Selling a rental and buying another? A 1031 exchange may let you put off paying capital gains tax on the sale. The rules are strict, though, and the deadlines don't bend. Here are the basics every Texas investor should know before listing.
What a 1031 exchange is
Section 1031 of the tax code lets you sell investment or business real estate and buy other investment real estate without paying tax on the gain right away. The tax is deferred, not erased. It generally carries over to the new property.
What qualifies
- Both properties must be held for investment or business use. Your own home doesn't qualify.
- "Like-kind" is broad for real estate. You can usually trade a rental house for a duplex, land, or a commercial building.
- Property held mainly to flip or resell usually doesn't qualify.
The two deadlines
- 45 days: from the day you close on the sale, you have 45 days to identify possible replacement properties in writing.
- 180 days: you must close on the replacement within 180 days of the sale (or by your tax return due date, if that comes first).
Weekends and holidays count. Missing either deadline usually means the sale becomes taxable.
You'll need a qualified intermediary
You can't touch the sale money. A qualified intermediary holds the funds and uses them to buy the replacement property. Set this up before you close on the sale. Once the money lands in your account, it's generally too late.
Rules of thumb to defer all of the tax
- Buy a replacement worth the same or more than what you sold
- Reinvest all of the cash from the sale
- Replace the debt you paid off, with new debt or extra cash
Any cash or debt relief you keep (often called "boot") may be taxed.
How I help
Timing is the hard part. I can help you line up replacement properties before your sale closes, so the 45-day window isn't a scramble. I'll also coordinate with your intermediary and title company so the paperwork stays in order.
Thinking about a 1031 exchange? Talk with your CPA first, then call or text me at (512) 629-9050 and we'll plan the timing together.
Trina Heinmiller
Team Lead | Southern Luxe Group | eXp Realty
Investor Guide 4 of 10: 1031 exchanges
← Guide 3: Analyze a rental property · Investor guide home · Next: House hacking (coming Nov 12)
This post is general information, not tax or legal advice. Talk with a CPA or tax attorney and a qualified intermediary about your situation.
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