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Feb. 27, 2024

How 1031 exchanges work, including controversial drop and swap exchanges

A 1031 exchange allows the seller to avoid or limit capital gains tax on the swap. However, depreciation recapture may apply in some cases. Also, any cash or debt relief received in the exchange is treated as taxable boot.

Robert W. Wood

Managing Partner, Wood LLP

333 Sacramento St
San Francisco , California 94111-3601

Phone: (415) 834-0113

Fax: (415) 789-4540


Univ of Chicago Law School

Wood is a tax lawyer at Wood LLP, and often advises lawyers and litigants about tax issues.


A 1031 exchange is a swap of one business or investment asset for another. Even if no cash is involved, most swaps are taxable as sales, including swaps of one type of crypto for another such as Bitcoin for Ethereum. But if you come within section 1031 of the tax code, you'll either have no tax or limited tax due at the time of the exchange. 1031 used to work for businesses, crypto, airplanes, artwork, and more, but since 2018, the provision only applies to real esta...

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