One of the most persistent 1031 Exchange myths is that investors must wait five years before completing another exchange.
That is not a general rule under Section 1031.
If you own qualifying real property, sell it, follow the applicable 1031 Exchange rules, and acquire qualifying replacement property, you may be able to complete another exchange even if your previous exchange happened much more recently.
Experienced commercial real estate investors may use multiple exchanges over time to reposition portfolios, enter new markets, reduce management responsibilities, improve cash flow, or preserve equity for future investment.
The important question is not how long it has been since your last exchange. It is whether each individual transaction qualifies under Section 1031.
Is There a Five-Year Waiting Period Between 1031 Exchanges?
No general five-year waiting period applies between qualifying 1031 Exchanges.
A properly structured 1031 Exchange may allow an investor to defer recognition of certain gains that could otherwise arise when qualifying investment or business real estate is sold.
Under current IRS rules, Section 1031 generally applies to exchanges of real property held for investment or productive use in a trade or business. Property held primarily for sale does not qualify.
For additional information, review the IRS guidance on like-kind exchanges.
The rules focus on factors including:
- The nature and use of the property
- The investor’s intent
- How the exchange is structured
- Whether the properties qualify
- Whether required 1031 Exchange deadlines are met
They do not create a general rule limiting investors to one exchange every five years.
Where Does the Five-Year 1031 Exchange Myth Come From?
The confusion likely comes from mixing Section 1031 with rules associated with Section 121, which addresses the exclusion of gain from the sale of a principal residence.
A five-year rule can become relevant when property acquired through a 1031 Exchange is later converted into a principal residence and the owner wants to claim the Section 121 home-sale exclusion.
That is very different from a rule requiring an investor to wait five years before completing another 1031 Exchange.
Understanding the distinction is important because confusing the two rules could cause an investor to overlook a potential planning opportunity.
Can You Do Another 1031 Exchange After Buying a Replacement Property?
Potentially, yes.
However, the replacement property must meet the requirements of Section 1031.
Qualifying real property generally must be held for investment or productive use in a trade or business. Real property held primarily for sale generally does not qualify.
There is also no universal minimum holding period stated for every standard 1031 Exchange. Holding time can be one factor used to evaluate investment intent, but the taxpayer’s purpose, use of the property, documentation, and surrounding circumstances can also matter.
This is why planning should begin before the relinquished property closes.
Your CPA, tax attorney, Qualified Intermediary (QI), and experienced 1031 real estate broker should understand the strategy before critical decisions are made.
Not familiar with some of these terms? Visit the 1031 Exchange Glossary for straightforward explanations.
Other 1031 Exchange Holding Rules to Know
Although there is no general five-year waiting period between exchanges, certain specialized situations have their own timing requirements.
Related-Party Exchanges
Special rules apply to exchanges involving related parties. In certain circumstances, disposing of property received in the exchange within two years can affect the tax treatment of the transaction.
You can find additional details in the IRS Instructions for Form 8824.
Vacation and Second Homes
The IRS also provides a specific safe harbor for certain dwelling units.
Under IRS Revenue Procedure 2008-16, certain ownership, rental, and personal-use requirements can apply when determining whether a dwelling unit is considered held for investment purposes.
Neither of these rules establishes a universal five-year waiting period between 1031 Exchanges.
Don’t Forget the 45-Day and 180-Day Deadlines
While there isn’t a five-year waiting period, 1031 Exchange deadlines are extremely important.
For a typical deferred exchange, an investor generally must:
- Identify potential replacement property within 45 days after transferring the relinquished property.
- Receive the replacement property within 180 days after the transfer, or by the applicable tax-return due date, including extensions, if earlier.
Missing these deadlines can prevent the transaction from qualifying for 1031 Exchange treatment.
The IRS Form 8824 guidance provides additional information about exchange requirements and reporting.
How Repeated 1031 Exchanges Can Support a Long-Term Real Estate Strategy
The ability to complete additional qualifying exchanges can give investors flexibility as their goals change.
For example, an investor may use a future 1031 Exchange to:
- Move from actively managed property into a more passive investment
- Exchange multifamily property for retail or other qualifying real estate
- Consolidate several smaller investments
- Diversify one property into multiple replacement properties
- Reposition equity into different markets
- Reduce property management responsibilities
- Adjust a portfolio as retirement or estate-planning goals change
An owner who no longer wants to manage repairs, vacancies, and tenant issues may also explore more passive replacement-property strategies, such as an absolute net single-tenant property or, when appropriate, a Delaware Statutory Trust (DST).
The right approach depends on the investor, the properties involved, and the overall financial and tax strategy.
The Bottom Line: There Is No General Five-Year Limit
The idea that you can only complete a 1031 Exchange every five years is a myth.
There is no general five-year waiting period between qualifying exchanges.
Instead, each transaction must be evaluated on its own merits. The properties must qualify, applicable deadlines must be followed, the transaction must be properly structured, and the investor’s intent should be consistent with holding the replacement property for investment or business purposes.
For more detailed federal tax information, see IRS Publication 544: Sales and Other Dispositions of Assets.
Before selling an investment property, speak with your tax advisor, engage a Qualified Intermediary before closing, and work with professionals who understand both the sale of the relinquished property and the acquisition of replacement property.
A 1031 Exchange is more than a transaction. It can be part of a long-term real estate investment strategy.
Need Help Planning a 1031 Exchange?
If you own investment property and are considering an exchange, schedule a no-obligation 1031 Exchange strategy call.
James Bean
SVN | Rich Investment Real Estate Partners
CA DRE# 01970580
Phone: 805-779-1031
Email: james.bean@svn.com
Real estate agents and brokers are also welcome to connect with James to discuss strategies for helping listing clients prepare for a potential exchange.
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Don’t Know a 1031 Exchange Term?
Use the 1031 Exchange Glossary to learn commonly used terminology.
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Disclaimer: This article is intended for educational purposes only and should not be considered tax, legal, lending, or financial advice. Every transaction is different. Property owners should consult their own qualified tax and legal advisors and engage an experienced Qualified Intermediary before structuring a sale or exchange.
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