A 1031 exchange is one of the most powerful tools available to real estate investors seeking to build wealth while deferring capital gains taxes. By selling an investment property and reinvesting the proceeds into another like-kind property, investors can keep their equity working for them rather than losing a portion to taxes. At Singh and Associates, LLP, we help clients navigate the detailed IRS rules that govern 1031 exchanges—from timelines and property qualifications to strategies that minimize or eliminate “boot”—so every transaction delivers maximum tax benefits.
What is a 1031 Exchange?
A 1031 exchange lets real estate investors defer capital gains taxes by selling an investment property and reinvesting the proceeds into a like-kind property. Named after Section 1031 of the IRS Code, it doesn’t eliminate taxes but delays them—helping investors grow equity over time.
How It Works:
- Sell investment property – Proceeds must go to a Qualified Intermediary (QI), not directly to the seller.
- Identify new property – You have 45 days to identify up to three potential replacements.
- Buy replacement property – Must close within 180 days of the original sale.
The process must follow strict IRS rules to qualify.
Key Rules:
To qualify for a 1031 exchange, several key rules must be followed. Both the relinquished and replacement properties must be like-kind, meaning they are held for investment or business purposes—not for personal use. The same taxpayer must hold title to both properties to maintain continuity of ownership. Additionally, the replacement property must be of equal or greater value, and the entire proceeds from the sale must be reinvested to fully defer capital gains taxes. The new loan on the exchanged property must also be of the save value or higher than the previous loan. Lastly, a Qualified Intermediary (QI) must be used to manage the transaction and hold the sale proceeds, as direct receipt of funds by the taxpayer will disqualify the exchange.
Avoiding Boot:
Boot is a common industry term (though not found in the Internal Revenue Code) that refers to any non-like-kind property or cash received in a 1031 exchange. Boot is taxable, up to the amount of gain realized.
Typical examples include:
- Cash received at closing
- Reduction in debt (if the replacement property has less debt than the relinquished one)
- Personal property or non-qualified assets (e.g., water rights, ditch stock)
- Seller-financed promissory notes
- Exchange proceeds used to pay non-transactional expenses, such as rent prorations or tenant deposits
- Excess borrowing on the replacement property, leading to unused cash
Even well-planned exchanges can inadvertently generate boot due to overlooked details.
How Our Firm Helps Minimize Boot
At Singh and Associates, LLP we specialize in real estate taxation and 1031 exchange analysis. We help identify and reduce potential boot before the exchange takes place.
We work closely with investors and their exchange intermediaries to:
- Review estimated closing statements before the sale and purchase
- Identify sources of potential boot, including debt imbalances and improper use of proceeds
- Advise on structuring strategies to keep the exchange fully tax-deferred
- Ensure funds are used appropriately and non-transaction costs are handled correctly
By planning ahead and structuring the transaction properly, we help our clients maximize tax deferral and avoid costly surprises. Avoiding boot is critical to preserving the tax benefits of a 1031 exchange. If you’re planning an exchange, early involvement from a tax professional can make all the difference.
Pros and Cons:
A 1031 exchange offers several advantages for real estate investors. It allows for the deferral of capital gains taxes, which can free up more capital for portfolio growth or diversification. Additionally, when structured properly, it may provide estate planning benefits, such as a potential step-up in cost basis for heirs, potentially eliminating deferred gains upon inheritance. However, the process is complex and subject to strict timelines and detailed requirements. Avoiding boot is also critical in achieving a successful 1031 exchange. Failing to comply with these rules can result in unexpected tax liabilities, making professional guidance essential.
Recent changes to 1031 exchanges:
Following the 2017 Tax Cuts and Jobs Act (TCJA), 1031 exchanges are now limited exclusively to real estate, eliminating the previous ability to defer taxes on personal property such as equipment or artwork. However, the definition of “like-kind” remains broad, allowing for flexibility in real estate exchanges—for example, investors can still exchange raw land for a commercial building, as long as both properties are held for investment or business use. On July 4, 2025, the One Big Beautiful Bill was signed into law. According to the bill, Section 1031 Like-Kind Exchanges were preserved. This means investors can still defer capital gains taxes by reinvesting in qualifying real estate.
Plan Your 1031 Exchange with Confidence and Expert Guidance
A 1031 exchange is a powerful tax-deferral tool for real estate investors but requires careful planning and expert guidance. Singh & Associates, LLP has advised real estate owners, operators, and syndicators since 1990 in planning seamless 1031 exchanges. Please reach out to us if you are interested in or have questions about 1031 exchanges.
