Are you looking to roll gains from a recent sale into a stronger Northshore asset while deferring federal taxes? You are not alone. Many investors use a 1031 exchange to reposition into Chattanooga properties without interrupting momentum or cash flow. In this playbook, you will learn the core 1031 rules, the 45 and 180 day timelines, Northshore asset types that fit well, and a step-by-step plan to keep your exchange on track. Let’s dive in.
What a 1031 exchange does
A 1031 exchange lets you defer federal taxable gain when you swap real property held for investment or business use for other like-kind real property. After the Tax Cuts and Jobs Act of 2017, only real property qualifies under IRC §1031. Personal property does not qualify for new exchanges.
You can structure an exchange several ways. Most investors use a delayed exchange, where you sell first and buy later using a qualified intermediary to hold proceeds. You can also do a simultaneous exchange, a reverse exchange using an Exchange Accommodation Titleholder to acquire the replacement first, or an improvement exchange where improvements are completed during the exchange timeline.
The key idea is simple. To defer federal tax, you sell investment real estate and buy other investment real estate, while following strict rules on timing, identification, and documentation.
Key deadlines you must hit
Two clocks start the day you transfer the relinquished property.
- Identification window: You have 45 calendar days to identify replacement property in writing and deliver that identification to your qualified intermediary. The description must be unambiguous, such as a street address or legal description.
- Completion deadline: You must acquire your replacement property within 180 calendar days after the sale date, or by your federal tax return due date for that year, including extensions, whichever comes first.
The “earlier of” rule matters. Filing an extension can help, but the extended due date can still arrive before 180 days in some situations. Plan timelines with your tax advisor before you list your property.
Identification rules that work in practice
You must identify within 45 days using one of these rules:
- 3‑property rule: Identify up to three properties of any value.
- 200% rule: Identify any number of properties as long as the total fair market value does not exceed 200% of your relinquished property’s value.
- 95% rule: If you exceed the 200% limit, your exchange can still qualify if you acquire at least 95% of the total fair market value of all identified properties.
For the 200% test, keep credible valuation support from appraisals or broker opinions used at the time of identification. Clear paper trails protect your exchange if questions arise later.
Mortgage and “boot” basics
Boot is any non like-kind property or cash you receive. If you receive boot, you generally recognize gain up to the amount of boot. Debt relief can also create mortgage boot. To fully defer gain, match or exceed the relinquished debt on your replacement purchase, or add cash to make up any shortfall. Coordinate with your lender early so financing aligns with your debt replacement plan.
Related-party and holding period reminders
Exchanges involving related parties have special rules that can cause recognition if the property is disposed of within two years. There is no fixed minimum holding period in the law, but the IRS looks at facts and circumstances to decide if a property was held for investment. Many practitioners favor longer holding periods for converted properties, but you should confirm approach and timing with your tax advisor.
Northshore assets that fit a 1031 strategy
Northshore sits just across the river from downtown Chattanooga. The area’s mix of residential and commercial options gives you a range of like-kind choices when you exchange.
Single-family rentals
If you are trading one rental home for another, or stepping up into small multifamily, single-family rentals near downtown and riverfront amenities can support demand. Watch HOA or condominium rules if you are moving into attached product.
Small and large multifamily
Two to four units and five-plus unit buildings are popular consolidation targets. Financing and underwriting differ from single-family, so engage your lender early to align terms and closing within 180 days.
Mixed-use and retail corridors
Street-level retail with apartments or offices above can be a strong fit if you want diversified income. Factor in cash flow variability and potential tenant turnover when you underwrite.
Office and professional space
Office needs vary by submarket. Evaluate occupancy trends, lease structures, and the potential for adaptive reuse if the plan changes.
Industrial and flex
Chattanooga’s role as a regional logistics hub makes small industrial and flex spaces attractive to investors seeking stable cash flow and lower management intensity.
Self-storage and specialty assets
Self-storage often aligns well with 1031 goals because of management scalability. Confirm the asset’s investment use and operating structure.
Land and build-to-suit
Raw land is like-kind real estate. If you plan improvements, an improvement exchange can capture value, but construction must fit strict identification and 180 day rules.
DSTs and TICs
Delaware Statutory Trusts and tenancy-in-common interests are common for investors who want passive ownership. Controls are limited for investors in these structures, so review offering documents and tax treatment with counsel before subscribing.
Short-term rentals
Short-term rentals can qualify only if they are held for investment and not run like a hotel business. How you use the property, services offered, and owner occupancy all matter. Also confirm Chattanooga’s zoning, registration, and licensing rules for STRs before you identify.
Local considerations in Hamilton County
- State tax context: Tennessee does not have a broad personal income tax. The former Hall tax on interest and dividends has been fully repealed. For most investors, the main tax impact of a 1031 exchange is at the federal level. Confirm your specific situation with state tax counsel, especially if you own through an entity or live out of state.
- Zoning and permitting: Northshore riverfront and historic areas may have overlay zoning and design standards. If your strategy involves change of use, exterior modifications, or STR operation, check City of Chattanooga and Hamilton County planning rules before you identify.
- Market drivers: Proximity to downtown, riverfront amenities, and access to I‑75 and I‑24 can support absorption for rental and commercial assets. Focus on current underwriting and operations rather than outdated pricing data.
Your step-by-step 1031 playbook
Use this checklist to stay on time and on target for a delayed exchange.
Pre-sale planning
- Confirm eligibility with your CPA. Verify your property is held for investment or business use and review potential gain.
- Engage a qualified intermediary. Have the QI selected and ready before any closing. They will prepare your exchange agreement and hold funds.
- Talk to lenders early. Share your exchange plan, request pre-qualification or an indicative commitment, and confirm the lender’s comfort with reverse or improvement structures if needed.
- Assemble documents. Pull leases, environmental reports, title, and operating records. Start valuation work for identification rules.
- Review DST or TIC options if you want passive ownership. Check subscription timelines to ensure they fit 45 and 180 day windows.
Sale day, Day 0
- Proceeds must go to the QI. Do not take constructive receipt. Escrow instructions should direct funds to your QI per the exchange agreement.
- Sign exchange documents. Confirm the exchange assignment and notices are executed at or before closing.
- Your clocks start. The 45 day identification window and 180 day completion period begin on the transfer date.
Days 1 to 45: Identify
- Identify replacement properties in writing to your QI under the 3 property, 200% or 95% rule.
- Document value support. Keep appraisals or broker opinions used for the 200% test.
- Coordinate financing. Lock loan terms and align closing timelines within 180 days.
- If reverse or improvement is likely, coordinate with the QI and an Exchange Accommodation Titleholder immediately. These require more setup.
Days 46 to 180: Acquire
- Close before the earlier of 180 days or your tax return due date, including extensions.
- Use QI funds at closing. Settlement statements should show the QI as the source of funds.
- Replace debt. If your replacement loan is smaller than the relinquished loan, add cash to avoid mortgage boot.
- Maintain records. Keep closing disclosures, identification notices, QI statements, and loan documents for your tax preparer.
Who to involve and when
- Qualified intermediary: Engage before you close on the sale, never after.
- Tax advisor or CPA: Consult at the planning stage and again at closing for forms and final analysis.
- Lender: Involve before identification so underwriting can clear inside the 180 day window. Confirm any reverse or construction tolerance.
- Real estate attorney: Use for reverse or improvement exchanges, related-party transactions, and to review QI or EAT contracts.
- Broker and market specialist: Involve early to curate on-market and off-market options that can close within your timelines.
- Contractor: If improving replacement property, get a scoped plan and schedule that fits identification and 180 day requirements.
Common pitfalls to avoid
- Waiting to hire a QI and taking possession of proceeds, which disqualifies the exchange.
- Missing the 45 day identification deadline. There are no extensions.
- Misreading the 180 day rule and the earlier federal tax return due date.
- Using vague identification descriptions. Always use precise legal descriptions or addresses.
- Overreliance on aggressive valuations for the 200% rule without documentation.
- Failing to replace debt and creating mortgage boot.
- Ignoring related-party rules that can trigger recognition within two years.
- Treating STRs like hotel businesses, which can jeopardize investment classification.
- Underestimating the complexity and cost of reverse or improvement exchanges.
- Choosing an unvetted QI. Confirm experience, escrow practices, bonding, and references.
Document checklist for tax time
- QI exchange agreement and all assignment documents.
- Settlement statements showing QI receipt and disbursement of funds.
- Written identification notices with clear property descriptions.
- Purchase and sale agreements for relinquished and replacement properties.
- Appraisals or broker opinions used for FMV calculations and 200% testing.
- Loan documents that demonstrate debt replacement.
- QI statements, closing disclosures, and correspondence with QI and lenders.
Example Northshore strategies
Use these simple scenarios to think through structure and timing.
- Scenario A, scale up: Sell a single-family rental in Northshore and identify three small multifamily options under the 3 property rule. Acquire one 10 unit building and consolidate operations.
- Scenario B, reverse exchange: Secure a desirable multifamily property first with an Exchange Accommodation Titleholder, then sell your relinquished property within 180 days.
- Scenario C, improvement exchange: Sell a commercial lot, identify a partially improved building, and complete renovations during the exchange period under an improvement structure.
How Lawrence Team Homes supports your 1031
You want a clean, on-time exchange with strong replacement options. Our team’s neighborhood focus across North Chattanooga and the riverfront helps you source properties that match your timeline and objectives. We coordinate with your QI, lender, and attorney, and we keep you on the 45 and 180 day rails with clear checklists and status updates.
Whether you are consolidating into multifamily, shifting into industrial or self-storage, or exploring a DST allocation, we help you weigh local demand drivers, underwriting assumptions, and permitting constraints. You stay focused on investment decisions while our systems reduce friction from search to close.
Ready to map your Northshore exchange and line up qualified replacements before Day 45? Talk to the Lawrence Team today.
FAQs
What is a 1031 exchange for Chattanooga investors?
- A 1031 exchange lets you defer federal capital gain tax by selling investment real estate and acquiring like-kind investment real estate, while meeting strict timing and identification rules.
How long do I have to identify Northshore replacement properties?
- You have 45 calendar days from the date you transfer your relinquished property to identify replacement properties in writing to your qualified intermediary.
When must I close on the replacement in a 1031 exchange?
- You must acquire the replacement property within 180 days of the sale date or by your federal tax return due date for that year, including extensions, whichever occurs first.
Can I reduce debt on the replacement and still fully defer tax?
- Not without adding cash. If your replacement debt is lower, the reduction is mortgage boot that can trigger taxable gain. You can add cash to offset the shortfall.
Do short-term rentals in Chattanooga qualify for a 1031 exchange?
- They can, if held for investment and not operated like a hotel business. Facts such as services provided, owner use, and turnover matter. Also confirm local STR rules.
Is Tennessee state tax a factor in a 1031 exchange?
- Tennessee does not have a broad personal income tax. For many investors, the primary tax effect is federal. Confirm state and entity-specific consequences with your tax advisor.
Do I need a qualified intermediary in a delayed exchange?
- Yes. Your QI must receive and hold proceeds. If sale proceeds hit your account, you have constructive receipt and the exchange will not qualify.
What if I want to buy first in Northshore?
- Consider a reverse exchange. An Exchange Accommodation Titleholder acquires the replacement property while you sell your relinquished property within 180 days.
