1031 Exchange Basics for Durham Investors

Thinking about selling an investment property in Durham and rolling the gains into your next deal without writing a big check to the IRS right now? A 1031 exchange can help you defer capital-gains tax while you reposition your portfolio. If you want a simple, local guide that explains what qualifies, how the deadlines work, and what to watch in Durham, you are in the right place. You will learn the must-know rules, a clear step-by-step plan, and practical tips for the Triangle market. Let’s dive in.

What a 1031 exchange does

A 1031 exchange lets you sell investment or business real estate and buy other qualifying real property, while deferring capital-gains tax. You are not avoiding tax forever. You are deferring it as long as each sale is followed by another qualifying exchange or other tax relief applies later.

After 2017, the law limits exchanges to real property only. Personal property, like equipment or furniture, does not qualify. You can review the basics in the IRS overview on like-kind exchanges for real estate to understand the scope and limits of the rule. For authoritative timing and identification details, refer to the Treasury Regulations that govern deferred exchanges.

• Learn more from the IRS about like-kind exchanges in plain English by reviewing the IRS guidance on like-kind exchanges.
• For the detailed timing and identification rules, see the Treasury Regulations on identification and timing.

Like-kind and use rules, simplified

“Like-kind” is broad for real estate. In practical terms, most investment real estate can be exchanged for most other investment real estate. For example, you can trade a Durham single-family rental for a small multifamily building, a downtown mixed-use asset, or even certain fractional interests, as long as both the sold property and the new property are held for investment or used in a trade or business.

Primary residences do not qualify. Conversions between investment and personal use have complex rules. If you are considering a strategy that involves a future move-in, talk with your tax advisor first.

Timelines you cannot miss

Two deadlines control every 1031 exchange. Missing either one typically ends your tax deferral.

• Identification period. You have exactly 45 calendar days from the sale closing to identify potential replacement properties in writing to your qualified intermediary.
• Exchange period. You must close on the replacement property within 180 calendar days of the sale closing, or by your tax return due date for that year if earlier.

These timelines are strict. The regulations spell out the details and safe harbors. Work backward from your closing date and build in buffers so you are not scrambling on day 45 or day 180.

Identification rules you will use

You control risk during the 45-day window by how you identify properties. You have three common options:

• 3-property rule. Identify up to three properties of any value.
• 200 percent rule. Identify more than three properties as long as the total value you identify does not exceed 200 percent of the value of what you sold.
• 95 percent exception. Identify any number of properties, and still qualify if you end up acquiring at least 95 percent of the total value you identified.

Keep backup options in your identification letter. Deals fall through, and you do not want your exchange to fail because your first pick did not close.

Why a qualified intermediary is required

You cannot touch the sale proceeds. If you receive or control the cash, the IRS treats it as taxable. A neutral third party, called a qualified intermediary, must hold the funds and coordinate the exchange paperwork. The QI also receives your written identification and moves the proceeds to the replacement closing.

You can see the IRS summary of this requirement and related rules in the IRS guidance on like-kind exchanges.

Understand boot and debt replacement

“Boot” is any cash or non-like-kind property you receive in the exchange. Boot is taxable to the extent of your gain. Debt matters too. If you sell a property with a certain mortgage balance and buy a replacement with less debt without adding cash, the reduction can be treated as taxable boot.

To fully defer tax, most investors aim to buy equal or greater value, reinvest all net proceeds, and replace equal or greater debt. Coordinate with your lender early so your loan terms match your exchange plan.

Exchange structures beyond the standard sale-then-buy

Most exchanges follow a straightforward sell-then-buy sequence. Some situations call for different setups:

• Reverse exchange. You buy the replacement first, and the relinquished property is parked with an exchange accommodation titleholder until it sells. These are more complex and costlier.
• Improvement exchange. You can direct exchange proceeds into improvements on the replacement property during the exchange window. This also requires special structuring.

Both options require experienced professionals. Build extra time into your plan.

Durham market opportunities for exchanges

Durham offers a wide range of property types that work well in a 1031, so you can adapt to your goals and risk profile:

• Single-family rentals near employment centers for steady long-term demand.
• Small multifamily buildings, duplex through 8 units, for scale without large onsite management.
• Mid-size multifamily for investors trading up to increase cash flow and depreciation.
• Downtown commercial or mixed-use, including storefronts, retail, and upper-floor office or residential in the core, American Tobacco District, and the Ninth Street area.
• Office or flex space near Research Triangle Park and South Durham business parks.
• Light industrial and last-mile warehouse in Durham County or adjacent counties.
• Land or development parcels on the outskirts for ground-up plans.
• NNN-leased single-tenant properties for more predictable, passive income.
• Fractional interests like Delaware Statutory Trusts for passive ownership without direct management.

The right fit depends on your investment horizon, financing, management preference, and tax picture. Make sure the replacement property aligns with the “held for investment or business use” standard.

Durham due diligence checklist

Local factors can shape your underwriting and your exchange timing. Add these items to your checklist:

• Zoning and permitted uses. Confirm City of Durham zoning and any overlays or historic rules before you identify a property.
• Landlord and tenant dynamics. Durham’s rental demand is influenced by Duke University, healthcare systems, research employers, and local colleges. Understand whether your target tenant base is student, workforce, or mixed.
• Short-term rental rules. If you plan a short-term rental strategy, review current City of Durham ordinances to confirm what is allowed.
• Environmental and building health. Older urban assets may involve site contamination, lead paint, or asbestos. Budget for environmental due diligence.
• Financing and underwriting. Lender approval and closing timelines must align with the 1031 calendar. Confirm any loan assumptions in advance.
• Recording and closing process. For state-level tax matters and links to county offices, the North Carolina Department of Revenue provides helpful resources.
• Market comps and cap rates. Durham submarkets can trade differently. Use current rent, vacancy, and redevelopment data when you price or bid.

Step-by-step timeline for a smooth exchange

Here is a practical sequence to follow from planning to reporting.

Pre-sale planning

• Meet with a tax advisor to estimate your gain and the target purchase price needed to fully defer tax.
• Engage a qualified intermediary and sign the exchange agreement so funds can be held properly at closing.
• Talk with your lender about mortgage payoff, assumptions, and new loan options for the replacement.
• Align sale contract dates with your exchange timeline to avoid closing conflicts.

At sale closing

• Make sure sale proceeds go directly to the QI. Do not accept funds.
• Record the exact closing date. Your 45-day and 180-day clocks start now.

Days 1 to 45: identification period

• Under the 3-property or 200 percent rule, submit your written identification to the QI.
• Name backups. If your first choice falls through, you still have options.
• Complete inspections and financing diligence as early as possible.

Days 46 to 180: completion period

• Schedule closing on your replacement property or properties so funds move from the QI to the seller.
• Track debt replacement to avoid unintended mortgage boot.
• Title, insurance, and entity ownership should be consistent with your exchange plan.

After closing

• Keep every document: exchange agreement, identification letter, settlement statements, and loan files.
• Work with your tax advisor to report the exchange on Form 8824 for the tax year of the sale.

Passive options: DSTs and fractional interests

If you want less hands-on management, Delaware Statutory Trusts and some tenancy-in-common structures can be eligible replacement property. These vehicles are structured so that investors are treated as owning real estate for exchange purposes. Each offering has limits on control and liquidity. Review sponsor documents closely with your advisor before identifying a DST in your 45-day window.

Common mistakes to avoid

A few missteps cause most failed exchanges. Stay ahead of them.

• Missing the 45-day or 180-day deadlines. There are no easy fixes after the fact.
• Touching the money. Do not receive, control, or benefit from the sale proceeds.
• Underestimating financing. Loan delays can push you past day 180.
• Forgetting debt replacement. Reinvest all net proceeds and match or increase debt if you want full deferral.
• Poor identification strategy. Use the 3-property or 200 percent rules wisely and include backups.

How we support Durham 1031 investors

You want a clear plan, on-time execution, and local knowledge that protects your deferral. Our team combines Durham market expertise with investor-focused service. We help you evaluate asset options across residential, commercial, and land, price your sale, source replacement opportunities, coordinate with your qualified intermediary, and keep lenders and attorneys in sync with your timeline. If you are considering a reverse or improvement exchange, we can assemble the right team early so your structure fits the rules.

When you are ready to plan your exchange, connect with Terra Nova Global Properties for thoughtful, local guidance backed by national resources.

Ready to map your 1031 exchange in Durham? Let’s connect and put a plan on paper that fits your goals.

Terra Nova Global Properties

FAQs

Can you exchange a Durham rental into your primary home?

• Generally no. A 1031 requires investment or business use; conversions to personal use have special rules and need careful tax planning.

How many replacement properties can you identify in a 1031?

• You can identify up to three of any value, or more than three if the total value is within 200 percent of what you sold, or meet the 95 percent exception.

What happens if you miss the 45 or 180-day deadline?

• The exchange typically fails for deferral purposes and your gain becomes taxable for that year.

Do you need a qualified intermediary, lawyer, and CPA in Durham?

• Yes. A QI holds funds and documents the exchange, while your tax advisor and real estate attorney handle reporting and local title matters.

Can you 1031 into a Delaware Statutory Trust for passive ownership?

• Many investors use DSTs as replacement property; they can qualify, but you should review offering documents and restrictions with your advisors.

Can a 1031 exchange help you cash out tax-free?

• No. Taking cash or reducing debt without adding cash creates taxable boot; a 1031 defers tax rather than eliminates it.

Are out-of-state or international properties allowed in a 1031?

• U.S. investment properties can be exchanged for other U.S. real property; cross-border deals involve added tax rules and need specialist advice.

References: For official guidance, see the IRS guidance on like-kind exchanges and the Treasury Regulations on identification and timing. For statewide tax resources and county office links, visit the North Carolina Department of Revenue.