A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows real estate investors to sell investment property and reinvest the proceeds into a new "like-kind" property while deferring all capital gains taxes. The tax is deferred, not eliminated, until the replacement property is eventually sold without another exchange.
Both the relinquished property (the one you are selling) and the replacement property must be held for investment or used in a trade or business. Personal residences do not qualify. "Like-kind" is broadly defined and includes most types of real property held for investment, including residential rentals, commercial property, land, and industrial property.
You have 45 days from the closing of your relinquished property to identify potential replacement properties in writing. You then have 180 days from the same closing to complete the purchase of the replacement property. Both deadlines are strict and cannot be extended except in very limited circumstances.
A qualified intermediary (QI) is a third party who holds the exchange proceeds between the sale of the relinquished property and the purchase of the replacement property. You cannot receive or control the funds during the exchange period. Using a qualified intermediary is a strict IRS requirement for a valid delayed exchange.
Yes. 1031 exchanges are not limited by state boundaries. You can sell property in Ohio and purchase replacement property anywhere in the United States. This is one of the most powerful aspects of the 1031 exchange program.
The amount of tax deferred depends on your capital gains, depreciation recapture, and applicable tax rates. For many Ohio investors, a 1031 exchange can defer combined federal and state taxes of 25-35% or more of the gain. The savings can be substantial, particularly for properties held for many years with significant appreciation.
Schedule your free, no-obligation consultation with a Wolterman Law attorney. Available in person at our Loveland or Blue Ash offices, by phone, or via Zoom.