1031 Exchange

What is a 1031 Exchange?

A 1031 Exchange, named after Section 1031 of the Internal Revenue Code, allows a real estate investor to defer capital gains taxes when selling an investment property, provided the proceeds are reinvested into a like-kind replacement property of equal or greater value. For industrial property owners in the Inland Empire, a 1031 Exchange is one of the most powerful tools available for repositioning equity, upgrading to a different asset, or transitioning into a more passive investment structure, without triggering an immediate and often substantial tax liability. The key word is defer. A 1031 Exchange does not eliminate capital gains taxes; it postpones them, allowing your full equity to continue working in real estate rather than a portion being paid to the IRS at the time of sale.

How the Process Works: From Listing to Close

Understanding a 1031 Exchange starts before the sale, not after it.

The Role of a Qualified Intermediary

A 1031 Exchange requires a Qualified Intermediary, also called an accommodator or QI, to hold the proceeds from your sale and facilitate the exchange. You cannot take constructive receipt of the funds at any point during the exchange without disqualifying it. The QI is a legal requirement, not optional. Selecting an experienced, reputable accommodator is as important as selecting your replacement property. We work with trusted QIs who specialize in commercial real estate exchanges and can coordinate the full process alongside your CPA and attorney. If you are considering a 1031 Exchange, we can refer you to accommodators we have worked with directly on IE industrial transactions.

Key Rules to Understand

• The replacement property must be of equal or greater value than the relinquished property
• All net proceeds from the sale must be reinvested; any cash received is taxable as "boot"
• The exchange must involve investment or business property, not a primary residence or personal use property
• Both the relinquished and replacement properties must be held for investment or productive use in a business
• The 45-day identification and 180-day closing deadlines are absolute; missing either disqualifies the exchange

The Most Common Mistake: Starting the Search Too Late

The single most common mistake IE industrial owners make in a 1031 is waiting until after closing, or worse, until the 45-day window is already running, to begin their replacement property search. Finding the right replacement asset takes time. In a supply-constrained market, quality industrial properties at investor pricing do not sit available indefinitely. If you begin your search with 30 days left on the identification clock, your options narrow dramatically and your negotiating leverage disappears entirely. The right approach is to begin evaluating replacement options as soon as closing looks likely, ideally while you are still in escrow on the sale. By the time the 45-day clock starts, you should already know which direction you are heading.

What About Selling First and Then Finding a Replacement?

This is the standard exchange sequence: sell first, identify and acquire second. It works well when quality replacement inventory is available in the market. When the replacement property you want is not yet available, or when you want to acquire first and sell second, a different structure may be appropriate. This is known as a Reverse Exchange, a more complex but powerful alternative worth exploring in the right circumstances.

How We Facilitate the Full Process

Our role in a 1031 Exchange spans the entire transaction:

We refer all exchange proceeds and QI coordination to trusted accommodators. Our focus is the real estate: finding, negotiating, and closing the right assets on both sides of the transaction.

Interested in a passive replacement property option? Learn more in our Delaware Statutory Trust Guide →