What is a downleg in real estate?

What is a Downleg?

In real estate, particularly within the context of a 1031 exchange, the term "downleg" refers to the property being sold or relinquished by the investor. It's the first part of the exchange process, where the investor disposes of an investment property and plans to reinvest the proceeds into another property (known as the "upleg") to defer capital gains taxes under the rules of Section 1031 of the Internal Revenue Code. The downleg property is essentially the asset that triggers the exchange process, allowing the investor to move capital from one investment to another without immediate tax implications, provided all requirements for a 1031 exchange are met.

Quick Example of a Downleg

An investor decides to sell a commercial office building (the downleg) for $2 million and plans to reinvest the proceeds into a multifamily residential complex (the upleg) worth $2.5 million. By moving the sale proceeds from the downleg to the upleg, the investor aims to defer capital gains taxes through a 1031 exchange.