If you’ve inherited real estate or are thinking about selling an investment property, you’ve probably heard someone mention a “1031 exchange.” And if you’ve ever Googled it, you’ve probably also felt your eyes glaze over by paragraph three.

Let’s break it down in plain, real-world language — no jargon storm, no legalese — so you can understand whether a 1031 exchange is a tool you can use, and when it actually makes sense.

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First things first: What is a 1031 exchange?

A 1031 exchange allows you to sell an investment or business-use property, reinvest the proceeds into another qualifying property, and defer paying capital gains taxes.

A few essentials to keep in mind:

• It applies to real property held for investment or business, not your personal residence.
  
• “Like-kind” is broader than most people assume — it simply means both the relinquished and replacement property are investment real estate.
  
• You must follow the IRS timelines: 45 days to identify new property and 180 days to close.
  
  

A Qualified Intermediary (QI) is required; you can’t take possession of the funds yourself.

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Myth: 1031 Exchanges Are Only for Wealthy, Large-Scale Investors

Not true.
You don’t need a portfolio of skyscrapers to use a 1031 exchange. Owners of single-family rentals, duplexes, land, small commercial spaces — even those with one inherited property — use 1031 exchanges all the time.

What matters isn’t the size of your investment.
What matters is that your property meets the IRS definition of being held for investment or productive business use.

So… Can You Use a 1031 Exchange on Inherited Property?

The short answer: You can — but whether you should depends on the situation.

When someone passes away and leaves you real estate, that property typically receives a step-up in basis. In plain terms, its tax basis resets to fair market value at the date of death.

That means:

• The built-in capital gain may be minimal or zero.
  
• If there’s little gain to defer, a 1031 exchange may offer less financial benefit.
  

However, there are times when doing a 1031 on inherited property is smart:

• If the inherited property is already an investment property and you want to reinvest into something with better long-term potential.
  
• If you’re ready to convert the inherited property into an investment by renting it out (and holding it long enough to establish investment intent).
  
• If you and any co-heirs agree on keeping the asset as an investment and want to continue building wealth through real estate.
  
• If you want to consolidate multiple inherited properties into one larger investment — or diversify one property into several.
  
  

The key is understanding whether the property qualifies today, and whether deferring gain is genuinely beneficial given the stepped-up basis.

Professional Takeaway

A 1031 exchange isn’t restricted to “big players,” and inherited properties can qualify under the right circumstances. But it’s not automatically the best fit for every situation. The smartest move is evaluating three things: how the property is currently used, whether your long-term goals align with reinvesting, and whether deferring gain actually creates meaningful financial benefit.

Checklist: “Does a 1031 Exchange Make Sense for Me?”

Your Property

• The property is not your primary residence.
  
• It is currently held for investment or business use, or you intend to convert it to such.
  
• You understand you’ll need a Qualified Intermediary to facilitate the exchange.
  
• You’re able to follow the 45-day identification and 180-day closing windows.
  

Your Goals

• You want to defer capital gains taxes right now.
  
• You plan to reinvest into another investment property instead of cashing out.
  
• You’re thinking long-term—building, consolidating, or diversifying your real estate portfolio.
  

If You Inherited the Property

• You understand the step-up in basis may reduce the potential tax savings.
  
• The inherited property is (or can be) investment-use property.
  
• All heirs on title agree to participate in the exchange.
  
• You want to continue the property as an investment rather than sell for cash.
  
  

If you checked most of the boxes, a 1031 exchange could be a strong fit.
If not, a traditional sale may be simpler and more beneficial.