What Is a 1031 Exchange?
A 1031 exchange, also known as a like-kind exchange, is a powerful tax deferral strategy authorized under Section 1031 of the Internal Revenue Code. It allows real estate investors to sell an investment property and reinvest the proceeds into a new like-kind property, deferring federal and state capital gains taxes that would otherwise be due at the time of sale.
For Ohio investors, this can mean deferring a combined federal and state capital gains tax burden that often exceeds 25-30% of the gain. A properly executed 1031 exchange allows you to keep more capital working for you, accelerating your ability to build wealth through real estate.
How Does a 1031 Exchange Work?
The process involves several critical steps and strict IRS timelines that must be followed precisely. Wolterman Law Office serves as your Qualified Intermediary (QI), the independent party required by the IRS to hold your exchange funds and facilitate the transaction.
Sell Your Relinquished Property
You sell your existing investment property. Before closing, you must have a Qualified Intermediary in place. Wolterman Law Office holds the sale proceeds in a secure exchange account.
Identify Replacement Property (45 Days)
You have 45 calendar days from the sale closing to identify up to three potential replacement properties. This deadline is strict and cannot be extended.
Close on Replacement Property (180 Days)
You must close on your replacement property within 180 calendar days of the original sale. Wolterman Law Office transfers the exchange funds directly to the closing.
Defer Your Capital Gains Taxes
When the exchange is complete, your capital gains taxes are deferred. You can continue to exchange properties indefinitely, potentially eliminating the tax burden entirely through a step-up in basis at death.
Types of 1031 Exchanges We Handle
Simultaneous Exchange
The sale of the relinquished property and the purchase of the replacement property close on the same day. Rare in practice but straightforward when it occurs.
Delayed Exchange
The most common type. The relinquished property closes first, and the replacement property closes within the 180-day window. We manage the exchange funds throughout.
Reverse Exchange
You acquire the replacement property before selling the relinquished property. This requires an Exchange Accommodation Titleholder and careful planning. We handle the full structure.
Construction / Improvement Exchange
Also known as a build-to-suit exchange. Allows you to use exchange funds to improve the replacement property before taking title. Complex but powerful for the right situation.
What Properties Qualify for a 1031 Exchange?
To qualify, both the relinquished and replacement properties must be held for productive use in a trade or business, or for investment. Qualifying properties include:
- Rental residential properties (single-family, multi-family)
- Commercial real estate (office, retail, industrial)
- Raw land held for investment
- Vacation rental properties (subject to IRS holding period requirements)
- Tenant-in-common (TIC) interests
- Delaware Statutory Trust (DST) interests
Your primary residence does not qualify. Properties held primarily for sale (like a house flipper's inventory) also do not qualify.
Why Use Wolterman Law Office as Your Qualified Intermediary?
Not all Qualified Intermediaries are the same. As a law firm, we bring a level of legal expertise and accountability that title companies and financial intermediaries cannot match. We understand the IRS regulations, Ohio tax law, and real estate law that intersect in every 1031 exchange. Our attorneys are available to answer your questions throughout the process, not just at closing.
Planning a Property Sale in Ohio? Talk to a 1031 Exchange Attorney First.
Once you close on your property sale without a 1031 exchange in place, it is too late to defer the taxes. Contact us before you list or accept an offer.
Frequently Asked Questions About 1031 Exchanges in Ohio
Can I do a 1031 exchange if I already have a buyer?
Yes, but you must have a Qualified Intermediary in place before the sale closes. Contact us as soon as possible once you have a buyer under contract.
Do I have to reinvest all of the proceeds?
To defer all capital gains taxes, you must reinvest all net proceeds and acquire replacement property of equal or greater value. Any proceeds you receive (called "boot") are taxable in the year of the exchange.
Can I exchange into multiple replacement properties?
Yes. You can identify up to three replacement properties and acquire one or more of them, as long as you meet the IRS identification and value rules.
What is Ohio's capital gains tax rate?
Ohio taxes capital gains as ordinary income. Combined with federal capital gains tax rates, Ohio investors can face a total tax burden of 25-35% or more on long-term gains. A 1031 exchange defers all of this.