How to Do a 1031 Exchange (and Who You Need on Your Team)

If you're a real estate investor or selling a rental or commercial property, a 1031 exchange could be one of the most powerful tax strategies available to you.

Named after Section 1031 of the IRS code, this tool lets you defer capital gains taxes when you sell one investment property and buy another of equal or greater value.

But it’s not as simple as just selling and buying—there are rules, timelines, and professionals you’ll need on your team to do it right.

What Is a 1031 Exchange?

A 1031 exchange allows you to defer paying capital gains taxes when you reinvest proceeds from the sale of one investment or business property into another “like-kind” property.

To qualify:

• Both properties must be held for business or investment purposes (not personal use).
• You must follow strict timelines (see below).

Key Deadlines You Need to Know

1. 45-Day Rule: From the date you close on your sale, you have 45 days to identify potential replacement properties in writing.
2. 180-Day Rule: You must close on the new property within 180 days of the sale of your original property.

These timelines run concurrently—so the clock starts ticking the day you close.

Who Do You Need on Your Team?

Executing a 1031 exchange requires coordination. Here’s who you’ll need:

1. Qualified Intermediary (QI)

Also known as an exchange accommodator, this is the neutral third party who holds the sale proceeds and facilitates the exchange. You must use a QI—if you take possession of the funds, you forfeit the tax benefits.

2. Real Estate Agent

Your agent should understand investment property dynamics and help identify suitable replacement properties that meet IRS guidelines.

A knowledgeable agent will:

• Search for properties that are “like-kind” (used for business or held as an investment—not personal residences).
• Ensure the replacement property is of equal or greater value to fully defer the gain.
• Help you identify and document properties within the 45-day identification window.
• Advise you on market conditions, rent potential, and property condition to meet your financial objectives.

IRS Identification Rules to Be Aware Of:

• Three Property Rule: You can identify up to 3 potential replacement properties, regardless of value.
• 200% Rule: You can identify more than 3 properties as long as their combined fair market value does not exceed 200% of the value of the relinquished property.
• 95% Rule: If you identify more than 3 properties and exceed 200% in value, you must close on 95% of the total value identified.

A savvy agent will help keep you compliant with these rules and coordinate with your Qualified Intermediary to ensure everything is properly documented.

3. Tax Advisor or CPA

To ensure you understand how the exchange impacts your taxes—especially if you’ve done one before, used depreciation, or plan to eventually cash out.

4. Real Estate Attorney (Optional)

Useful in complex or high-value transactions, or when the exchange involves partnerships or trusts.

Can You Use a 1031 Exchange in the Coachella Valley?

Absolutely. Many investors in the Coachella Valley use 1031 exchanges to sell income-producing properties—such as long-term rentals, vacation homes (if used correctly), or multi-family units—and reinvest in higher-performing areas or better cash-flow opportunities.

Just remember: your replacement property must be for investment purposes. A second home for personal use won't qualify.

Bottom line: A 1031 exchange can help you build wealth faster by deferring taxes—but only if you play by the rules.

Want help assembling your exchange team or exploring what you could trade up into? Let’s talk.

Schedule a strategy session today to see if a 1031 exchange makes sense for your next move.