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1031 Like-Kind Exchange · New Jersey · Defer Your Capital Gains

Defer Capital Gains Tax
With a 1031 Exchange
in New Jersey

Hallmark Realtors helps NJ real estate investors buy and sell 1031 exchange properties — and guides you through every step of the Qualified Intermediary process. Protect your equity. Grow your portfolio. Defer the tax.

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The Basics

What Is a 1031 Exchange?

A 1031 exchange — formally called a like-kind exchange under IRC Section 1031 — is a tax-deferral strategy that allows real estate investors to sell an investment or business property and reinvest the proceeds into another qualifying property without paying immediate capital gains tax or depreciation recapture.

The name comes from Section 1031 of the Internal Revenue Code, which has allowed tax-deferred real estate exchanges since 1921. It is one of the most powerful wealth-building tools available to real estate investors. Rather than losing 15–20% of your gain to federal capital gains tax (plus depreciation recapture at 25%, plus state taxes), you roll the full proceeds into your next investment and continue growing your portfolio.

Critically, a 1031 exchange defers taxes — it does not eliminate them. The deferred gain carries forward as a reduced cost basis on the replacement property and becomes taxable upon a future taxable sale. However, if the replacement property is later inherited, heirs receive a stepped-up basis and the deferred gain may never be taxed at all. Many investors chain multiple exchanges through their lifetime, deferring tax indefinitely.

“A 1031 exchange does not just save money — it multiplies your purchasing power. Every dollar you would have paid in capital gains tax becomes equity working for you in your next investment.”

— Hallmark Realtors, Clark, NJ

Under the Tax Cuts and Jobs Act of 2017, like-kind exchanges are restricted to real property only. Personal property no longer qualifies. As of 2026, the rules governing real property exchanges under Section 1031 remain unchanged.

The Four Requirements

01
Like-Kind Property
Both the relinquished and replacement properties must be real property held for investment or business use. “Like-kind” is broadly interpreted for real estate.
02
Equal or Greater Value
To defer all gain, the replacement property must be equal to or greater in value than the relinquished property, and all net equity must be reinvested.
03
Same Taxpayer
The taxpayer who sells the relinquished property must be the same taxpayer who takes title to the replacement property. LLCs, partnerships, trusts, and corporations may all qualify.
04
Qualified Intermediary
A neutral third-party QI must hold the exchange proceeds. You cannot take constructive receipt of the funds at any point during the exchange.
What's at Stake

The Tax Bill You’re
Deferring

On a typical NJ investment property sale, the combined federal tax burden without an exchange can reach 35–40% of the gain. A properly structured 1031 exchange defers all of it.

0–20%
Federal Long-Term Capital Gains
Rate depends on taxable income bracket
25%
Depreciation Recapture Rate
On all prior depreciation deductions taken
3.8%
Net Investment Income Tax (NIIT)
Applies above $200K/$250K MAGI thresholds
~7%
NJ State Capital Gains Tax
NJ taxes gains as ordinary income

💵 What a 1031 Exchange Preserves on a $1,000,000 Gain

$200K+
Taxes without exchange
Federal CG + recapture + NIIT + NJ state
$0
Taxes with proper exchange
All deferred to future taxable sale
$200K+
Working capital preserved
Fully reinvested into replacement property

Tax rates are federal 2025 rates. NJ state taxes on capital gains are assessed as ordinary income. Consult a qualified tax advisor for your specific situation — Hallmark Realtors does not provide tax advice.

Critical Deadlines

The 45-Day & 180-Day
Rules — Explained

The two most important rules in a 1031 exchange are the identification period and the exchange period. Both are strict, non-negotiable, and run concurrently from the same start date.

Your Exchange Timeline

Day 0 — Relinquished Property Closes
The clock starts the moment the relinquished property transfers to the buyer. Your Qualified Intermediary takes control of the sale proceeds. You may not take constructive receipt of any funds.
45-Day Identification PeriodDay 45
By midnight of the 45th calendar day, you must deliver a written identification notice to your QI naming your replacement property candidates. This includes weekends and holidays. No extensions except in federally declared disasters.
180-Day Exchange PeriodDay 180
You must close on at least one identified replacement property by the 180th calendar day from the closing of your relinquished property — or by the due date of your federal tax return for that year, whichever is earlier. These periods overlap: the 45-day window is contained within the 180-day window.
⚠️ Missing Either Deadline Is Catastrophic

If you miss the 45-day identification deadline or the 180-day closing deadline, your exchange fails entirely. The full gain becomes immediately taxable in the year of the sale — you cannot partially salvage a failed exchange. Early planning and backup property identification are essential.

The Three Identification Rules

3-Property Rule (Most Common)
You may identify up to three replacement properties of any value. You must close on at least one. This is the most commonly used rule and gives you the most flexibility without additional restrictions.
200% Rule
If you identify more than three properties, their combined fair market value cannot exceed 200% of the fair market value of all relinquished properties. If you exceed 200%, your identification is invalid unless you satisfy the 95% Exception.
95% Exception
If you identify more than three properties and their combined value exceeds 200%, you must actually acquire at least 95% of the aggregate fair market value of all identified properties. This is rarely achievable and is a last resort.

Identification Notice Requirements

  • Written and signed by the exchanger prior to midnight on Day 45
  • Unambiguous description — street address or legal description (a unit number is required for multi-unit buildings)
  • Delivered to your QI (or the seller of the replacement property, or the settlement agent) — not to your own attorney, CPA, or agent
  • Percentage noted if acquiring less than 100% ownership interest
  • You may revoke or amend identification at any time before midnight on Day 45; no changes permitted after
Exchange Structures

Types of 1031 Exchanges

Not all 1031 exchanges are structured the same way. The right structure depends on your timeline, whether you’ve already found your replacement property, and whether you want to improve the property as part of the exchange.

Most Common
🕐

Delayed (Forward) Exchange

The standard structure. You sell your relinquished property first, your QI holds the proceeds, and you have 45 days to identify and 180 days to close on replacement property. The vast majority of 1031 exchanges use this structure. Hallmark assists sellers in listing and closing relinquished properties and helps identify and close on suitable replacement properties within the IRS windows.

Reverse Exchange
⏪️

Reverse Exchange

You acquire the replacement property before selling the relinquished property. An Exchange Accommodation Titleholder (EAT) takes title to the replacement property and holds it until you sell the relinquished property. You still have 45 days to identify which property will be relinquished and 180 days to complete the sale. Reverse exchanges are more expensive due to EAT fees and more complex financing. Used when the right replacement property appears before the relinquished property sells.

Build-To-Suit
🏗️

Construction (Improvement) Exchange

Allows you to use exchange proceeds to build or improve the replacement property while still qualifying for tax deferral. An EAT holds title to the replacement property while improvements are made. Improvements must be identified within the 45-day window and completed before Day 180, at which point you take title to the improved property. Used when the replacement property is worth less than the relinquished property and the difference can be made up through construction, or when you want to build to your specifications.

Simultaneous
⇄

Simultaneous Exchange

Both properties close on the same day, either through a direct swap between two parties or through a QI-facilitated simultaneous closing. The original form of 1031 exchange, now relatively rare due to the difficulty of coordinating two simultaneous closings. A QI is still required when there is not a direct, equal-value swap between two parties. For most investors, the delayed exchange is significantly more practical.

Qualifying Property

What Qualifies as
Like-Kind Property?

For real estate, “like-kind” is remarkably broad. Almost any US investment or business real property can be exchanged for almost any other US investment or business real property.

Property Types That Qualify

Single-family rental homes
Multi-family apartment buildings
Commercial office buildings
Retail / strip mall properties
Industrial & warehouse facilities
Raw land / unimproved land
Net lease (NNN) properties
Hotels & hospitality properties
Delaware Statutory Trusts (DSTs)
Tenants-in-Common (TIC) interests
Mixed-use properties
Farms & agricultural land
📌 Cross-Property Type Exchanges Are Allowed

You can exchange an apartment building for raw land, a single-family rental for a commercial building, or a NJ property for one in another US state. The only requirements are that both properties are held for investment or business use and both are real property located in the United States.

The “Held for Investment or Business” Requirement

Both the relinquished property and the replacement property must be held for productive use in a trade or business, or for investment. This is the most important qualifying requirement for real property exchanges.

There is no IRS-specified minimum holding period, but intent matters. The IRS will examine whether the property was genuinely held for investment purposes. Most tax professionals recommend holding both the relinquished and replacement properties for at least one to two years to demonstrate investment intent and avoid IRS challenges.

If you sell a property too quickly after acquiring it — or if you engage in frequent property flipping — the IRS may classify you as a “dealer”, in which case the property is considered inventory rather than investment property and does not qualify for a 1031 exchange.

❌ Property That Does Not Qualify

  • Your primary residence (personal use disqualifies)
  • Vacation or second homes used primarily for personal use
  • Property held primarily for sale (dealer property / flips)
  • Stocks, bonds, notes, and securities
  • Partnership interests (though see DST and TIC structures)
  • REITs (Real Estate Investment Trusts)
  • Foreign real property (cannot exchange foreign for US or vice versa)
  • Business inventory and stock in trade
Tax Mechanics

Boot, Depreciation Recapture
& Partial Exchanges

Understanding boot and depreciation recapture is critical to structuring a fully tax-deferred exchange — and to understanding the consequences if your exchange is not perfectly structured.

What Is Boot?

Boot is any non-like-kind consideration received in a 1031 exchange. Boot is taxable in the year of the exchange — it does not disqualify the entire exchange, but it reduces the amount of tax deferred. Common forms of boot include:

  • Cash boot: Any exchange proceeds not reinvested in the replacement property (i.e., you “take some out”)
  • Mortgage boot (debt relief): If the debt on the replacement property is lower than on the relinquished property, the net reduction in debt is treated as boot
  • Non-like-kind property: Personal property or other assets received as part of the exchange

To avoid boot entirely: reinvest all net proceeds into replacement property of equal or greater value, and replace all debt with at least equal debt (or additional cash equity).

Depreciation Recapture

When you sell a depreciated property, the IRS “recaptures” the depreciation deductions you previously took and taxes them at a maximum federal rate of 25% (Section 1250 recapture). This is separate from capital gains tax on the price appreciation.

In a properly structured 1031 exchange, depreciation recapture is also deferred along with capital gains tax. The accumulated depreciation carries forward as a reduced cost basis on the replacement property. If you later sell without exchanging, all deferred recapture becomes due.

If your exchange results in boot, depreciation recapture is the first tax applied to the boot received, up to the total amount of depreciation previously taken. Only after recapture is satisfied does the remaining boot become capital gain.

Tax Rates at a Glance

Long-Term Capital Gains (Federal)
0% / 15% / 20%
Rate depends on your taxable income. Most investors pay 15% or 20%. Properties held more than one year qualify for long-term rates.
Short-Term Capital Gains (Federal)
10% – 37%
Properties held one year or less are taxed at ordinary income rates — up to 37%. A compelling reason to hold at least one year before exchanging.
Section 1250 Depreciation Recapture
25% (max)
Applies to the portion of gain attributable to prior depreciation deductions on real property. Taxed separately from, and before, capital gains.
Net Investment Income Tax (NIIT)
3.8%
Applies to gains for filers with MAGI above $200,000 (single) or $250,000 (married filing jointly). Deferred by a successful exchange.
NJ State Tax on Capital Gains
~7%+
New Jersey taxes capital gains as ordinary income, with rates up to approximately 10.75% at the highest bracket. NJ also defers state taxes in a valid exchange.
📌 Important Disclaimer

Tax rates and rules change. The figures above are general reference information for 2025–2026. Hallmark Realtors assists with the real estate components of a 1031 exchange — we are not tax advisors. Always consult a qualified CPA or tax attorney before initiating an exchange.

The QI — Your Required Partner

Understanding the
Qualified Intermediary

The Qualified Intermediary is not optional — without one, your exchange fails. Understanding what a QI does, who qualifies, and who is disqualified is essential before you close on your relinquished property.

What a Qualified Intermediary Does

A QI (also called an exchange facilitator or accommodator) is a neutral third party who steps into the exchange transaction to prevent you from taking constructive receipt of the sale proceeds. The moment you receive the funds — even briefly — the exchange is disqualified and the gain becomes immediately taxable.

Specifically, the QI:

  • Enters into a written exchange agreement with you before the relinquished property closes
  • Receives the sale proceeds directly from closing and holds them in a segregated, FDIC-insured escrow account
  • Prepares all IRS-required exchange documentation including the exchange agreement and assignment of contracts
  • Receives your written identification notice on or before Day 45
  • Transfers funds to close on the replacement property at your direction within the 180-day window
  • Provides documentation for IRS Form 8824 (which you file with your tax return to report the exchange)

When to Engage Your QI

The QI must be engaged before the relinquished property closes. You cannot retroactively structure a 1031 exchange after you have already received the proceeds. Most professionals recommend engaging a QI as early as possible — ideally when you first list your relinquished property or put it under contract.

If closing documents are being prepared and the QI is not yet in place, there is a real risk that the title company will send the proceeds directly to you instead of the QI, permanently disqualifying the exchange.

Disqualified Persons (Cannot Serve as Your QI)

  • You yourself — the taxpayer/exchanger cannot be their own QI
  • Your real estate agent or broker (if they represented you in the last 2 years)
  • Your attorney (if they provided non-exchange legal services in the last 2 years)
  • Your accountant or CPA (if they provided non-exchange services in the last 2 years)
  • Your investment banker or financial advisor (within last 2 years)
  • Your employee or business partner
  • Family members and related entities (relatives, controlled entities)

How Hallmark Guides You Through the QI Process

Hallmark Realtors is not a Qualified Intermediary — and under IRS rules, we cannot be your QI if we have represented you as your real estate agent. What we can do is guide you to the right QI and coordinate every step of the exchange.

  • Recommend experienced, reputable QI firms with established track records in NJ exchanges
  • Ensure QI engagement is in place before your relinquished property closes — protecting the exchange from the first day
  • Coordinate with the QI, title company, and attorneys to ensure closing documents properly reflect the exchange structure
  • Help you identify replacement properties within your 45-day window using our MLS access, LeadingRE network, and market expertise
  • Assist with due diligence, offer drafting, and closing on replacement properties within the 180-day window
  • Connect you with NJ-licensed tax advisors, real estate attorneys, and 1031-experienced CPAs

The 45-day identification window moves fast. Having Hallmark’s agents actively sourcing replacement property options before your relinquished property closes is the single most effective way to protect your exchange.

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40+
Years in NJ Investment Real Estate
How We Help

Hallmark’s Role in Your
1031 Exchange

We handle the real estate — buying, selling, and identifying properties under tight deadlines. You focus on the strategy; we focus on execution.

01
Selling Your Relinquished Property
We list and market your relinquished property to achieve the strongest sale price and timeline. Coordinating the closing to ensure your QI is properly in place before settlement is a standard part of our process for exchange clients.
02
Replacement Property Search — Before You Need It
The 45-day clock waits for no one. We begin the replacement property search as soon as you engage us — often before your relinquished property closes. Our MLS access, off-market contacts, and LeadingRE network give you the broadest possible view of qualifying properties within your window.
03
Due Diligence Under Deadline Pressure
Exchange timelines compress the normal due diligence process. Our agents are experienced in conducting rapid but thorough property analysis, reviewing financials for income properties, coordinating inspections, and identifying issues that could derail a closing within the 180-day window.
04
QI Referral & Coordination
We refer clients to experienced, vetted 1031 Qualified Intermediaries in New Jersey and nationally. We then coordinate directly with your QI throughout the exchange to ensure proper documentation, assignment of contracts, and fund flow at both closings.
05
Professional Team Coordination
A successful 1031 exchange requires a coordinated team: your real estate agent, QI, real estate attorney, CPA, and lender all working in sync. Hallmark has the relationships and experience to keep all parties aligned on the IRS deadlines that govern your exchange.
06
40+ Years. 500+ Reviews. Central NJ.
Investment property buyers and sellers in Central NJ have trusted Hallmark Realtors since 1984. Our track record, local market depth, and LeadingRE network give exchange clients access to opportunities and expertise that a general brokerage simply cannot match.
Step by Step

How a Delayed 1031 Exchange
Works Start to Finish

The most common exchange structure — from deciding to exchange through closing on replacement property.

01
Decide & Engage Early
Contact Hallmark and your tax advisor before listing. Engage a QI early. Begin identifying potential replacement properties now, before your relinquished property goes under contract.
02
List & Sell Relinquished Property
Hallmark lists and markets your relinquished property. Your QI is in place before closing. At settlement, proceeds are wired directly to the QI — not to you. Day 0 begins.
03
Identify by Day 45
Hallmark actively sources replacement property. You deliver a written identification notice to your QI naming up to three properties (3-Property Rule) by midnight of Day 45.
04
Contract & Close by Day 180
Hallmark assists with offer, due diligence, and closing on the replacement property. Your QI transfers the exchange funds to complete the purchase. You take title. Exchange complete.
05
File IRS Form 8824
Your CPA files Form 8824 (Like-Kind Exchanges) with your federal tax return for the year of the exchange. Your QI provides all necessary documentation. The deferred gain is reported but not taxed.
The Team Behind Your Exchange

Locally Trusted Experts. One Team.

When you work with Hallmark on a 1031 exchange, you get agents who understand investment property, exchange timelines, and Central NJ markets — built up over 40+ years of local real estate practice.

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Common Questions

1031 Exchange FAQ

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Can I use a 1031 exchange for my primary residence?
Generally no. A primary residence does not qualify for a 1031 exchange because it is not held for investment or business purposes. However, there are edge cases: if a portion of your primary residence is used exclusively as a home office or rental unit (e.g., a duplex where you occupy one unit), that portion may qualify. Additionally, if you converted a rental property into your primary residence, a 1031 exchange for the property may be available under specific circumstances. Always consult a qualified tax advisor.
Can I exchange into multiple replacement properties?
Yes. You can exchange one property for multiple replacement properties, or multiple properties for one or several replacements. The identification rules still apply — use the 3-Property Rule to identify up to three potential replacement properties of any combined value, and close on at least one. If you want to identify more than three properties, the 200% Rule requires their combined value not exceed 200% of your relinquished property. Many investors use 1031 exchanges to consolidate multiple properties into one or diversify one large property into several smaller ones.
What happens if I can't find a replacement property in time?
If you do not identify a replacement property by Day 45 or do not close by Day 180, your exchange fails. The full gain becomes immediately taxable in the year of the sale. There are no extensions granted by the IRS except in federally declared disaster areas. This is why it is critical to begin identifying potential replacement properties before your relinquished property closes — not after. Many experienced exchange investors have their replacement targets largely identified before they even list their relinquished property.
Can I take cash out of a 1031 exchange?
Yes, but any cash you take out is taxable boot. If you receive $50,000 in cash because your replacement property is $50,000 less than your relinquished property, that $50,000 is taxable in the year of the exchange. The rest of the exchange proceeds remain deferred. A partial exchange is still valid — you defer the portion reinvested and pay tax on the boot received. If you want cash and want to minimize taxes, a better strategy is often to complete a full exchange and then do a cash-out refinance on the replacement property after closing.
Is there a minimum holding period for exchange property?
There is no IRS-mandated minimum holding period for either the relinquished or replacement property, but intent is everything. The IRS requires both properties to be held for investment or business purposes. Selling a replacement property shortly after acquiring it signals to the IRS that you never intended to hold it for investment — which can disqualify the exchange retroactively. Most tax professionals recommend holding both properties for at least one year (to qualify for long-term capital gains rates) and ideally two years to clearly demonstrate investment intent. The IRS has twice proposed a mandatory one-year hold period, though none has been enacted as of 2026.
What is a Delaware Statutory Trust (DST) and can it be used in a 1031 exchange?
A Delaware Statutory Trust is a legal entity that holds real property and allows multiple investors to own fractional beneficial interests. The IRS has ruled that DST interests qualify as like-kind real property for 1031 exchange purposes (Revenue Ruling 2004-86). DSTs are commonly used as backup replacement properties when a direct replacement property deal falls through, or as a passive investment alternative for investors who no longer want to actively manage property. DST investments are securities and must be sold through a licensed broker-dealer. Hallmark can refer you to specialists in DST investment options.
What happens to the deferred tax when I eventually sell the replacement property?
When you sell the replacement property in a taxable sale (without another exchange), all deferred gain from the original exchange — plus any additional appreciation on the replacement property — becomes taxable at that time. Your cost basis in the replacement property is reduced by the deferred gain carried forward from the exchange. However, if the replacement property passes to your heirs at death, they receive a stepped-up cost basis equal to the property's fair market value at the date of death, and the entire deferred gain may be permanently eliminated. This is the “swap until you drop” strategy used by many multi-generational real estate investors.
Can an LLC, trust, or corporation do a 1031 exchange?
Yes. Individuals, C corporations, S corporations, partnerships (general and limited), LLCs, and trusts can all qualify for 1031 exchange treatment. The key requirement is that the same taxpayer entity that sells the relinquished property must be the same entity that acquires the replacement property. This is called the “same taxpayer rule.” Complications arise when ownership structures change between the sale and acquisition (e.g., the property is in one LLC and you want to take title in another). These situations require careful planning with a tax advisor before closing.
Free Consultation

Planning a 1031 Exchange
in New Jersey?

Talk to a Hallmark agent about your investment property, your goals, and how we can help you execute a successful exchange — no obligation, completely confidential.

  • We help you sell your relinquished property at the right price and timeline
  • We identify and source replacement properties before your 45-day clock expires
  • We guide you to the right Qualified Intermediary for your exchange
  • We coordinate your full team — QI, attorney, CPA, and lender
  • 40+ years in NJ real estate • 500+ five-star reviews
  • LeadingRE network for out-of-NJ replacement properties

📍 112 Westfield Ave, Clark, NJ 07066
📞 (732) 574-9400
🌐 hallmarkrealtors.com


Hallmark Realtors is not a Qualified Intermediary or tax advisor. We assist with the real estate components of 1031 exchanges and coordinate with your QI, CPA, and legal team. Always consult qualified tax and legal professionals before initiating an exchange.

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