What Is a 1031 Exchange? A Step-by-Step Guide for Gig Harbor Investors
Hi, I’m Falynn Auston—a local Gig Harbor realtor, investor, and your go-to resource for building wealth through smart real estate decisions. One of my favorite tools for doing just that? The 1031 exchange.
If you’re a property owner looking to grow your portfolio and defer capital gains taxes, you might be wondering: What is a 1031 exchange, and how does it actually work? Let’s break it all down, step by step, so you can make confident investment moves in Gig Harbor and beyond.
What Is a 1031 Exchange and How Does It Work?
A 1031 exchange—named after Section 1031 of the IRS tax code—allows real estate investors to defer paying capital gains taxes when they sell an investment property, as long as they reinvest the proceeds into another like-kind property.
Put simply: Sell one investment property, buy another, and you can keep your profits working for you—without handing over a chunk to the IRS (yet).
The Purpose of a 1031 Exchange
The goal of a 1031 exchange is to encourage reinvestment in real estate. Instead of losing momentum to capital gains taxes after every sale, investors can roll profits forward—allowing for greater long-term portfolio growth, wealth building, and compounding equity.
Who Qualifies for a 1031 Exchange?
You may qualify for a 1031 exchange if:
The property you’re selling and buying is held for investment or business purposes.
Both the relinquished and replacement properties are in the U.S. and of “like-kind” (more on that below).
You follow strict timelines and procedural rules (this is where your team of pros comes in).
Sorry—primary residences don’t count. But rental homes, commercial buildings, and land typically do.
Benefits of a 1031 Exchange for Property Owners
Defer Capital Gains Taxes: Keep more of your profits working for you.
Grow Your Portfolio Faster: Reinvest untaxed gains into bigger or better properties.
Diversify Your Holdings: Shift into different markets or property types (as long as they’re like-kind).
Build Long-Term Wealth: Continue exchanging and compounding gains over time.
Strategic Retirement Planning: Transition investment properties into retirement assets.
Rules and Requirements You Must Follow
While 1031 exchanges offer huge advantages, they also come with strict guidelines.
Like-Kind Property Requirements
“Like-kind” doesn’t mean identical. You can exchange:
A single-family rental for a multi-unit complex
Raw land for a commercial space
An industrial building for another investment property
As long as both properties are held for investment or business use, they typically qualify.
The 45-Day and 180-Day Deadlines Explained
Timing is everything.
45 Days: You must identify potential replacement properties in writing within 45 days of closing the sale of your current property.
180 Days: You must close on the new property within 180 days of the original sale.
Miss these deadlines, and you could lose your tax deferral benefit entirely.
Common Mistakes to Avoid
Missing a deadline
Trying to DIY the process without a Qualified Intermediary (QI)
Not consulting a tax professional
Choosing non-like-kind properties
Improperly using exchange funds
How to Navigate the 1031 Exchange Process
Here’s a step-by-step roadmap to help you understand how a 1031 exchange works in real life.
Step 1 – Sell Your Current Property
Start by listing and selling your current investment property. Once it goes under contract, do not accept the proceeds directly. That’s where the Qualified Intermediary comes in.
Step 2 – Identify Replacement Properties
Within 45 days of closing your sale, you must identify up to three potential replacement properties (or more, under specific rules). This list must be submitted in writing to your QI.
Pro tip: Work with your real estate agent to scout strong options early—before the clock starts ticking.
Step 3 – Complete the Exchange Within 180 Days
Once your replacement property is selected, you must close the purchase within 180 days of the original property sale. Your QI will manage the funds and ensure everything is handled correctly.
Step 4 – Work with a Qualified Intermediary
A QI is your transaction quarterback. They hold the sale proceeds, manage paperwork, and make sure you meet IRS requirements. Choose someone experienced and reputable—I always recommend my go-to attorney, Martin Burns at Burns Law, PLLC.
Is a 1031 Exchange Right for You?
If you’re an investor in Gig Harbor looking to scale your portfolio or reposition your assets while deferring taxes, a 1031 exchange can be a smart, strategic move.
It’s especially useful for:
Upgrading into higher-performing properties
Consolidating multiple properties into one
Diversifying into different markets or property types
Work with Experts to Maximize Your Investment
The 1031 exchange process is powerful—but also complex. A trusted team of experts (real estate agent, tax advisor, attorney, and Qualified Intermediary) is essential to ensure compliance and maximize your returns.
Key Takeaways
A 1031 exchange lets you sell investment property and reinvest the proceeds tax-deferred into another like-kind property.
You must identify new properties within 45 days and close within 180 days.
The process must be handled by a Qualified Intermediary—you can’t touch the sale proceeds.
1031 exchanges help investors build long-term wealth by deferring capital gains taxes.
Always consult with professionals to ensure compliance and maximize benefits.
FAQs
What is the downside of a 1031 exchange?
It’s complex, time-sensitive, and requires strict IRS compliance. If you miss a deadline or choose an ineligible property, you could lose your tax benefits.
Why would a seller want a 1031 exchange?
To defer capital gains taxes and reinvest the full proceeds into another property—maximizing their buying power.
Can you ever live in a 1031 exchange property?
Eventually, yes—but only after meeting IRS requirements (like renting it out for at least two years first). Talk to a tax advisor to plan ahead.
Considering a 1031 Exchange?
Contact Paige Schulte and the Neighborhood Experts for personalized guidance on using a 1031 exchange to build wealth through smart real estate investments in Gig Harbor.
Let’s keep your money working for you—every step of the way.
