1031 Exchange Guide

A 1031 exchange — named for Section 1031 of the tax code, and sometimes called a like-kind exchange — lets a real estate investor sell an investment property and reinvest the proceeds into another investment property while deferring the capital gains tax that would otherwise be due on the sale. It's one of the most powerful tools available for investors looking to grow a portfolio without losing a chunk of their equity to taxes at every trade.

It's a deferral, not a forgiveness. The tax basis of your old property carries over into the new one, and the deferred gain generally becomes due if you eventually sell without doing another exchange — though many investors use exchanges repeatedly across a career, and the deferred gain can potentially be eliminated for heirs entirely if the property is held until death, under the separate step-up-in-basis rules. None of this replaces advice from your own CPA and a qualified intermediary — this guide covers the mechanics so you know what questions to ask them.

What Counts as "Like-Kind"

For real estate, "like-kind" is interpreted broadly: essentially any real property held for investment or business use qualifies as like-kind to any other, so a rental duplex can be exchanged for raw land, a retail strip, or an apartment building. Your primary residence does not qualify, and since 2018 the like-kind exchange rules apply to real property only — personal property exchanges (equipment, vehicles, etc.) no longer qualify under Section 1031.

The Two Deadlines That Run the Whole Process

• 45-day identification window: Starting the day your relinquished property closes, you have 45 calendar days to formally identify potential replacement properties in writing to your qualified intermediary.
• 180-day exchange period: You must close on the replacement property within 180 calendar days of the original sale — not 180 days after identification. Both clocks start on the same day and run concurrently.

These deadlines are calendar days, not business days, and the IRS generally does not grant extensions outside of specific federally declared disaster relief. Miss either one and the exchange fails — the sale is simply treated as a normal taxable sale.

Identification Rules

You can't just say "I'll find something" — the IRS requires a specific written identification within the 45-day window, under one of these standard tests:

• Three-property rule: Identify up to three properties regardless of their combined value.
• 200% rule: Identify any number of properties, as long as their combined fair market value doesn't exceed 200% of the relinquished property's sale price.
• 95% rule: Identify any number of properties of any combined value, provided you actually acquire at least 95% of the total value identified.

The Qualified Intermediary (QI)

You cannot receive the sale proceeds yourself at any point in the process — doing so disqualifies the exchange immediately. A qualified intermediary is an independent third party who holds the funds from your sale in escrow and uses them to acquire the replacement property on your behalf. Your QI cannot be someone who has acted as your agent within the prior two years — that generally rules out your own real estate agent, attorney, accountant, or broker. See our companion guide on finding and vetting a qualified intermediary for what to look for.

The Equal-or-Up Rule, In Plain Terms

To defer 100% of your gain, the replacement property generally needs to be of equal or greater value than the relinquished property, and you generally need to reinvest all of your net equity and replace any debt that was paid off (or offset the difference with additional cash). Falling short on either front doesn't kill the exchange — it just means part of the gain becomes taxable in the current year. For the actual math behind this, see our 1031 exchange formula guide.

Reporting the Exchange

A completed 1031 exchange is reported to the IRS on Form 8824, filed with your tax return for the year the exchange took place. Your CPA will need documentation from the QI showing the sale, the identification, and the purchase of the replacement property.

A Few Variations Worth Knowing

• Reverse exchange: You acquire the replacement property before selling the relinquished one — structurally more complex and requires an accommodation titleholder to hold one property temporarily.
• Improvement (build-to-suit) exchange: Exchange proceeds are used to improve the replacement property, not just acquire it, within the same 180-day window.

Frequently Asked Questions

Q: Do I have to buy something in the exact same category — residential for residential, commercial for commercial?
A: No. Under the current rules any real property held for investment or business use is like-kind to any other, so cross-category exchanges (rental house for raw land, for example) are generally allowed.

Q: What happens if I miss the 45-day identification deadline?
A: The exchange fails and the original sale is treated as a normal taxable transaction, with capital gains tax due in the ordinary way.

Q: Does a 1031 exchange eliminate my tax bill permanently?
A: It defers it. The deferred gain generally carries forward into the replacement property's basis and becomes taxable on a future non-exchange sale — though it can potentially be wiped out for your heirs through the separate step-up-in-basis rules if the property is held until death. Ask your CPA how this applies to your situation.

Q: Can I do a 1031 exchange on my primary residence?
A: No — Section 1031 applies to property held for investment or business use, not personal residences.