The 1031 Brief Podcast Ep. 1: What Is a 1031 Exchange?

In this kickoff episode of The 1031 Brief, Ashley Stefan, Divisional Counsel for First American Exchange Company, explains what a 1031 exchange does and why it matters. She discusses what “like-kind” means in real estate and in a 1031 context, and why there are advantages to having an exchange structure in place before a sale closes. This episode gives investors and advisors a foundation for understanding how this tax deferral tool may help keep capital working in qualifying real estate.

Check out the 1031 Basics Checklist.

Read our full 1031 exchange guide.

Listen to the episode on Spotify or Apple Podcasts.

TRANSCRIPT

Ashley Stefan: Welcome to The 1031 Brief, a podcast from First American Exchange Company. I'm Ashley Stefan.

On this podcast, we break down real estate, tax, and 1031 exchange concepts in plain English without the hype and without burying the answer under jargon. Something to note, this podcast is for educational purposes. It's not legal, tax, financial, or investment advice. Every investor's situation is different, so always talk with your own tax advisor and legal counsel to go over your options. So, let's start with the foundation.

At First American Exchange Company, we work with investors across the country who are trying to navigate exchange timelines, documents, and real property transactions. And what we see over and over is this.

People have heard of 1031 exchanges. They know there may be a tax benefit, but they're not always clear on how the rule actually works in practice. That gap matters because a 1031 exchange isn't something that you can usually fix after the fact.

It's a structure that has to be set up before the sale closes.

A 1031 exchange comes from section 1031 of the Internal Revenue Code. In plain English, it allows an investor to defer recognition of gain when selling certain real property. That property has to have been held for investment or for use in a trade or business, and the investor needs to reinvest all their proceeds into other qualifying like-kind real property and follow all the applicable exchange rules. A key word to focus on here is defer.

A 1031 exchange isn't tax forgiveness. It doesn't make the gain disappear. Instead, if it's done right, it allows the investor to carry that gain forward into the replacement property and avoid taxation for now. That matters because the investor can keep more equity working in the next property instead of the funds going to a tax bill at the time of the sale.

Think of it this way. If you sell an appreciated rental property, you might have gain. Without an exchange, that gain likely triggers tax liability. With a properly structured exchange, the tax on that gain may be delayed while you remain invested in the next qualified real estate asset. That additional buying power can provide deep market leverage, but the exchange doesn't occur automatically. In a typical deferred, or what we sometimes call delayed exchange, the investor doesn't and cannot receive the sale proceeds directly. A qualified intermediary or QI is brought in before closing, and the exchange proceeds are held by that QI in a safe harbor account, while the investor identifies and acquires replacement property. If the seller receives the funds directly from the sale, even briefly, or if they even receive the right to receive those funds momentarily, the exchange can fail from the start.

That's why the setup has to happen early.

The phrase ‘like-kind’ sounds narrow, but in the 1031 exchange context, it's broader than most people expect. It doesn't mean two identical properties or asset classes. It refers instead to real property that's held for investment or for business use, exchanged for a similar ownership interest in other real property also held for investment or business use. And that's pretty broad.

So, for example, an investor may sell an apartment building and buy raw land in exchange. That investor could also sell a rental house and acquire a retail property. An investor might also sell a multifamily property and acquire several smaller rental properties. The point is, those properties may look very different. What matters is the nature or the character of the real property and the taxpayers qualifying use.

What generally doesn't qualify is property held primarily for personal use, like a primary residence, or a property held primarily for sale, like dealer inventory or a flipper's inventory. Those are different categories of property, and they require a different analysis at sale time. So, the short version is this. Like-kind doesn't mean the same type of building, same neighborhood, same asset class, or same size. But it does mean the property on both sides of the exchange needs to have a qualified investment or business use.

Let's quickly clear up three myths about 1031 exchanges.

The first myth, a 1031 exchange means no tax ever. Not usually. A 1031 exchange is generally considered a deferral strategy. The gain is carried forward. Some investors continue exchanging over time, every time they sell their investment property. And some estate plans may change the eventual tax result under current law. But those are planning questions for a tax advisor. The basic point is simple. Don't think of 1031 as tax erased. Think of it as tax deferred until the point that you sell your investment property without an exchange and the carried over gain is taxed.

The second myth is that 1031 exchanges are only for huge investors. This is a myth and not true. Many exchanges involve everyday investors, someone selling a single rental property, a family moving from active management to a more passive real estate investment, a small business owner repositioning their property, or an investor that's consolidating or diversifying their portfolio. The 1031 landscape can be very technical, but the participating investors run the gamut in terms of experience level and size. The third myth is that I can decide to exchange after I sell. This is the myth that causes the most preventable damage because once a sale is closed, even if the seller hasn't received the proceeds yet, it's too late to go back and structure a 1031 exchange. The qualified intermediary and exchange documents need to be in place before closing in order for the investor to have a qualifying exchange safe harbor setup. That's why we'll say this often on this podcast. If an exchange is even a possibility, start the conversation early.

Let's put some simple numbers around a 1031 exchange. This is just an illustration. And actual tax results depend on the investor's full situation.

But imagine two investors each sell an investment property, and each has a $200,000 gain. Investor A sells, pays the applicable tax, and reinvests what's left after into some other sort of asset. Investor B plans ahead, completes a properly structured 1031 exchange, and keeps their pre-tax equity working in the next qualifying property that they invest in. The difference isn't just a tax line on a closing statement. It's the actual capital that those investors are seeing reinvested in their new property. Capital can help an investor buy a stronger replacement property.

It can help support financing efforts. It can create more room for reserves, capital improvements to be built, or diversification of a portfolio. And, if that capital remains invested over time, it may compound. Compounding is quiet. It doesn't make a lot of noise in year one. But over 10, 15, or 20 years, the difference between paying tax today and keeping more money invested can become very meaningful.

That's why a 1031 exchange is often less about a single transaction and more about long-term real estate strategy. Now, one important note, a 1031 exchange isn't always the right answer. If an investor needs liquidity, wants to exit real estate, can't find a suitable replacement property, is selling at a loss, or has other tax or estate planning priorities, paying the tax and moving on may be the better decision. Taxes matter.

But taxes aren't the only decision driver. The real question isn't, can I do a 1031 exchange? The better question is, does a 1031 exchange fit my facts, my timing, my replacement options, and my broader plan?

That's a decision to make with a qualified tax or legal advisor or your financial advisors, along with a qualified intermediary.

In future episodes, we'll break down the details that investors usually care about the most, the 45-day identification period, the 180-day exchange period, what it is that a qualified intermediary does, what can create taxable boot accidentally, when reverse exchanges or improvement exchanges may be strategic, and where investors tend to get tripped up. We'll also talk about the market context, because a 1031 exchange doesn't happen in a vacuum and it isn't just a tax concept; it's a real estate transaction with timing, financing, inventory, due diligence, and negotiation risk and considerations.

The main takeaway today is this: A 1031 exchange can help keep capital working, but the structure has to be in place before the sale closes. A 1031 exchange usually doesn't break down overnight. The real deal breaker is poor planning from the start.

If you found this helpful, subscribe to The 1031 Brief, so you don't miss future episodes. We'll link a 1031 Basics Checklist in the show notes, including the basic timeline and the questions to ask before you list a property for sale.

Thanks for listening and see you next time on The 1031 Brief, where we bring you information useful enough to remember and practical enough to use.

This podcast is for educational purposes only and isn't legal, tax, financial, or investment advice. Please consult your own tax advisor and legal counsel about your situation.

This episode is copyright 2026 by First American Financial Corporation, all rights reserved.

This transcript has been edited for clarity.

Check out more episodes of The 1031 Brief.