Published March 2025 | 10 min read
A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows real estate investors to defer capital gains taxes when selling an investment property by reinvesting the proceeds into a like-kind replacement property. For Ohio real estate investors, a properly executed 1031 exchange can mean deferring tens or hundreds of thousands of dollars in federal and state taxes.
The Basic Requirements
To qualify for a 1031 exchange, the property being sold (the relinquished property) and the property being purchased (the replacement property) must both be held for investment or used in a trade or business. Personal residences do not qualify. Both properties must be located within the United States.
The Critical Timelines
The IRS imposes strict deadlines on 1031 exchanges. You have 45 days from the sale of your relinquished property to identify potential replacement properties in writing. You then have 180 days from the sale to close on the replacement property. These deadlines are absolute and cannot be extended.
The Role of the Qualified Intermediary
You cannot receive the sale proceeds directly. The funds must be held by a qualified intermediary (QI) between the sale and the purchase. Wolterman Law Office serves as a qualified intermediary for Ohio real estate investors, ensuring your exchange is properly structured and documented.
Ohio Capital Gains Tax Considerations
Ohio taxes capital gains as ordinary income at rates up to 3.99%. A 1031 exchange defers both federal capital gains taxes (up to 20% plus the 3.8% net investment income tax) and Ohio state taxes. For a $500,000 gain, the total tax deferral can exceed $120,000.
Common 1031 Exchange Mistakes
The most common mistakes include missing the 45-day identification deadline, failing to identify enough replacement properties, receiving boot (cash or non-like-kind property), and not working with a qualified intermediary from the start of the transaction.