Deferring Your Taxes With 1031 Exchanges - Tommy Hinson
Or listen wherever you podcast!
Episode Description
In this forum episode of the On The Rise Podcast, Jeremy Dyer, VP of Capital Formation at Rise 48, welcomes Tommy Hinson, CEO of Investors 1031 Exchange, for a plain-English walkthrough of the 1031 exchange. Tommy explains how investors defer capital gains by rolling real estate into more real estate — "swap till you drop" — until a stepped-up basis erases the tax at death. The session covers the types of exchanges, the same-taxpayer rule and why partnerships cause problems, the 45- and 180-day deadlines, reinvesting 100% of equity, TIC and DST structures, the 721 UPREIT endgame, and a case study showing how much you lose by skipping a 1031. A practical primer for real estate investors.
Summary
A 1031 lets you defer tax by rolling real estate into real estate.
The 1031 exchange defers capital gains when you sell investment property and reinvest in more investment property. Tommy's phrase is "swap till you drop" — keep exchanging, and when heirs inherit, the stepped-up basis at death can wipe the deferred tax away entirely.
Understand how basis moves.
Basis rises with capital improvements (a new kitchen adds to it) and falls with depreciation, which happens whether or not your CPA elects it. A lower basis means a larger taxable gain — but for 1031 purposes, continuing to reinvest all the cash avoids the tax anyway.
Know the types of exchanges.
Most common is the forward (delayed) exchange — sell, then buy within the deadlines. There's also the simultaneous, the reverse (buy first, sell second, via a special-purpose entity), and the build-to-suit/improvement exchange, where leftover proceeds fund renovations on the replacement property.
The same taxpayer must sell and buy — and partnerships are a trap.
Whoever's tax return reports the sale must report the purchase. Single-member LLCs and trusts pass through fine, but multi-member partnerships own the property jointly, so one partner can't peel off and exchange alone. Tommy's fix: hold property as tenants-in-common so each owner can exchange independently.
Two deadlines start the moment escrow closes.
You have 45 days to identify replacement property (via the three-property rule, the 200% rule, or the rarely used 95% rule) and 180 days total to close. The deadlines are firm — a tax-return extension can preserve the full window, and only a federally declared disaster extends them.
Intent to hold for investment is required.
The property must be held for investment or business use — not flips, not a primary residence, not ground-up development for resale. Holding through two tax cycles has generally satisfied auditors, though it isn't written in the code; documentation of intent matters.
Reinvest 100% of equity — or pay the boot.
To fully defer, buy equal or greater value and reinvest all net proceeds; unreplaced cash or debt becomes taxable "boot." Rather than take cash out of the exchange (taxed at 20–40%), Tommy suggests completing the exchange and doing a cash-out refinance later, which isn't taxable.
Businesses no longer qualify — and the 721 UPREIT is the endgame.
Since the 2014 tax changes, only real estate qualifies (personal property and businesses were removed), so a sold business must separate real estate value from business value. For very large portfolios, a 721 UPREIT converts holdings into REIT shares for liquidity — but it's the end of the road, since you can't exchange out afterward.
Resources
Website: Rise48equity.com
