1031 Exchange

Named for Internal Revenue Code Section 1031, this allows a seller of investment or business-use real estate to defer federal (and typically state) capital gains tax by reinvesting net proceeds into like-kind replacement property. Both the relinquished and replacement property must be held for investment or business use, not a primary residence.

The mechanics run on two hard deadlines that a broker has to build a search around: 45 days from closing on the relinquished property to identify replacement property in writing, and 180 days total to close on it. A qualified intermediary must hold the sale proceeds — a seller who touches the cash disqualifies the exchange.

For a seller weighing a 1031 against a straight sale, the analysis is usually about total return after tax, not just deferral: replacement property with a lower cap rate, higher leverage cost, or thinner tenant credit can leave the exchanger worse off than paying the tax and reinvesting freely. We run that comparison before recommending an exchange rather than assuming deferral wins by default.

Cannabis real estate complicates 1031 planning because federal illegality under the Controlled Substances Act creates uncertainty about whether cannabis-use property qualifies as like-kind to a conventional asset; sellers exiting a Michigan cannabis facility should get tax counsel involved before relying on 1031 treatment.