How 1031 Exchanges Work
A 1031 exchange (named after Section 1031 of the Internal Revenue Code) lets you sell an investment property, reinvest the full proceeds into a replacement investment property, and defer all capital gains and depreciation recapture taxes. The replacement property must be like-kind — for real estate, this means any real property held for investment, regardless of type. You can exchange a single-family rental for a multifamily, a commercial building, or even raw land.
The exchange must be structured before you sell. A qualified intermediary (QI) holds the proceeds and facilitates the transfer. If the money touches your hands at any point, the exchange is disqualified.
Timeline and Rules
Two critical deadlines govern 1031 exchanges. The 45-day identification period starts on the day you close on your relinquished property — you must identify potential replacement properties in writing to your QI within this window. The 180-day exchange period is your deadline to close on the replacement property.
The replacement property must be of equal or greater value than the property you sold. If you reinvest less than the full proceeds, the difference (called boot) is taxable. You must also replace all the debt — meaning the mortgage on the replacement must be equal to or greater than the mortgage on the relinquished property.
New York State Considerations
While 1031 exchanges defer federal taxes, New York State follows the federal rules — meaning your state taxes are also deferred. However, if you exchange a New York property for one in another state, New York may eventually recapture the deferred gain if you sell the replacement without doing another exchange.
Some New York investors use the 1031 exchange to transition from hands-on rental properties to more passive investments like Delaware Statutory Trusts (DSTs) or triple-net lease properties, which provide income without management responsibilities. This can be an ideal exit strategy for tired landlords who want to defer taxes while reducing their workload.