Internal Revenue Code section 1031

A Section 1031 exchange, commonly known as a like-kind exchange, is a transaction under the 26 U.S.C. § 1031 of the Internal Revenue Code that allows owners of investment or business real estate to defer certain taxes when selling property and reinvesting the proceeds into other qualifying real property. It is most commonly used by real estate investors and property owners with low tax basis, for whom an outright sale would otherwise trigger capital gains tax and depreciation recapture. By exchanging rather than selling, taxpayers may defer recognition of these taxes while maintaining continuity of investment in real estate.

Section 1031 exchanges are frequently used as part of long-term real estate investment and estate-planning strategies. Because the exchange defers, rather than eliminates, tax liability by carrying forward the taxpayer’s adjusted basis, investors may continue exchanging properties over time. If the property is held until death, the deferred gain may be eliminated through a step-up in basis under U.S. tax law, a feature that has made Section 1031 exchanges particularly common among long-term property owners seeking to defer taxes across generations.

Before 2018, section 1031 also applied to certain exchanges of personal property, but the Tax Cuts and Jobs Act of 2017 limited nonrecognition treatment to exchanges of real property.

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