A 1031 exchange lets you sell investment or business real estate and buy replacement real estate without paying tax on the gain right away. The gain is deferred, not forgiven: it carries into the new property through a lower tax basis. To qualify, you must identify the replacement within 45 days of selling and receive it within 180 days or by your tax return due date for that year, whichever comes first.
The name comes from Section 1031 of the Internal Revenue Code. The 1031 exchange rules are strict and the deadlines cannot be extended for ordinary delays, so it pays to understand them before you list a property.
What property qualifies for a 1031 exchange?
Since 2018, only real property qualifies. Exchanges of equipment, vehicles, artwork and other personal property no longer get like-kind treatment. Both the property you give up and the property you receive must be held for productive use in a trade or business or for investment.
“Like-kind” is broad for real estate. The IRS explains that real properties are generally like-kind to each other regardless of whether they are improved or unimproved, so you can trade a rental house for raw land or a small office building. Two limits matter:
- Property held primarily for sale, such as a house you flip, does not qualify.
- U.S. real property and foreign real property are not like-kind to each other.
Your own main home does not qualify either, since it is not held for investment.
What are the 1031 exchange deadlines?
The clock starts on the day you transfer the property you are selling.
- Identification period: you have 45 days to identify potential replacement properties in writing.
- Exchange period: you must receive the replacement property within 180 days of the sale or by the due date, including extensions, of your tax return for the year of the sale, whichever is earlier.
Both periods run at the same time; the 45 days are part of the 180, not added to them. Weekends and holidays count.
Worked example: you close on a rental on March 2, 2026. Counting 45 days forward lands on April 16, 2026, the last day to identify replacements. Counting 180 days lands on August 29, 2026, the last day to close on the purchase. Because a sale early in the year leaves plenty of time before the following April filing date, the 180-day limit controls here. A sale in mid-October or later is different: 180 days would run past April 15, so you would need to extend your return to keep the full period.
Why do you need a qualified intermediary?
If you take control of the sale cash, even briefly, the IRS can treat the transaction as a sale and purchase rather than a 1031 exchange. To avoid that, investors typically use a qualified intermediary, an independent party that holds the sale proceeds and uses them to buy the replacement property. Your own attorney, real estate agent or accountant who has acted for you recently generally cannot serve in that role.
What is boot in a 1031 exchange?
Boot is anything you receive that is not like-kind property, most often leftover cash or a reduction in debt. You owe tax on the gain up to the amount of boot received. If you sell for $600,000 and buy a replacement for $560,000, the $40,000 difference that comes back to you is taxable, even though the rest of the gain is deferred.
To defer all of the gain, a common rule of thumb is to buy replacement property of equal or greater value and reinvest all of the net proceeds, replacing any mortgage you paid off with new debt or added cash.
How does basis carry over in a 1031 exchange?
This is where the deferral shows up. Suppose:
- Sale price of the relinquished rental: $600,000
- Adjusted basis: $350,000
- Gain: $600,000 − $350,000 = $250,000
You buy a replacement for $700,000 and receive no boot. None of the $250,000 is taxed now. Your basis in the new property is its cost minus the deferred gain: $700,000 − $250,000 = $450,000. That is the same as the old $350,000 basis plus the $100,000 of extra money you put in. When you eventually sell without another exchange, the deferred gain becomes taxable along with any new gain.
Depreciation on the new property is based on that carried-over basis, so the deferred gain also reduces your future depreciation deductions compared with a fully taxable purchase.
How do you report a 1031 exchange?
File IRS Form 8824, Like-Kind Exchanges, with your tax return for the year in which you transferred the property. The form records the dates, describes the properties, and calculates any recognized gain and the basis of the replacement property. Keep the qualified intermediary agreement and closing statements with your records.
Is a 1031 exchange always worth it?
Not always. If your gain is small, your tax rate is low, or you plan to exit real estate soon, the cost and complexity may outweigh the deferral. Run the numbers on the sale first with the 1031 exchange calculator, check whether the property still earns its keep with the rental property calculator, and compare keeping or selling with the rent vs. sell calculator. If the home was your residence rather than a rental, the separate home sale exclusion may apply instead; the home sale capital gains calculator covers that case.
What mistakes break a 1031 exchange?
- Touching the sale proceeds before the replacement closes.
- Missing the 45-day identification deadline by even one day.
- Buying a property you intend to use personally or flip.
- Taking cash out at closing without realizing it is taxable boot.
- Forgetting that a late-year sale can be cut short by the return due date.
Because the rules are technical, many investors planning a 1031 exchange bring in a tax professional before the sale closes rather than after.
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A 1031 exchange lets you sell investment or business real estate and buy replacement real estate without paying tax on the gain right away. The gain is deferred, not forgiven: it carries into the new property through a…
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