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

By Mark Hanna, CCIM

At SVN | Hanna Solutions Commercial Real Estate, we help our clients build long-term wealth and make confident investment decisions. One of the most effective strategies for real estate investors is the 1031 Exchange. This tool lets you sell an investment property and defer capital gains taxes by reinvesting into another like-kind property.

Below is a simple breakdown of how it works—and how we can help you execute it correctly.

📜 A Brief History of the 1031 Exchange

The 1031 Exchange comes from Section 1031 of the Internal Revenue Code, which Congress enacted in 1921. Originally, the goal was simple: encourage reinvestment and stimulate economic activity. In other words, the law rewards investors who keep capital working by exchanging one business or investment property for another.

Since then, the rules have changed over time. However, the core advantage remains the same: tax deferral, which helps you preserve more capital for your next acquisition.

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

1. Sell Your Investment Property

• You must hold the property for business or investment—not as a personal residence.
• Instead of receiving the funds directly, you route sale proceeds to a Qualified Intermediary (QI).

2. Engage a Qualified Intermediary (QI)

• A QI holds the funds and facilitates the exchange.
• If you receive the funds directly, you trigger taxes and disqualify the exchange.

3. Identify Replacement Properties (45-Day Rule)

• Within 45 days of the sale, you must identify up to three replacement properties in writing.

4. Purchase Replacement Property (180-Day Rule)

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

5. Reinvest and Defer Taxes

• When you reinvest the proceeds into like-kind property and follow IRS requirements, you defer capital gains taxes. As a result, you preserve equity and increase buying power.

🔁 Key Benefits of a 1031 Exchange

• Defer capital gains taxes and keep more equity working
• Reinvest full proceeds without the drag of immediate taxes
• Expand or upgrade your portfolio more efficiently
• Access new markets or property types as strategy changes
• Build generational wealth through compounding reinvestment

⚠️ What to Keep in Mind

• Only applies to like-kind real estate held for business or investment
• Follow strict timelines (45-day identification, 180-day close)
• You must use a Qualified Intermediary
• Personal residences and quick “flips” do not qualify

🤝 In-House 1031 Exchange Services with Accruit

SVN | Hanna Solutions Commercial Real Estate offers 1031 Exchange services in-house through our partnership with Accruit, a national leader in Qualified Intermediary services. Because of this partnership, we simplify the process and help you stay compliant with IRS rules from start to finish.

Whether you’re selling a single-tenant retail building, a multifamily property, or an industrial warehouse, our team can guide 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