How the Wealthy use a 1031 Exchange for High-Net-Worth Investors to Grow their Net Worth

If you’re looking to save for retirement or leave more behind for your kids, take a page from the handbook of the ultra-wealthy, who increase their investing power by deferring taxes on property sales, through a 1031 exchange for high-net-worth investors.

There was a time when becoming a millionaire was the goal of any hardworking American. But these days, $1 million might not be enough to retire on, depending on where you live. Once you make it to a million, you’ll have to continue making smart choices with your money.

Being a millionaire doesn’t necessarily mean you have your finances squared away. According to a study from Northwestern Mutual, nearly 1 in 4 American millionaires says they don’t know how much money they’ll need to retire comfortably, and 29% say they haven’t prepared a will.

If you’re still working on your first million, knowing that you’ll have to set your sights higher to retire comfortably or leave something behind for your loved ones can seem daunting. The good news is that you can employ the same strategies that those with high net worth use to build wealth, particularly when it comes to property ownership.

What separates HNWI and UHNWI from the rest of the population

Sometimes the terminology around wealth can get confusing because of a lack of concrete definitions. Generally speaking, a high net worth individual (HNWI) is “someone with liquid assets of at least $1 million,” and anyone with a net worth over $30 million is considered an ultra high net worth individual (UHNWI).

The United States is home to more HNWI than anywhere else in the world. The U.S. is also home to 35% of all global UHNWIs, according to the 2026 Knight Frank wealth report, which points out that as of 2023, “21% of HNWI investable wealth was now allocated to directly owned commercial property.”

While it’s true that there are differences between the ultra-wealthy and everyday investors, such as the ability to invest in alternatives, this data shows that the wealthy have put a significant portion of their net worth into property ownership, which says good things about real estate as an asset class.

One of the most significant differences between how regular Americans invest and how the wealthy invest? Minimizing the amount that gets lost to taxes, through capital gains tax deferral. According to a working paper from the National Bureau of Economic Research (“NBER”), the effective tax rate for the 400 richest Americans “averaged 24% in 2018–2020 compared with 30% for the full population and 45% for top labor income earners.”

There is plenty of available analysis on whether the ultra-wealthy should or should not be able to take advantage of certain methods for lowering their effective tax rates, but our focus is on how they do it, and which methods are available to investors seeking to enter the HNWI world. The NBER study points to pass-through corporate entities, which are available to average American business owners, while there are others, such as borrowing against investments, which only apply to those with substantial holdings in securities.

The principle here is pretty simple: the less you lose to taxes, the more you’ll have to invest, and the more your net worth can grow from those investments. For property owners, the tool that HNWI and UHNWI use to grow their real estate portfolios is available to anyone who owns business or investment property.

How high-net-worth families use like-kind exchange to defer capital gains tax

Internal Revenue Code Section 1031 sets the rules for like-kind exchanges of real property. Any time you sell a property, you will owe capital gains taxes on the sale. But if your property was held as an investment or for use in a business, and you use the sales proceeds to acquire a like-kind property according to 1031 procedural rules, you can defer those capital gains taxes (and certain other taxes) to a later date.

By putting off taxes to a later date, you’ll have more to invest in other properties right now, allowing you to diversify and acquire higher-value assets with more growth potential. 1031 exchanges help taxpayers save for retirement, build small businesses, and generate passive income for their later years.

Consider this scenario: you, the taxpayer, purchase an investment property for $200,000. This could be a retail storefront, a rental property, a warehouse, a farm, or even a vacation home you rent out part of the year through a short-term rental site. When it comes time to sell, your property’s value has increased to $1 million. Congratulations, you have now entered the HNWI club. Or have you?

If you receive your sales proceeds in cash, you’ll owe capital gains taxes on that $1 million, which would lower the amount you’re ultimately left with. You’ll have less than $1 million to reinvest in your future. That’s where a 1031 exchange comes in.

In a 1031 exchange, the sales proceeds are held by a Qualified Intermediary (QI), a third party that manages funds during the exchange so you don’t take receipt of them. You then have 45 days to identify and 180 days to acquire a like-kind property, using the sales proceeds to pay for it. If your replacement property is valued the same or higher than your relinquished property (the property you sold), you can fully defer capital gains taxes, which won’t be due until you eventually sell your replacement property and receive the proceeds in cash.

What the wealthy understand about Section 1031 is that it’s extremely flexible in some key ways. For starters, the definition of “like kind” is quite loose. You can exchange nearly any type of business or investment property for another, for example, a retail storefront for a warehouse or a factory for a portfolio of rental properties. You could even exchange for an interest in a Delaware Statutory Trust (DST), transitioning into passive ownership in retirement. This flexibility allows investors to diversify and change asset types without being hurt by taxation.

Another useful trait of 1031 exchanges are that they can be performed in series. If you exchange from Property 1 into Property 2, and you later sell Property 2, you would then owe the capital gains taxes you deferred through your exchange. But if you execute another exchange from Property 2 to Property 3, the tax deferral continues. You won’t owe those taxes until you perform a taxable sale and receive the proceeds in cash. With proper planning, this could result in tax-free inheritance for your heirs.

Using 1031 exchanges to build multi-generational wealth and simplify estate planning

People often talk about “generational wealth,” but depending on where you live, inheritance taxes and estate taxes can eat into what you leave behind for your loved ones. There’s also the question of how to divide your assets. If you own a single high-value investment property, you might consider selling it during your lifetime so the proceeds can be divided evenly among your children and spare them the burden of deciding what to do with the property. However, doing so could trigger the capital gains taxes you worked so hard to defer through 1031 exchange

The difference between the ultra-wealthy and the rest of us is that their financial advisors work with them to establish a proper estate plan long before they pass. That’s why the NBER working paper found that the ultra-wealthy “paid 0.8% of their wealth in estate tax when married and 7% when single,” well below standard estate tax rates.

As Kiplinger says, “Estate planning is a fundamental pillar of wealth protection,” regardless of how much wealth you’re protecting. If your goal is to leave behind a level of wealth that would be eligible for estate taxes, you need a plan, and 1031 exchanges provide great flexibility for those who understand how they work.

We’ve mentioned that it’s possible to perform exchanges into newer properties in series, continuing tax deferral in the process. With proper planning, this can be done for the rest of your life. If you hold a 1031 property until your death, your heirs will receive a step up in basis, so that when they eventually sell the property in a taxable sale, their gain is calculated based on the property’s value at the time they inherited it, rather than when you acquired the original property.

Exchanging many times and never cashing out until your death to take advantage of the step up in basis is known as the “swap till you drop” strategy, and it allows property owners to maximize the value of their investments. When done right, it can mean never paying capital gains taxes on the property sales that were part of exchanges. And your heirs can continue to perform subsequent like-kind exchanges, continuing 1031 tax deferral on their own.

1031 can also make it easier to divide your assets. Instead of leaving behind one high-value property, you can exchange into a series of DSTs that can be easily divided in your will. This avoids unnecessary capital gains taxes as well as unnecessary battles over what to do with your property once you’re gone.

How to plan your 1031 exchange for high-net-worth investors

While it’s true that not every tool available to HNWI and UHNWI is available to everyday investors, Section 1031 is one method that any American can take advantage of if they own business or investment property. When it’s time for you to execute a like-kind exchange, you can utilize the same services used by the ultra-wealthy.

Every exchange requires a Qualified Intermediary (QI) to hold funds during the exchange. You could work with the cheapest QI you can find, but just because someone is an eligible third party doesn’t mean they understand 1031 rules. Do what the wealthy do and work with an experienced QI that has helped tens of thousands of people like you build wealth and continue upward mobility.

JTC has helped facilitate exchanges for everyone from first-time exchangers to major corporations. Everyone we work with has access to the same experienced team, the same institutional-grade security controls, and the same transparency tools that allow for 24/7 access to exchange information. If you want to follow in the footsteps of those who’ve entered the world of the ultra-wealthy through a 1031 exchange for high-net-worth investors, get in touch with JTC.

JTC’s 1031 Exchange Services