July 13, 2025
1031 Exchange 101: A Powerful Tax Strategy- When Done Right
If you’re considering selling a rental property, one of the most powerful tools in your tax strategy toolbox is the 1031 exchange.
At Fortitude Tax & Accounting, we help landlords understand how to leverage this tool to keep more of their hard-earned gains working for them—not going to the IRS.
Here’s what you need to know.
What Is a 1031 Exchange?
A 1031 exchange (named after Section 1031 of the tax code) allows you to sell one investment property and defer paying capital gains taxes if you reinvest the proceeds into another qualifying property.
Instead of paying taxes on your sale now, you roll your gain into the next property. This keeps your money working for you and compounds your wealth over time.
Learn more directly from the IRS about Like-Kind Exchanges (Section 1031)
⚠️ Important: You must plan to do a 1031 exchange before you close on the sale of your property. If you don’t have your exchange structure—and Qualified Intermediary (QI)—in place before closing, you cannot go back and elect to do a 1031 later. You can always decide not to complete the exchange and pay the tax instead—but you cannot reverse-engineer one after the fact.
Key Rules You Must Follow
See IRS Fact Sheet on 1031 Exchange Requirements
Like-Kind Requirement
Both properties must be held for investment or business purposes—not personal use. “Like-kind” is broadly defined:
- A single-family rental can exchange for a duplex, commercial property, or land.
Timeline is Non-Negotiable
- 45 days from closing on the sale to identify replacement properties.
- 180 days from closing to complete the purchase.
Qualified Intermediary (QI) Required
You cannot touch the money. A QI holds the funds between transactions. Here’s a helpful guide on choosing a Qualified Intermediary from Realized 1031.
Equal or Greater Value
To defer all taxes, your replacement property (or properties) must equal or exceed:
- The value of the property sold
- The debt paid off on the old property
Otherwise, you may pay tax on the difference (This is referred to as “boot”).
Why Consider a 1031 Exchange?
✅ Defer Capital Gains Tax: Keep more capital working for you.
✅ Defer Depreciation Recapture: Delay paying the 25% recapture tax.
✅ Consolidate or Diversify: Swap multiple smaller rentals for one larger property—or vice versa.
✅ Improve Cash Flow: Exchange into properties with better income potential.
What OB3 Didn’t Change About 1031s
The One Big Beautiful Bill Act (OB3) extended and clarified many business tax provisions, but it did not alter 1031 exchanges for real estate.
- 1031s remain a vital strategy for landlords.
- As bonus depreciation phases out, 1031s will remain one of the few powerful tools for deferring taxes.
When a 1031 Exchange Might Not Be Right
- If you want cash out now (you’ll pay taxes on any cash you receive—“boot”).
- If your long-term goal is to exit real estate altogether.
- If your basis is already low and depreciation recapture outweighs potential benefits.
How Fortitude Helps You Do It Right
At Fortitude Tax & Accounting, we help landlords:
✅ Evaluate if a 1031 fits your long-term strategy
✅ Plan timelines and ensure compliance with IRS rules
✅ Coordinate with trusted Qualified Intermediaries
✅ Build proactive exit and acquisition strategies around your goals
👉 Schedule a consultation to talk through your strategy before the sale.
Related Articles in This Series:
- Exit Strategies for Landlords: How to Sell Smarter and Pay Less Tax
- 2025 Tax Law Changes: What They Mean for Your Rental Property
- Active vs. Passive Rental Income: How It Impacts Your Taxes (and Your Deductions)
Frequently Asked Questions
Can I exchange into multiple properties?
Yes—multiple replacement properties are allowed if they meet IRS guidelines.
Does this apply to short-term rentals?
Potentially, if they are held for investment purposes and not personal use.
Can I move into my replacement property later?
Eventually, but strict rules apply if you convert to personal use. Consult your CPA before making this move.
Does a 1031 eliminate taxes permanently?
No—it defers them. Taxes become due when you eventually sell without another exchange. However, if you hold until death, your heirs receive a step-up in basis, eliminating the deferred tax.
Can Fortitude help with this process?
Yes—we handle 1031 planning regularly and work with trusted intermediaries to ensure you follow the rules.
Fortitude Tax & Accounting, located in Stansbury Park, Utah, just outside the Greater Salt Lake City area, specializes in proactive tax savings and accounting services tailored for therapists, real estate professionals, and small business owners. Led by Melissa Calwell, CPA, EA, with over 30 years of hands-on experience in both the private sector and public accounting, our firm offers comprehensive services including tax planning, tax preparation, bookkeeping, payroll, and tax strategies designed to maximize your savings. Choosing Fortitude Tax & Accounting means partnering with a firm committed to helping you achieve financial success through expert guidance and personalized service. Contact us today to learn how we can work together to optimize your financial future.
Fortitude Tax & Accounting has provided this article for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post and their personal situation.
