A practical guide for real estate investors on how 1031 exchanges work, the different types available, and how to use them to defer taxes and grow your portfolio faster.
A 1031 exchange is one of the most powerful tools available to real estate investors. It allows you to defer capital gains taxes when selling an investment property and reinvesting the proceeds into another qualifying property. When used correctly, a 1031 exchange can help you scale your portfolio, increase cash flow, and preserve more capital for future investments. However, not all 1031 exchanges are the same. Understanding the different types is critical to choosing the right strategy for your goals.
Here’s a breakdown of the main types of 1031 exchanges and how each one works.
1. Delayed Exchange (Most Common)
The delayed exchange is by far the most widely used type of 1031 exchange. This is the traditional structure most investors are referring to when they mention a “1031.”
In a delayed exchange, you sell your current investment property first and then use the proceeds to acquire your replacement property within specific IRS time limits.
Key Rules:
You have 45 days from the sale to identify potential replacement properties.
You have 180 days from the sale to close on one or more of those replacement properties.
All proceeds must be held by a Qualified Intermediary (QI)—you cannot touch the funds.
This structure works best for investors who already have a clear idea of what they want to buy next and can move efficiently through escrow.
2. Simultaneous Exchange
A simultaneous exchange occurs when the relinquished property and the replacement property close on the same day. This structure was more common in the past, before delayed exchanges became widely accepted.
While this type of exchange avoids holding funds with a Qualified Intermediary for long periods, it can be difficult to coordinate both transactions to close at exactly the same time. Because of the logistical complexity, simultaneous exchanges are much less common today.
3. Reverse Exchange
In a reverse exchange, you acquire the replacement property before selling your current property. This can be an excellent strategy when a great deal becomes available and you don’t want to risk missing it.
Because the IRS does not allow you to own both properties outright during an exchange, a special holding entity—often through an Exchange Accommodation Titleholder (EAT)—temporarily holds one of the properties until your original asset is sold.
Key Rules:
You must identify which property will be sold within 45 days.
You must complete the sale within 180 days.
Reverse exchanges require more capital and legal structuring but provide incredible flexibility in competitive markets.
4. Build-to-Suit (Improvement) Exchange
A build-to-suit exchange—also known as an improvement exchange—allows you to use exchange proceeds not just to purchase a replacement property, but also to improve it.
This is ideal for investors who want to reposition a property, develop land, or add value through renovations.
Key Requirement:
All improvements must be completed and paid for within the 180-day exchange window in order to count toward the replacement value.
This structure is especially popular with commercial and multifamily investors seeking higher long-term appreciation and stronger cash flow through redevelopment.
5. Partial Exchange
A partial 1031 exchange occurs when not all proceeds are reinvested into the replacement property. Any cash or debt reduction that is not reinvested is considered “boot” and becomes taxable.
This strategy is sometimes intentionally used when investors want to take some capital off the table while still deferring a portion of their gains.
Why 1031 Exchanges Matter for Long-Term Wealth
Using 1031 exchanges strategically allows investors to:
Defer capital gains taxes indefinitely
Scale into larger and higher-performing assets
Improve cash flow without triggering tax liability
Shift from active management into more passive investments
Reposition portfolios by asset class or geography
For many investors, 1031 exchanges act as a compounding vehicle for wealth—allowing gains to be reinvested again and again instead of being reduced by taxes at every sale.
Final Thoughts
A 1031 exchange is not a one-size-fits-all strategy. The right structure depends on your investment goals, timing, liquidity, and risk tolerance. Whether you’re moving from residential into multifamily, upgrading into larger commercial assets, or transitioning into passive income investments, understanding your exchange options is essential.
Before initiating any 1031 exchange, always consult with a qualified intermediary, tax advisor, and real estate professional to ensure your transaction is structured correctly.
If you’d like guidance on executing a 1031 exchange or identifying strong replacement properties, our team is here to help.