tax-deferred exchange

Tax-deferred exchange refers to the ability of taxpayers to replace one investment property with another similar property rather than taking the sale proceeds. In certain transactions, this exchange allows deferral of capital gains taxes until the replacement property is sold. These transactions are commonly called 1031 exchanges, governed by 26 U.S.C. § 1031.

In a 1031 exchange, the taxpayer must identify the replacement property within 45 days of selling the original property and must acquire it within 180 days (or by the due date of the transferor’s tax return, if earlier). The replacement property must be of equal or greater value to fully defer the gain, though multiple properties may be combined to meet this requirement. The basis of the replacement property is adjusted to reflect the deferred gain, ensuring that capital gains taxes are recognized when the replacement property is ultimately sold.

[Last reviewed in September of 2025 by the Wex Definitions Team] 

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