A 1031 exchange is a tax-deferral strategy that allows real estate investors to sell an investment property and reinvest the proceeds into another “like-kind” property without immediately paying capital gains taxes. The exchange must follow specific IRS rules, including using a qualified intermediary and identifying a replacement property within 45 days. The main benefit is preserving equity by deferring taxes, allowing more capital to be reinvested.

Example:

An investor sells a $500,000 rental property in Charleston, SC and uses a 1031 exchange to purchase a $500,000 multifamily property in Greenville, SC. By completing the exchange properly, the investor defers paying capital gains taxes on the sale and reinvests the full $500,000 into the new property.