What Is a 1031 Exchange?

A 1031 Exchange, named after Section 1031 of the IRS tax code, allows investors to defer capital gains taxes when selling an investment property, as long as the equity is reinvested into another investment property of equal or greater value.

It’s essentially a tax-deferred trade. Instead of handing a large portion of your profit to the IRS, you keep those dollars working inside your portfolio.

Why Investors Use a 1031 Exchange

Tax deferral keeps more equity available for reinvestment. Expanding a portfolio becomes easier, since selling one property can help you purchase more than one replacement. Cash flow often improves when a lower-performing property is traded for stronger rental assets.
Investors can shift equity from one market to another while staying fully tax-deferred.

Basic Rules of a 1031 Exchange

Replacement properties must be considered “like kind,” which includes almost all real estate held for investment.

A qualified intermediary must hold the funds during the transition. Replacement properties must be identified within the allowed identification timeline. The exchange must be fully completed within the required closing timeline.

How Selling One Property Can Turn Into Owning Two

Here’s a simple example that mirrors what many Chattanooga investors are doing today.

An investor sells an investment property with a healthy amount of equity after paying off the mortgage. Instead of paying capital gains taxes, the investor places the entire amount with a qualified intermediary for use in a 1031 Exchange.

Within the allowed identification period, the investor selects two investment properties. Each one offers strong rental income, solid locations, and long-term appreciation potential. Together, the two new properties exceed the value of the property that was sold, which satisfies the rules of the exchange.

At closing, the investor divides the tax-deferred equity between both purchases. The remainder of each purchase is financed through traditional lending. This strategy allows the investor to replace one equity-heavy property with two income-producing assets that offer:

• Stronger overall cash flow
• Multiple streams of rental income
• Greater long-term appreciation opportunities
• Expanded depreciation benefits
• More options for future sales or exchanges

Why Investors Love This Approach

• It creates diversification across more units and locations.
• It builds two rental incomes instead of one.
• It expands tax benefits through additional depreciation.
• It strengthens long-term exit strategies by adding more flexibility.

Is a 1031 Exchange a Good Fit for You?

If you own a property that has significantly appreciated or one that no longer performs the way you need it to, a 1031 Exchange may be the most powerful way to grow your portfolio without losing momentum to taxes.

At Chattanooga Property Shop and Property Shop Commercial, our team helps investors:

• Identify eligible properties
• Analyze cash flow and cap rates
• Structure multi-property purchases
• Navigate timelines with confidence
• Plan long-term rental and appreciation strategies

Considering a 1031 Exchange in the coming year?

Whether you want to turn one property into two or reorganize your entire portfolio, we’re here to help you map out the right strategy.

Reach out for a confidential conversation about your goals. Your equity has worked hard to get you here—now let’s make it work even harder.