Staring at a big gain on a DC investment property and wondering how to keep your money working instead of writing a large tax check? You are not alone. Many Georgetown and Glover Park landlords use 1031 exchanges to roll equity into larger or more strategic assets without immediate federal tax on gains.
In this guide, you will learn how 1031 exchanges work, the exact timelines to follow, practical identification strategies for DC rowhouses and small multifamily, and the local factors that matter in 20007 and across the Washington metro. You will also get a checklist to help you move from plan to closing with confidence. Let’s dive in.
What a 1031 exchange does
A 1031 exchange lets you defer federal tax on the sale of investment or business real estate when you reinvest into like-kind real property. The tax code behind it is Internal Revenue Code Section 1031. The rule applies only to real property under current law. Personal property like appliances or equipment does not qualify. For an overview, see the IRS guidance on like-kind exchanges.
Deferral is not forgiveness. Your gain and any prior depreciation carry into the next property through your basis. If you sell the replacement property later without another valid exchange, the deferred gain becomes taxable at that time. For details on basis carryover and depreciation recapture, review IRS Publication 544.
“Like-kind” is broader than it sounds. Most US investment or business real property is like-kind to other US real property. That means you can exchange a DC rental rowhouse for a small multifamily in another DC neighborhood or in the suburbs. Property held primarily for sale, such as a flip, generally does not qualify.
DC investors: what qualifies
If you hold a Georgetown rowhouse as a rental or a small multifamily for investment, you can exchange it for another investment or business property. You can move up in unit count, shift to a different submarket, or diversify using a fractional vehicle like a Delaware Statutory Trust if it meets IRS rules. You cannot swap US property into foreign real estate and treat it as like-kind.
Your vesting also matters. Title on your replacement property should match the taxpayer who sold the relinquished property. If you need a new entity for financing or risk reasons, discuss acceptable structures with your qualified intermediary and tax advisor before you close.
Deadlines and identification rules
The 45 and 180 day clock
Two deadlines control every exchange, and they run at the same time:
- By day 45 after you transfer the relinquished property, you must identify replacement property in writing and deliver it to your qualified intermediary.
- By day 180 after the transfer, you must complete the purchase of the replacement property.
These are calendar days, not business days. They are strict deadlines and are not extendable. Missing either one usually means the exchange fails for tax-deferral purposes.
Three rules to identify property
You can use one of these identification methods:
- Three-property rule: name up to three properties, any value.
- 200 percent rule: name any number of properties if the total value you identify is not more than 200 percent of what you sold.
- 95 percent exception: if you identify more than allowed above, you must acquire 95 percent of the total value you identified.
Your identification must be unambiguous. Include legal descriptions or clear addresses and send it to the qualified intermediary by day 45.
Exchange structures that fit DC deals
Forward exchange
This is the most common path. You sell first. The qualified intermediary holds the proceeds and then uses the funds to buy your replacement property within 180 days. It is straightforward and usually has the lowest fees.
Reverse exchange
Sometimes you find the perfect replacement before you can sell. In a reverse exchange, a special entity called an exchange accommodation titleholder parks the property for you until you sell your relinquished asset. Reverse exchanges are more complex and cost more, so plan early and coordinate lender, title, and intermediary.
Improvement exchange
If you need to renovate a replacement property, an improvement exchange can fund qualified work during the 180-day window. It is useful for completing a renovation, not a ground-up project. In Georgetown and Glover Park, where historic approvals and permits can take time, this structure works best for scoped, permitted updates you can finish quickly.
DST and TIC options
Delaware Statutory Trusts and Tenancy-in-Common interests can qualify as replacement property when structured to IRS standards. Many investors use DSTs for passive, diversified ownership with fixed financing terms. Review sponsor fees, control rights, and financing side effects before you commit.
Georgetown and Glover Park strategies
Example: scaling from a rowhouse
Say you own a rental rowhouse in 20007. You want more units and better risk spread. Under the three-property rule, you might identify:
- A 6-unit building in Columbia Heights to boost cash flow.
- A 10-unit building in Northeast DC for scale.
- A DST interest in a stabilized suburban apartment for passive diversification.
If you expect competitive bidding, consider the 200 percent rule so you can name more than three options. This can keep your plan alive if one deal falls out.
Example: reverse swap for a 6 unit
You find a compelling 6-unit in Glover Park, but your Maryland property will not close in time. A reverse exchange lets you acquire the 6-unit first using an exchange accommodation entity, then sell your current property within the overall 180-day window. Confirm your lender can work with reverse exchange mechanics before you write the offer.
Debt replacement and boot
To fully defer taxes, aim to buy equal or higher value and replace equal or greater debt. If you reduce your mortgage or take cash out, the difference is called boot and is taxable to the extent of your gain. If you want less leverage on the replacement, you can add cash at closing to avoid mortgage boot.
DC-specific taxes and regulations
Transfer and recordation taxes
Washington, DC imposes transfer and recordation taxes on most conveyances. A federal 1031 exchange does not eliminate these local costs. Plan for them in your net proceeds and replacement budgets. You can review current brackets and procedures on the DC OTR transfer and recordation tax rates page.
Nonresident filings
If you live outside the District but own DC rentals, your rental income and any gain from DC property are DC-sourced for filing purposes. A 1031 exchange defers federal gain. It does not remove potential DC filing duties for nonresidents. Coordinate with a DC-savvy tax professional to prepare the right returns and any required forms.
Historic and zoning limits
Georgetown and parts of Glover Park fall under historic preservation and zoning rules that can limit exterior changes, unit conversions, and density. This can affect timelines for improvement exchanges and value-add plans. Before you identify a property that needs work, confirm the approvals and permits you will need and whether you can finish the key steps within 180 days.
Avoid common pitfalls
- Constructive receipt: never touch the sale proceeds. Your qualified intermediary must hold the funds from settlement through replacement closing.
- Late or vague identification: do not miss day 45 and do not rely on incomplete addresses. Put the identification in writing and ensure the intermediary confirms receipt.
- Missing the 180-day close: build margin into your schedule for title work, lender conditions, and DC recording.
- Mortgage mismatch: if you downsize your loan without adding cash, you may create taxable boot.
- Related-party traps: deals with family members or entities you control have special rules. If a related party sells within two years, your exchange could be taxable.
- Poor documentation: keep signed exchange agreements, settlement statements showing the intermediary’s role, and vesting documents that match the taxpayer.
Your 1031 team and checklist
Build your team
- Qualified intermediary with DC experience, documented controls, and clear fee schedules.
- DC real estate attorney or title company that routinely closes exchanges and can coordinate recording.
- Tax advisor who knows Section 1031 and DC filing rules, especially for nonresident owners.
- Local broker who understands Georgetown, Glover Park, and metro submarkets, plus historic and zoning nuances.
- Lender who can meet exchange timelines, including reverse and improvement structures.
Documents to prepare
- Executed exchange agreement with the qualified intermediary before your sale closes.
- Written identification letter to the intermediary by day 45.
- Complete settlement statements showing funds held and disbursed by the intermediary.
- Title and vesting documents for the replacement that match the selling taxpayer.
- Loan documents or proof of cash that show you replaced equal or greater debt.
Timeline and costs
- Intermediary fees are usually modest for forward exchanges and higher for reverse and improvement exchanges. Get written quotes early.
- DC closing costs include title premiums, recording charges, and transfer and recordation taxes. Confirm current rates with the title company and DC OTR.
- If you consider DST or TIC interests, review sponsor fees and financing terms.
Next steps
If you are considering an exchange in 20007 or across the Washington-Arlington-Alexandria metro, start early. Decide on your goals, assemble your team, and set a search plan that fits the 45 and 180 day windows. Clarify your debt target so you can avoid boot and lock your financing path.
You deserve local guidance that blends neighborhood knowledge with execution. If you want help evaluating rowhouse-to-multifamily moves, cross-jurisdiction options, or how historic rules may affect your timeline, let’s talk. Chuck Burger can help you map the market, set a search strategy, and coordinate the players so your exchange stays on track.
FAQs
What is a 1031 exchange in real estate?
- It is a federal tax deferral that lets you sell investment or business real property and reinvest in like-kind real property while deferring recognition of gain under IRC Section 1031.
What are the 45 and 180 day deadlines in a 1031?
- You have 45 days after your sale to identify replacement property in writing and 180 days to close on it, and both periods run at the same time.
Do DC transfer and recordation taxes go away in a 1031?
- No. Local transfer and recordation taxes usually still apply in DC even when you defer federal tax, so budget for these costs at both closings.
Can I exchange a DC rental rowhouse into property in Virginia or Maryland?
- Yes. US investment real property is broadly like-kind to other US real property, but state and local filing rules vary, so plan for cross-border compliance.
How does depreciation recapture work after a 1031 exchange?
- Depreciation recapture is deferred into the replacement property and will be recognized if you later sell that property without another qualifying exchange.
Who holds my sale proceeds in a 1031?
- A qualified intermediary must hold the funds so you do not have constructive receipt, which would cause the exchange to fail.
Is an improvement exchange realistic in Georgetown or Glover Park?
- It can be for permitted renovations you can complete within 180 days, but long approval cycles in historic areas often exceed that window.
