Before a 1031 Exchange: Decide What the Replacement Property Must Do

A replacement property should solve a specific ownership problem. That might mean less management work, a different tenant mix, more predictable capital spending, or a location that is easier to oversee. Start with that objective before comparing listings.

Separate tax eligibility from investment quality

The IRS describes Section 1031 as applying to qualifying exchanges of real property used for business or held for investment. Property held primarily for sale does not qualify. Cash or other non-like-kind property received can create recognized gain. Eligibility alone does not make a replacement property a sound acquisition; your tax advisor and exchange professional should assess the proposed structure.

Write the replacement brief before selling

• State the income requirement after debt service, reserves, and management costs.
• Define acceptable locations, property types, tenant concentration, and lease rollover.
• Set limits for deferred maintenance, renovation exposure, and additional cash required.
• Agree on who can approve an acquisition and what would cause you to walk away.

Test the financing and the downside

Use actual lender feedback, insurance quotes, property tax information, and a documented capital plan. Compare the cost of holding the current property with the full cost of the replacement. Avoid treating a higher advertised cap rate as proof of better cash flow.

Coordinate the people before the deadlines

JE leads EREG’s 1031 advisory. Share the property being sold, expected timing, ownership entity, and replacement criteria. We can coordinate the real estate search and diligence alongside your qualified intermediary, attorney, and tax advisor. Those professionals should confirm the exchange deadlines and tax treatment for your transaction.