How Everyday Real Estate Investors Use 1031 Exchanges to Scale

When you sell a property for more than you bought it for, you will usually have to pay capital gains tax.

The amount depends on factors such as how long you’ve owned the property and your taxable income, but it could be as high as 37% if you sell within a year and generate short-term capital gains.

However, IRC Section 1031 provides an exception, allowing investors to defer paying tax on the gain if they reinvest the proceeds in similar property. Commonly known as the 1031 stock market, investors use this strategy to reinvest in more profitable properties and increase their wealth.

There are a few rules to consider: 1031 exchanges are for investment properties, not primary residences; you must exchange for another similar good or “similar to this“, which the IRS defines as “of the same kind or character”; and you have a limited time to complete the exchange.

As soon as you sell, the clock starts: you must identify your replacement property(ies) (you can identify up to three properties of the same type) in writing within 45 days of the sale of the first property. Then, you must close on the replacement property within 180 days of the initial sale of your property.

One investor BI spoke with attempted a 1031 exchange, but ultimately abandoned it because he couldn’t meet the 180-day deadline.

While his failed 1031 experiment may be “rare,” he said, “there are so many things that could delay a closing.”

BI spoke with three investors who have successfully executed 1,031 trades and have stronger portfolios as a result.

Jeff White and Suleyka Bolaños traded their worst-performing property and quadrupled their cash flow

The first property Jeff White and Suleyka Bolaños purchased — a fourplex in Denver — was a work.

Looking back, “we could have done a lot better,” said the couple, who retired in their 40s by buying one rental property a year.

Through a 1031 exchange, they were ultimately able to exchange it for two higher-performing assets.

“We put the fourplex up for sale, found a buyer, and then went into contract on this large single-family home and a condo,” White said. “We closed on the same day – three transactions – paid zero taxes and got rid of our worst property which at the time was only bringing in $400 a month max to those other two properties.”

They rented out every single room in the single-family home and rented the condo to a Section 8 tenant, which more than quadrupled their cash flow, White said: “We went from $400 to $1,700 overnight.”

Nicole Shirvani exchanged a duplex for two properties

Nicole Shirvani, a full-time psychiatrist, uses real estate to increase her savings and give herself the flexibility to eventually cut back on her work.

When she moved from Oregon to Florida in 2022 for a new job, the single mother traded in her Oregon duplex for two different properties closer to her new home: an oceanfront condo and a single-family home.

She began looking at exchange properties before listing the duplex to give herself enough time.

“Before you sell, try to have replacement properties identified and everything lined up,” she advises. “You don’t want to sell a house, not be able to find suitable properties and be stuck, unable to invest that money into anything.”

Shirvani, who has since added two short-term rentals in the Shenandoah Valley and a triplex in Lakeland, Fla., to her portfolio, plans to use the same strategy as she continues to expand.

Zeona McIntyre went from a small property to a multifamily that generated greater cash flow

Zeona McIntrye is financially independent thanks to her property portfolio, but when she started investing in her 20s, she couldn’t qualify for a mortgage. She didn’t have significant savings or a consistent income to show to a mortgage lender.

It forced her to get creative with her first purchase — a one-bedroom condo in Boulder, Colorado, which she financed with private loans — and introduced her to many nontraditional real estate strategies. She used a home equity line of credit to purchase her second property, which she then exchanged for a quadplex using a 1031 exchange.

“A 1031 exchange allows you to postpone your tax burden; “A lot of people think, ‘Oh, I don’t pay taxes,’ but technically you get rid of the situation,” she said. “The cool thing, though, is you can do unlimited 1031 exchanges and roll them over and over again. And then, when you die, if you pass it on to someone else, like your children or a family member, the inherited home no longer has a tax liability. So it dies with you.”