Like-Kind Exchange (1031 Exchange)

A like-kind exchange, known as a 1031 exchange after the tax code section, lets an investor sell an investment property and defer the capital gains tax by buying another one. Exchange buyers often compare replacement properties by cap rate because they are trading one income stream for another.

The rules are strict. The replacement must be identified within 45 days of the sale and bought within 180 days, and the proceeds must be held by a qualified intermediary. Missing a deadline can make the whole gain taxable.

The deadlines put pressure on buyers, and some accept a lower cap rate than they otherwise would to complete the exchange in time. Comparing the tax saved with the income given up by paying more is worth doing before committing to a replacement property.