1031 Exchange FAQ: Your Guide to Tax-Deferred Real Estate Investing in San Francisco
A 1031 exchange is one of the most powerful tools available to real estate investors. It allows you to sell an investment property and reinvest in another while deferring capital gains taxes, keeping more of your money working for you.
Even if you’re not a seasoned investor, you may have seen listings described as “great for a 1031 exchange” and wondered what that means. The process can seem complex, but the fundamentals are straightforward. Below, you’ll find a glossary of key terms and answers to the most common questions clients ask about 1031 exchanges.
Glossary of Key Terms
1031 Exchange: A program that lets you sell an investment property, buy another one, and defer capital gains taxes.
Deferred Capital Gains: Instead of paying taxes right away on your profit from the sale, you postpone them by reinvesting through another 1031 exchange. Taxes are only due when you eventually sell without doing another exchange — unless your heirs inherit the property, in which case they often avoid the deferred taxes through a “step-up in basis.”
Qualified Intermediary (QI): A required third party who holds your sale proceeds and helps make sure your exchange follows IRS rules.
Identification (45-Day Rule): Within 45 days of selling your property, you must submit a written list to your QI with the exact property (or properties) you may want to buy. This list has to include the property’s address or legal description, but you don’t need to be in contract yet.
Completion (180-Day Rule): The exchange is considered complete once you’ve closed escrow on the replacement property. This must happen within 180 days of selling your original property.
10 Frequently Asked Questions About 1031 Exchanges
1. What is a 1031 exchange?
It’s a way to sell an investment property, buy another one, and delay paying capital gains taxes. Investors use it to keep more money working for them in real estate instead of sending it to the IRS right away.
2. What types of properties qualify?
The key is that both properties must be for investment or business use. For example, you can exchange a single-family rental for a condo, a duplex, or even a commercial property.
3. Can I use a 1031 exchange for my home?
No. Your primary residence or vacation home doesn’t qualify — this is only for investment properties.
4. What does it mean to “identify” a property in 45 days?
After you sell, you have 45 days to tell your QI in writing which property (or up to three properties) you might buy. Think of it as putting your options down on paper — not necessarily being in contract yet.
5. How long do I have to finish the exchange?
You have 180 days to close escrow on the replacement property. Closing is what makes the exchange official.
6. Do I need to reinvest all the money from the sale?
Yes, if you want to defer all of the taxes. If you keep some of the money (called “boot”), you’ll pay taxes on that portion.
7. What happens to the money from my sale in the meantime?
It goes straight to your Qualified Intermediary. You can’t touch the funds yourself, or the exchange won’t qualify.
8. Can I buy more than one property?
Yes. You can identify up to three potential properties, or even more under certain IRS rules. Many investors use this flexibility to diversify.
9. What if I miss the deadlines?
Unfortunately, the exchange fails and you’ll owe taxes on the sale. The IRS doesn’t allow extensions, so it’s important to plan ahead and move quickly.
10. Can the property I buy be in a different city or state?
Yes. As long as both properties are located in the U.S. and used for investment or business purposes, you can exchange across different cities, counties, or states. For example, you could sell a rental condo in San Francisco and reinvest in a multi-unit building in Austin. Many investors use 1031 exchanges to diversify into new markets.
Bonus FAQ: Why Are Some Properties Marketed as “Great for a 1031 Exchange”?
Technically, any investment property held for business or rental use can qualify for a 1031 exchange. There’s nothing about the IRS rules that makes one property more eligible than another. So why do some listings get marketed this way?
It usually comes down to investor appeal:
Rental Potential – Properties with strong, reliable rental income are especially attractive to exchange buyers who want steady cash flow.
Turnkey Condition – Investors in an exchange often prefer properties that are ready to rent or already leased, so they don’t lose time on renovations.
Price Point Alignment – Since investors need to reinvest all proceeds to defer taxes, properties at common exchange price ranges get extra attention (often between $1-2M in San Francisco).
Quick Closing Potential – Because exchangers are on a strict timeline (45 days to identify, 180 days to close), properties that can close smoothly and quickly are especially appealing.
When you see a home marketed as “great for a 1031 exchange,” it’s less about eligibility and more about how well it fits what exchange buyers are looking for: income potential, convenience, the right price, and a fast close.
Final Thoughts
A 1031 exchange is one of the best tools real estate investors have for building wealth. By deferring capital gains taxes, you can put more of your money to work in your next property. The tradeoff is that the rules are strict and the deadlines are tight. That’s where having an experienced agent matters — someone who understands the timelines, can help you quickly identify the right replacement properties, and can guide you through negotiations to keep the process moving smoothly.
If you’re considering a 1031 exchange in San Francisco or beyond, I’d be happy to walk you through the process and connect you with trusted professionals who can make sure your exchange is set up for success.
