1031 Exchange Questions
Answered

A 1031 exchange (named after Section 1031 of the IRS tax code) allows real estate investors to defer capital gains taxes when selling an investment property — as long as the proceeds are reinvested into a like-kind replacement property within specific IRS timelines. A properly executed 1031 exchange can defer taxes indefinitely and preserve significant equity that would otherwise be lost to federal and state capital gains taxes, the 3.8% Net Investment Income Tax, and depreciation recapture.

A Qualified Intermediary (QI) is a required third-party entity that facilitates a 1031 exchange by holding the sale proceeds from the relinquished property and transferring them to the replacement property at closing. The investor cannot receive or have constructive receipt of the funds at any point during the exchange — the QI ensures this critical requirement is met. You must designate a QI before closing on the sale of your relinquished property. Selecting a reputable, experienced qualified intermediary is one of the most important decisions in the exchange process.

There are two critical IRS deadlines — missing either one disqualifies the exchange and triggers the full capital gains tax liability.

"Like-kind" is broader than most investors realize. Any real property held for investment or business use generally qualifies — including:

• Residential rental properties (single-family, multifamily)
• Commercial buildings (office, retail, industrial)
• Raw land held for investment
• Delaware Statutory Trusts (DSTs)
• Net-lease properties

Properties that do not qualify include primary residences, vacation homes used primarily for personal use, and properties held primarily for sale (fix-and-flip projects).

Yes. The IRS confirmed in Revenue Ruling 2004-86 that DST interests qualify as like-kind replacement property for 1031 exchange purposes. DSTs are one of the most popular 1031 replacement options because they are passive, always available, and close quickly — making them ideal for investors who need to meet the 45-day and 180-day deadlines without the delays of traditional real estate transactions. See the full DST FAQ →

If you fail to identify a replacement property within 45 days, or fail to close within 180 days, the exchange is disqualified and the full capital gains tax becomes due for that tax year. This is one of the most common reasons investors turn to DSTs — DST offerings are always available, can be identified immediately, and close on an accelerated timeline. True North's weekly-updated marketplace gives investors access to ready-to-close DST options at all times.

Boot refers to any value received in a 1031 exchange that is not like-kind property. Common forms of boot include:

• Cash boot — sale proceeds not reinvested into replacement property
• Mortgage boot — if the replacement property has less debt than the relinquished property, the difference is taxable
• Personal property received as part of the exchange

Boot is taxable in the year of the exchange, even if the rest qualifies for deferral. To avoid boot entirely, reinvest all equity and replace or exceed the debt on the relinquished property.

A properly executed 1031 exchange defers 100% of the capital gains tax on equity reinvested into like-kind replacement property. This includes:

• Federal long-term capital gains tax (up to 20%)
• 3.8% Net Investment Income Tax (NIIT) for high-income investors
• Depreciation recapture tax (25%)
• State capital gains taxes (varies by state)

For high-net-worth investors in high-tax states, the combined tax liability can exceed 35% of the gain — making a 1031 exchange one of the most powerful wealth-preservation tools available.

Yes. The IRS allows three identification approaches:

• Three-Property Rule — Identify up to 3 properties regardless of total value (most common)
• 200% Rule — Identify any number of properties as long as their combined value doesn't exceed 200% of the sale price
• 95% Rule — Identify any number of properties but must close on 95% of total identified value

Investors can also split exchange proceeds across multiple DST offerings to diversify across property types, geographies, and sponsors — all while fully deferring capital gains.

A reverse 1031 exchange allows an investor to acquire the replacement property before selling the relinquished property. An Exchange Accommodation Titleholder (EAT) holds the replacement property until the relinquished property is sold. The same 180-day deadline applies from acquisition of the replacement property. Reverse exchanges are more complex and expensive than standard forward exchanges, but they allow investors to secure a desirable replacement property without waiting to sell their current property first.

Yes. Investors can continue rolling exchange proceeds into new like-kind replacement properties indefinitely, deferring capital gains taxes at each step. If the investor holds the property until death, their heirs may receive a stepped-up cost basis — potentially eliminating all deferred capital gains taxes entirely. This makes the 1031 exchange one of the most powerful multi-generational wealth transfer strategies available to real estate investors.

While not legally required, working with an experienced 1031 exchange advisor is strongly recommended. The strict IRS timelines, identification rules, and debt replacement requirements leave little room for error. True North Private Investments specializes in 1031 exchange advisory — helping accredited investors identify qualifying replacement properties, access DST offerings, and coordinate with qualified intermediaries, CPAs, and attorneys to execute exchanges successfully.

The best time to contact True North is before you close on the sale of your relinquished property — ideally 30 to 60 days in advance. This gives us time to identify suitable replacement property options and ensures you can meet the 45-day identification deadline without pressure. If you're already in your exchange window, contact us immediately — DST offerings can close quickly and may still meet your deadline. Reach Corey at csmith@gpcchi.com or (612) 968-3442.