What Is a 1031 Exchange and When Should You Use One in New Mexico?

Navigating real estate tax law can feel overwhelming even for experienced real estate agents and investors. The tax code often seems like it’s written to confuse rather than clarify. You’re not alone. Many professionals struggle to fully grasp strategies like the Starker exchange (also called the Starker Code) or like kind exchange rules.

But mastering this tool can give you a massive advantage when scaling your real estate properties. A 1031 exchange allows you to defer tax liability on a relinquished property sale, using the proceeds to invest in new real property instead of losing a large chunk to taxes upfront.

Imagine using that money to upgrade from one property to two or three higher-value assets—all while keeping Uncle Sam waiting. That’s the power of a 1031 exchange.

In this post, we’ll break it down with clear examples, what qualifies, how to do it, and how investors in New Mexico are using this strategy to grow their portfolios and reduce tax implications.

What Is a 1031 Exchange, Really?

At its core, a 1031 exchange, also known as a like kind exchange, lets you defer tax liability when selling real property used for investment or business. Instead of paying capital gains taxes immediately after a sale, you can roll the profits into another qualified investment.

The property you sell is known as the relinquished property, and the one you purchase is the replacement property. As long as the exchange process meets IRS rules, your tax bill gets postponed, giving you more money to invest in a better-performing asset.

It’s important to note: this isn’t a tax exemption, just a delay. The IRS will eventually collect. But in the meantime, you can use that capital to scale your portfolio more aggressively. To put it simply, you’re not getting out of paying taxes, you’re deferring them. It’s like kicking the tax can down the road.

Let’s say you sell one investment property for a profit and roll that into a larger business property or rental property. You’ve now leveraged your equity for higher returns, without triggering capital gains tax immediately.

There are tax implications down the road, of course. If you don’t sell during your lifetime, the deferred taxes may be passed to your heirs, often with a stepped-up basis. That’s why this tool is central to many long-term wealth strategies.

What Counts as a “Like-Kind” Exchange?

Like-Kind Doesn’t Mean Same-Kind

One of the most misunderstood aspects of a 1031 exchange is what qualifies as “like kind property.” Thankfully, the IRS rules are far more flexible than most assume.

Like-kind doesn’t mean house-for-house. The key IRS guideline is that if you sell an asset for $500,000, the property you buy must be worth $500,000 or more. You can swap real property of any type, provided it’s held for investment or business property purposes.

For example, you can sell a rental property and buy an apartment building, or sell raw land and purchase a vacation home (provided it’s held for fair rental or future appreciation, not personal use).

You can even exchange personal property or intangible property in some cases, though those exchanges are subject to stricter IRS scrutiny. The key is that both relinquished property and potential replacement property must serve as business property or investment property.

Examples of like-kind property exchanges include:

• Rental property → Apartment building
• Vacation home (rented out for income) → New rental property
• Raw land → Commercial real estate properties
• Business property → Depreciable property (such as office space or mixed-use buildings)
• Beach house (short-term rental) → Long-term rental property

Property Must Be for Investment

To qualify, both the relinquished property and the replacement property must be held for business or investment purposes, not personal enjoyment. A vacation home or beach house used purely as a second home typically won’t qualify, unless it meets fair rental guidelines.

If you’re unsure, always consult your qualified intermediary or exchange facilitator to verify eligibility. Getting this wrong could trigger unexpected tax implications.

Who Should Consider a 1031 Exchange?

A 1031 exchange isn’t for everyone, but for the right investor, it can be an incredibly valuable wealth-building tool. Here’s who should take a closer look:

Owners with Long-Held Properties

If you’ve owned one property or even two properties for several years, and those assets have appreciated, selling outright could mean facing hefty tax liability. A 1031 exchange lets you defer those taxes while growing your portfolio.

BRRRR Investors & Value-Add Investors

If you’ve successfully executed the BRRRR strategy or added value through renovations, you likely have significant equity in one investment property. Rolling that equity into a new deal, such as an apartment building or new rental property, through a 1031 exchange allows you to keep the momentum going.

Investors Scaling into Other Real Estate

Whether you want to trade up from rental property to larger real estate properties, or from residential to commercial real property, this tool is designed to help. Many real estate agents also recommend 1031 exchanges to clients shifting from personal property to investment-grade assets.

Passive Investors or Estate Planners

Investors looking to create a long-term portfolio for wealth transfer often use 1031 exchanges as part of their strategy. Done properly, it allows families to build multi-generational holdings while managing tax implications.

If you’re unsure if your property or goals fit the model, a good exchange facilitator or qualified intermediary can help determine eligibility.

Why the IRS Actually Likes 1031 Exchanges

Contrary to popular belief, a 1031 exchange isn’t a loophole or shady tax trick. The IRS encourages the exchange process because every sale in the real estate market generates economic activity, and ultimately, more taxable income.

Here’s an example: When a person sells a relinquished property, agents, appraisers, lenders, and title companies all get paid. These professionals pay income taxes on their earnings. The money from the sale flows through multiple industries.

When that money is then used to invest in new real estate properties, another round of transactions happens, creating more taxable events. Ultimately, the IRS still collects its share, just down the road.

By encouraging reinvestment, 1031 exchanges stimulate the market while giving investors a way to grow their holdings. It’s a win-win: more economic growth for the IRS and a significant advantage for the savvy investor.

What You Need to Do It Right

To successfully complete a 1031 exchange, it’s critical to follow IRS guidelines. Missing a single step can trigger immediate tax liability.

Hire a Qualified Intermediary

You can’t touch the proceeds from your relinquished property sale; a qualified intermediary (also called an exchange facilitator) must hold the funds and manage the exchange process.

In New Mexico, firms like Ultravest (run by Bill McCoy) serve as excellent exchange facilitators, helping ensure your paperwork, legal description, and timelines meet IRS standards.

Follow the IRS Timeline

A delayed exchange, the most common type, requires you to:

• Identify potential replacement property within 45 days of the sale
• Close on the new property within 180 days

For more complex situations (such as a reverse exchange), where you acquire the new rental property before selling your relinquished property, an exchange accommodation titleholder is needed to hold title during the transition. This structure is more advanced but allows flexibility in a competitive real estate market.

Document Everything

Details matter: your contracts, property legal description, and all closing documents must be fully aligned with like kind exchange requirements. The IRS will scrutinize these details during an audit.

Avoid Pitfalls

Missing a deadline or touching the funds mid-transaction can trigger unintended tax implications. This is why even experienced real estate agents rely on professional intermediaries.

Long-Term Play: Building Generational Wealth

Savvy real estate investors use the 1031 exchange not just to defer taxes today, but to build generational wealth. By using this strategy repeatedly, you can upgrade from small rental property holdings into larger real property assets, such as apartment buildings or commercial real estate.

Each time you complete a 1031 exchange, you roll your equity from exchanged properties into higher-performing assets. The beauty of this system is that while your portfolio grows, your deferred tax liability does not come due, unless you sell without reinvesting.

Many investors plan to pass on these assets to their heirs. Thanks to the stepped-up basis rule, heirs may inherit real estate properties at current market value, minimizing or eliminating potential tax implications altogether.

Here’s an example: An investor starts with one rental property, uses a 1031 exchange to trade into a new rental property, then grows that into a portfolio of fair rental commercial buildings. Over time, they accumulate millions in real property, with limited tax exposure, while earning steady income for their family.

This long-term investment strategy is one of the most powerful tools available to those looking to build legacy wealth through real estate investing.

Thinking About a 1031 Exchange in New Mexico?

A 1031 exchange is one of the smartest ways to defer capital gains taxes while growing your real estate portfolio. If you’re considering selling a property in New Mexico, Absolute Real Estate has the resources and connections to make the process simple and stress-free.

Not sure if a 1031 exchange is right for you? Reach out today, and we’ll connect you with the right experts to ensure your next move maximizes your investment potential.