What does upleg mean in real estate?

What is an Upleg?

In real estate, particularly within the context of a 1031 exchange, the term "upleg" refers to the replacement property into which an investor reinvests the proceeds from the sale of their original property (known as the "downleg"). The upleg property is the asset acquired in the latter part of the exchange process, allowing the investor to defer capital gains taxes on the sale of the downleg property, provided that the exchange meets the requirements set forth under Section 1031 of the Internal Revenue Code. This terminology is specific to the 1031 exchange process, highlighting the sequential nature of selling one investment property and purchasing another as part of a tax-deferral strategy.

Quick Example of an Upleg

In a hypothetical 1031 exchange deal, an investor sells an apartment complex (the downleg) for $1 million and uses the proceeds to purchase a retail shopping center (the upleg) for $1.2 million. By reinvesting the sale proceeds into the upleg property, the investor successfully defers capital gains taxes that would otherwise be due from the sale of the apartment complex, adhering to the rules of a 1031 exchange.