Understanding 1031 Exchanges: A Quick Guide (From Your Escrow Team)

If you're a real estate investor, you may have heard about something called a 1031 Exchange. It sounds like a secret code, right? But don’t worry—we’re here to explain it in a way that’s super easy to understand. And yes, it’s something we help with every day in escrow!

What Is a 1031 Exchange?

A 1031 Exchange (also called a like-kind exchange) is a way to sell an investment property and buy another one—without paying capital gains taxes right away. It's a rule from the IRS (that’s the government tax people), and it helps investors grow their real estate wealth faster.

Example Time:

Let’s say you bought a rental house for $200,000 and later sell it for $300,000. Normally, you'd have to pay taxes on that $100,000 profit.

BUT—if you use a 1031 Exchange, you can use all that money to buy a new investment property. No taxes due now!

How Does the 1031 Exchange Work?

Here’s a quick step-by-step process from our escrow perspective:

1. Sell your current investment property

   
   

   • You start the process with your real estate agent and escrow officer (that’s us!).

     
     

2. Let escrow know it’s a 1031 Exchange

   
   

   • Tell us upfront so we can help structure the sale correctly.

     
     

3. Use a Qualified Intermediary (QI)

   
   

   • The IRS says you can’t touch the money from the sale. A QI (someone who holds the money safely) handles that part. Escrow works directly with your QI to make it smooth.

     
     

4. Identify your new property fast

   
   

   • You have 45 days after the sale to write down which property (or properties) you want to buy next.

     
     

5. Buy your new property within 180 days

   
   

   • Escrow helps close the new deal with your QI and real estate team.

     
     

6. Congrats! You’ve deferred your capital gains tax!

   
   

   • Now your money keeps working for you, tax-free (for now).

   
   

   Important Rules to Know:

7. 
   

   • Properties must be investment or business use only—not your personal home.

   • New property must be equal or greater in value than the one you sold.

   • The process must follow IRS 1031 rules exactly—so use professionals like a real estate attorney, escrow officer, and QI.

Why Escrow is Important in a 1031 Exchange

As your escrow partner, we:

• Make sure all documents are handled properly.

• Communicate with the QI and agents.

• Ensure timelines (like the 45-day ID window) are followed.

• Help avoid costly mistakes that could cancel the exchange.

Final Thoughts

A 1031 Exchange is one of the best tools for real estate investors who want to grow their portfolio and defer paying taxes. Just remember—it’s all about timing, paperwork, and having the right team.

At Southwest Escrow, we’re here to make sure your 1031 Exchange is stress-free and successful. Have questions? Let’s talk!

Need help with your 1031 Exchange?

📞 Call us today at (310) 674-7660

📍 Visit us at 502 S La Brea Ave, Inglewood, CA 90301

🌐 Learn more: southwestescrow.com

📧 Email: pajavon@southwestescrow.com

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