportunity to defer capital gains taxes when exchanging one business or investment property for another.

Over the years, the rules have evolved—but the core benefit remains: tax deferral, allowing your capital to continue working for you.

✅ Step-by-Step: How a 1031 Exchange Works

1. Sell Your Investment Property

• Property must be held for business or investment purposes—not a personal residence.
• Proceeds from the sale go to a Qualified Intermediary (QI)—not directly to you.

2. Engage a Qualified Intermediary (QI)

• A QI is required to hold your funds and facilitate the exchange.
• Direct receipt of funds disqualifies the exchange, triggering tax liability.

3. Identify Replacement Properties (45-Day Rule)

• You have 45 days from the sale date to formally identify up to three potential replacement properties in writing.

4. Purchase Replacement Property (180-Day Rule)

• You must close on one or more identified properties within 180 days of the original sale date.

5. Reinvest and Defer Taxes

• By reinvesting all proceeds into a like-kind property and meeting the IRS requirements, you defer capital gains taxes, preserving your equity and increasing your buying power.

🔁 Key Benefits of a 1031 Exchange

• Defer capital gains taxes
• Reinvest full proceeds without tax drag
• Expand or upgrade your investment portfolio
• Access new markets or property types
• Build generational wealth

⚠️ What to Keep in Mind

• Applies only to like-kind real estate held for business or investment
• Strict timelines must be followed (45-day identification, 180-day close)
• Must use a Qualified Intermediary
• Personal residences and “flips” are not eligible

🤝 In-House 1031 Exchange Services with Accruit

SVN | Hanna Solutions Commercial Real Estate is proud to offer 1031 Exchange Services in-house through our partnership with Accruit, a national leader in Qualified Intermediary services. This partnership allows us to simplify the process for our clients and ensure every step of your exchange is executed professionally, securely, and in full compliance with IRS rules.

Whether you’re selling a single-tenant retail building, a multifamily property, or an industrial warehouse, our team is ready to guide you through your exchange and help you reinvest with confidence.

Want to explore a 1031 Exchange or see if your property qualifies? Let’s talk.

SVN | Hanna Solutions Commercial Real Estate

(956) 322-4001