If you're selling commercial real estate in Florida, your next move could come with a major tax bill. But there's a powerful strategy that many real estate investors and business owners use to legally defer capital gains taxes: the 1031 Exchange.
Whether you're new to commercial property or a seasoned investor, understanding how a 1031 Exchange works—and how it fits into a commercial closing—can save you significant money and future headaches.
At Ayala Law, we assist clients through commercial transactions and 1031 exchanges across Florida. This blog post breaks it all down so you know exactly what's involved, what to watch for, and how to approach it with confidence.
What Is a 1031 Exchange?
A 1031 Exchange (named after Section 1031 of the Internal Revenue Code) allows real estate investors to defer capital gains taxes when they sell one investment property and reinvest the proceeds into another "like-kind" property.
Instead of paying taxes on the gain from your sale, you roll the proceeds into your next property—and the taxes are deferred until you sell that next property. This strategy is popular for those who are looking to build long-term wealth through real estate.
How Does a 1031 Exchange Work in a Commercial Real Estate Transaction?
Step 1: Sell Your Current Investment Property
You begin by listing and closing on your existing commercial property. At closing, instead of receiving the sale proceeds directly, the funds go to a Qualified Intermediary (QI). This is a neutral third party required by law to hold the funds until you buy the replacement property.
Step 2: Identify a Replacement Property
You have 45 days from the date of closing on the first property to identify up to three potential "like-kind" properties you may want to buy.
Step 3: Close on the Replacement Property
You must close on one of the identified properties within 180 days of selling the original property. The Qualified Intermediary will use the funds held in escrow to complete this purchase.
Step 4: Defer Capital Gains Tax
As long as all requirements are met—including timeline and documentation—you successfully defer paying taxes on your capital gain.
What Counts as a "Like-Kind" Property in a 1031 Exchange?
One of the most common Google searches is: "What qualifies as like-kind property in a 1031 exchange?"
In the context of a 1031 exchange, "like-kind" is broader than most people think. It doesn't mean identical. For example:
- A retail building can be exchanged for an office space
- A warehouse can be exchanged for a multifamily building
- Vacant commercial land can be exchanged for improved property
The key is that both properties are held for investment or business purposes, not for personal use.
Can You Use a 1031 Exchange in Florida for Commercial Property?
Yes—and Florida is one of the most active states for 1031 exchanges due to its booming real estate market and no state income tax. At Ayala Law, we regularly assist with:
- Commercial property sales and acquisitions
- 1031 exchange planning and coordination
- Working alongside your QI, accountant, and title company
If you're selling property in Miami, Orlando, Tampa, or anywhere else in Florida, a 1031 exchange can be a smart way to legally defer taxes and keep your capital working for you.
What Are the Rules for a Valid 1031 Exchange?
To make sure your exchange qualifies, there are several strict requirements:
- Must Use a Qualified Intermediary: You cannot
receive or control the sale proceeds.
Must Follow the 45-Day and 180-Day Rule: No extensions. - Property Must Be for Investment or Business Use: Not a primary residence.
- New Property Must Be of Equal or Greater
Value: To fully defer taxes.
Same Taxpayer Rule: The name on the title of the sold property must match the name on the replacement property.
Failing to meet even one of these rules could disqualify your exchange, triggering immediate taxes.
How Can a Lawyer Help with a 1031 Exchange and Commercial Closing?
While a 1031 exchange can be incredibly beneficial, it's not a DIY process. Mistakes in contract language, timing, or title handling can invalidate the exchange.
An experienced attorney can:
- Draft or review contracts to ensure 1031-friendly terms
- Coordinate with the Qualified Intermediary
- Review deadlines and documents to ensure compliance
- Identify title or zoning issues during the commercial closing
- Work alongside your tax advisor to protect your tax deferral strategy
Our attorneys serve as legal counsel during both the 1031 exchange and the commercial closing—ensuring nothing falls through the cracks.
Can You Use a 1031 Exchange for Partial Tax Deferral?
Yes. This is commonly referred to as a partial 1031 exchange. If you reinvest only part of the sale proceeds into a new property and keep the rest, you will pay capital gains taxes only on the amount you kept.
This may be a strategic move depending on your liquidity needs—but it should be planned carefully with your legal and tax team.
Final Thoughts: Is a 1031 Exchange Right for You?
If you're selling commercial property and planning to reinvest in another, a 1031 exchange may be one of the most powerful legal tools available to defer capital gains tax and grow your real estate portfolio.
That said, the rules are complex, and one misstep can cost you the tax deferral. That's why working with experienced legal counsel is essential. At Ayala Law, we guide Florida property owners and investors through commercial real estate closings and 1031 exchanges with precision and clarity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
