A Guide to 1031 Exchanges in Virginia

Key Takeaways

• A 1031 exchange lets Virginia landlords defer capital gains taxes when swapping one investment property for another of equal or greater value.
• To qualify, both properties must be used for business or investment purposes, and a Qualified Intermediary is required to handle the transaction.
• Meeting the 45-day identification and 180-day purchase deadlines is essential to completing a valid exchange and keeping your full equity working for you.

---

If you’re a landlord in Virginia, there’s one tax rule that can make a big difference in how much profit you keep from your real estate investments: the 1031 exchange. This IRS provision allows you to defer paying capital gains taxes when selling one investment property and buying another of equal or greater value.

Do you plan to sell one of your rental properties and reinvest the earnings into another? Without proper planning, you could lose tens of thousands of dollars to taxes. A 1031 exchange offers a legal way to delay that tax hit and reinvest the full proceeds into your next property.

Limehouse Property Management put together this article to help landlords in Virginia understand how 1031 exchanges work, what rules apply, and how to use them to build long-term wealth.

How 1031 Exchanges Work in Virginia

When a property owner exchanges one investment property for another, they can defer paying capital gains taxes under Section 1031 of the Internal Revenue Code. You must fulfill all IRS requirements to benefit from this rule.

A Qualified Intermediary (QI) is tasked to handle the funds from the sale and make sure they are properly used to purchase the replacement property. If you receive the money yourself or skip using a QI, the exchange will not qualify, and taxes will apply.

What Properties Qualify?

To qualify for a 1031 exchange:

• The property you sell and the one you purchase must both be used for investment or business activities, not for personal use.
• The properties must be “like-kind“. In this context, that means similar in nature, not necessarily identical in use or value. For example, you can exchange a single-family rental for a duplex, apartment building, or even commercial real estate.

Properties that do not qualify include personal residences, second homes, or properties held primarily for resale (such as flipped houses). Also, personal property like furniture, vehicles, or equipment cannot be included in a 1031 exchange.

Critical Deadlines You Must Meet

To successfully complete a 1031 exchange, you must follow two strict deadlines:

• 45-Day Identification Period: You have 45 calendar days from the sale of your original property to identify potential replacement properties in writing. You may identify up to three properties, regardless of their value, or more than three if their total value does not exceed 200% of the value of the property sold.
• 180-Day Purchase Deadline: You must close on the replacement property within 180 calendar days from the sale date of the original property. These two timeframes run at the same time, so the clock starts ticking on both when you close on the first property.

There are no extensions for weekends or holidays. Missing either deadline disqualifies the exchange.

Role of the Qualified Intermediary (QI)

You cannot handle the sale proceeds yourself. The IRS requires the use of a Qualified Intermediary to manage the funds and paperwork. The QI will:

• Hold the sale proceeds in a separate account.
• Prepare the required exchange documents.
• Disburse funds to purchase the replacement property.
• Ensure all steps meet IRS requirements.

Even if you work with an attorney or accountant, a QI is still necessary to complete a valid 1031 exchange.

Avoiding Taxable “Boot”

“Boot” refers to any cash, mortgage relief, or non-like-kind property received during a 1031 exchange. Receiving boot makes part of the transaction taxable, even if most of it qualifies for deferral.

Common sources of boot include:

• Taking cash out of the sale.
• Buying a less expensive replacement property.
• Not reinvesting all of the sale proceeds.

To avoid boot and maximize your tax deferral, the new property should be equal to or greater in value, and all proceeds from the original sale must be used in the new purchase. Also, ensure that your mortgage amount is not reduced unless you add additional cash to offset the difference.

Types of Exchanges

Virginia landlords typically use one of these four types of exchanges:

• Delayed Exchange: The most common. You sell your property, then acquire a new one within 180 days.
• Simultaneous Exchange: Both properties close on the same day. This is rare and hard to coordinate.
• Reverse Exchange: You purchase the new property before selling the old one. This requires more capital upfront and is more complex.
• Build-to-Suit Exchange: You use exchange funds to build or renovate the new property. This type must be completed within the same 180-day period and follows additional guidelines.

Each method has unique requirements and should be carefully planned with professional support.

Virginia-Specific Notes

Virginia follows federal rules for 1031 exchanges, meaning any deferred gains at the federal level are also deferred for state income tax. However, you should be aware of:

• Transfer and recording fees: These are still owed, even in an exchange.
• Depreciation recapture: If you’ve claimed depreciation on the old property, it may be recaptured and taxed later unless deferred again in the next exchange.
• Exit strategy: Eventually, if you sell without another 1031 exchange, you’ll need to pay taxes on the original gain plus any deferred depreciation.

Bottom Line

A 1031 exchange is a powerful tool for landlords in Virginia to delay taxes, increase purchasing power, and grow investment portfolios. By following IRS rules, using a Qualified Intermediary, meeting deadlines, and reinvesting all proceeds, you can defer capital gains and maintain full control over your equity.

Understanding the risks, especially the concept of “boot,” is essential to doing it right. Limehouse Property Management helps landlords across Virginia understand and manage all stages of the real estate investment process.

From evaluating whether a 1031 exchange makes sense to connecting you with trusted intermediaries and overseeing the management of your replacement property, we provide hands-on support every step of the way.

Thinking about selling or reinvesting? Contact Limehouse Property Management today for professional guidance and full-service support on your next 1031 exchange.