Stop Tipping the IRS: How Smart Investors Use 1031 Exchanges to Defer Taxes
If your clients are selling investment real estate and paying capital gains taxes without exploring a 1031 exchange, they’re most likely leaving money on the table.
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TL;DR:
A 1031 exchange allows investors to defer capital gains taxes by reinvesting proceeds from a real estate sale into another qualifying property. It’s a powerful wealth-preservation tool—but it only works if the 1031 exchange rules and timeline are followed. Lesser-known options like Delaware Statutory Trusts and certain mineral rights expand what's possible beyond traditional real estate.
What You May Not Know About 1031 Exchanges:
You can 1031 into fractional ownership of institutional-grade real estate via Delaware Statutory Trusts (DSTs)—think Class A multifamily, medical buildings, logistics centers, and more. No more tenant phone calls. No more direct dealing with the HOA.
You can also 1031 into qualifying mineral rights—specifically royalty or leasehold interests that are considered real property under state law and are held for investment, such as oil and natural gas assets that generate monthly income. Not all mineral interests qualify, so proper structuring is key.
These options can help clients offload landlord responsibilities without triggering a tax event.
1031 Exchange: The Basics
What Is It?
A 1031 exchange (IRS Code Section 1031) lets investors defer capital gains taxes by reinvesting the proceeds from the sale of investment or business-use property into another like-kind property.
When to Use It:
Clients are selling appreciated investment property
They want to avoid a big capital gains tax hit
They’re looking to diversify or simplify their real estate holdings
They’re ready to retire and shift from active to passive income
Why Use It:
Defer taxes: Keep more capital compounding
Upgrade or reposition: Move into better-performing markets or assets
Go passive: Exchange into DSTs or mineral rights for mailbox income
1031 Exchange Rules & Timeline:
Identify replacement property within 45 days
Close within 180 days
Must use a Qualified Intermediary (Q.I.)—proceeds can’t hit the client’s bank account
Must reinvest equal or greater value in property and debt to fully defer taxes
Still Reading? Here’s Your Gem:
If a client fails to close on any of their identified properties after Day 45, and doesn’t complete the exchange, they don’t just pay taxes immediately—they also can’t access their sale proceeds until Day 181. This is a lesser-known risk in the 1031 exchange process that many investors miss. If you don’t understand the 1031 timeline, your clients could lose access to their funds and trigger an unexpected tax bill. That’s because the Qualified Intermediary (Q.I.) is legally required to hold the funds for the full 180-day exchange window unless the exchange is properly completed. It’s a mandatory lockup—no exceptions, even if the exchange fails.
Pro Tip:
To avoid being stuck with no viable options, clients can use the 3-property rule (identify up to 3 properties of any value) or the 200% rule (identify more than 3 properties, as long as their total fair market value doesn’t exceed 200% of the relinquished property). This provides strategic flexibility—but the clock doesn’t stop, and the rules are rigid. Backups matter.
Bottom Line:
A properly structured 1031 exchange—when aligned with the correct rules and timeline—can help clients grow their wealth faster and reposition their portfolios without the tax drag. As a real estate or tax professional, helping your clients understand all their options—including DSTs and properly structured mineral rights—could be the difference between a one-time sale and a lifetime client.
Sources:
IRS Instructions for Form 8824:
https://www.irs.gov/instructions/i8824#en_US_202212_publink100045435Revenue Procedure 2002-22 (DST Guidance):
https://www.irs.gov/irb/2004-33_IRBRevenue Ruling 68-331 (Mineral Rights):
https://www.irs.gov/pub/irs-drop/td_9935.pdf
Disclosures & Disclaimers:
This material is for informational purposes only and should not be considered personalized financial, investment, tax, or legal advice. The information provided herein is not intended to be a recommendation or solicitation to buy or sell any specific security or investment strategy. Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
1031 exchanges, Delaware Statutory Trusts (DSTs), and mineral rights may not be suitable for all investors and are subject to specific rules, tax codes, and eligibility requirements. You should consult with your financial advisor, tax professional, and legal counsel to determine whether these strategies are appropriate for your individual circumstances.
Advisory services are offered through Legacy Wealth Management, LLC, a Registered Investment Adviser. Registration does not imply a certain level of skill or training. Shawn Ogawa is a Series 65 licensed Investment Advisor Representative (IAR) and provides investment advice through Legacy Wealth Management, LLC, serving clients nationwide.