Selling an investment home in Paradise Valley and hoping to keep more of your gains working for you? A 1031 exchange can defer federal capital gains taxes when you trade one investment property for another that meets IRS rules. As a local investor, you also need to navigate tight timelines, luxury-market inventory, and Arizona reporting. In this guide, you’ll learn the key rules, timelines, local considerations, and a clear checklist to help you plan with confidence. Let’s dive in.
What a 1031 exchange is
A 1031 like-kind exchange lets you defer recognition of capital gain when you sell real property held for investment or business use and reinvest in qualifying real property. You must follow strict identification and closing timelines and use a Qualified Intermediary (QI) to handle the funds. Review the IRS like-kind exchange overview for core definitions and requirements in the IRS like-kind exchange overview.
After the 2017 tax law change, 1031 exchanges apply to real property only. Personal property does not qualify. Your primary residence generally does not qualify either. If you are considering converting a home to a rental before selling, review the holding and intent requirements with your tax advisor using IRS Publication 544.
Key deadlines and rules
These two federal deadlines drive the entire process:
- Identification period: 45 days from the sale of your relinquished property to identify potential replacements in writing and deliver the list to your QI.
- Exchange period: 180 days from the same sale closing to acquire the replacement property or properties.
The periods run at the same time, so you must close within 180 days even if you identify early. The IRS outlines three common identification methods in its guidance:
- Three-property rule: Identify up to three properties of any value.
- 200% rule: Identify any number of properties, as long as their total market value does not exceed 200% of what you sold.
- 95% rule: If you identify more than allowed by the 200% rule, you must acquire at least 95% of the total value you identified.
You must use a QI to avoid receiving or controlling the sale proceeds. If you receive the funds, even briefly, the exchange can be disqualified.
Exchange structures to consider
- Delayed exchange. You sell first, the QI holds the proceeds, and you acquire the replacement within 180 days. This is the most common approach.
- Reverse exchange. You buy the replacement first and park title with an exchange accommodation titleholder while you sell the old property. This can help when Paradise Valley inventory is limited.
- Improvement exchange. You direct exchange funds to improve the replacement property during the 180-day window. Permitting and construction timelines must be realistic.
Tax items to watch
- Boot. If you take cash or receive non-like property, you will recognize gain up to the amount of boot. Buying down in value or reducing debt without adding cash can create boot.
- Depreciation recapture. A properly structured exchange defers recapture, but it does not erase it. It will be handled later when you have a taxable sale.
- Basis carryover. Your basis generally carries over from the relinquished property, adjusted for any additional cash paid, boot received, and debt differences. The rules are summarized in IRS Publication 544.
Work with your CPA to model these items before you list, so you know how much you need to reinvest to minimize taxable boot.
Arizona and Maricopa specifics
- State income tax. Arizona often follows federal treatment for exchanges, but procedures and filings can differ. Confirm how your exchange will be handled on your Arizona return with the Arizona Department of Revenue.
- Property taxes and assessment. The 1031 exchange itself does not preserve assessed values. Expect normal assessment processes for the replacement property. For reporting and questions on ownership changes, consult the Maricopa County Assessor.
- Recording and title. Coordinate deed language and exchange documents with your QI and title company. For recording procedures and timing, your team can confirm requirements with the Maricopa County Recorder.
If you plan improvements in Paradise Valley during an exchange, verify local permitting steps and timelines through the Town of Paradise Valley.
Paradise Valley market realities
Paradise Valley is a low-density, luxury market with limited inventory. Replacement properties can be competitive and time-sensitive. To protect your exchange:
- Identify multiple backup properties within your identification rules.
- Consider a reverse exchange if the right property appears before you sell.
- Allow extra time for high-value due diligence, lender approvals, and title work.
Local expertise and early coordination with your QI, title officer, and lender can keep the 45- and 180-day clocks on track.
Your pre-exchange checklist
- Confirm the property qualifies as investment or business use with a CPA.
- Engage a reputable, bonded Qualified Intermediary before listing.
- Notify your title company, escrow officer, and lender about the exchange early.
- Match vesting. Ensure the entity or person selling also takes title to the replacement.
- Prepare for 45-day identification. Use the three-property or 200% rules and name backups.
- Plan for luxury timelines. Consider reverse or improvement structures if needed.
- Model depreciation recapture and basis carryover with your CPA.
- Coordinate FIRPTA if a foreign seller or buyer is involved.
- Confirm any ownership change reporting with the Maricopa County Assessor.
- Keep meticulous records. Save QI agreements, identification notices, closing statements, title docs, and Form 8824.
A simple Paradise Valley example
Imagine you sell a Paradise Valley single-family rental for 2.5 million. Your adjusted basis is 1.2 million. You identify and buy a replacement investment property for 2.7 million within 180 days. You add 200,000 in new cash at closing and take no cash out.
- Because you bought up in value and did not receive cash, there is no boot.
- Your gain is deferred, including potential depreciation recapture.
- Your basis in the new property generally starts with the 1.2 million carryover basis, increased by the new cash you added, and adjusted for any debt differences.
Work with your CPA to run exact numbers and confirm how much to reinvest to maintain full deferral.
Foreign sellers and FIRPTA
Foreign sellers of U.S. real estate are subject to FIRPTA withholding. A 1031 exchange does not automatically remove that requirement. Special procedures and a withholding certificate may apply. Review the rules in the IRS FIRPTA guidance and coordinate early with your QI and tax advisor.
How we support your exchange
You deserve a smooth, well-timed exchange that protects your equity. As a boutique team focused on Paradise Valley and neighboring luxury markets, we help you:
- Time your sale and purchase to fit the 45/180-day windows.
- Source on- and off-market options so you can identify strong backups.
- Coordinate with your QI, title, escrow, and lender to minimize delays.
- Prepare properties for market using Compass-backed marketing and presentation.
If you are weighing a 1031 exchange in Paradise Valley, connect with us early so we can align the right strategy and team.
Ready to explore your options or line up potential replacements? Reach out to Phoenix Living: Joelle Addante + David Thayer for local guidance and a streamlined plan.
FAQs
Can you 1031 a Paradise Valley rental into another home?
- Yes, if both properties are held for investment or business use and you meet the IRS identification and closing timelines using a QI.
What happens if you miss the 45-day identification deadline?
- The exchange fails and gain becomes taxable, so plan early and identify multiple backups to protect your timeline.
Do you still pay Arizona tax on deferred gain in a 1031?
- Arizona often aligns with federal treatment, but filing details can differ; confirm your situation with the Arizona Department of Revenue and your CPA.
How does FIRPTA affect a foreign seller using a 1031?
- FIRPTA withholding may still apply; review the IRS FIRPTA guidance and coordinate with your QI and tax advisor.
Can you use a 1031 to improve a replacement property in Paradise Valley?
- Yes, through an improvement exchange, but improvements must fit within 180 days and follow IRS and local permitting rules, so plan with your QI and town officials.
