1031 Delayed Exchange: Deadlines, Qualified Intermediary, and Boot

A 1031 delayed exchange lets you sell investment or business real estate and defer the capital gains tax by rolling the proceeds into like-kind replacement property, as long as a qualified intermediary holds the money, you identify the new property in writing within 45 days of the sale, and you close on it within 180 days. Miss either deadline, touch the cash, or fail to reinvest the full value, and the deferral collapses in whole or in part. The rules below walk through exactly what you have to do.

The Two Deadlines That Control the Exchange

Two clocks start the day you transfer your relinquished property to the buyer, and both run at the same time.

45-day identification period. You must formally identify potential replacement properties in writing, signed and delivered to your qualified intermediary or another party to the exchange, by midnight on day 45. There are no weekend extensions. Miss it and the exchange fails.¹
180-day exchange period. You must close on the replacement property by the earlier of 180 days after the sale or the due date, including extensions, of your federal tax return for the year of the sale.¹

Because the 45-day window is carved out of the 180-day total, once identification closes you have 135 days left to buy. The tax-return wrinkle trips people up. Sell in October without filing an extension and your April 15 due date arrives before day 180, cutting the exchange period short. Filing an extension pushes the due date out and preserves the full 180 days.

Disaster Extensions

The only circumstance that extends either deadline is a federally declared disaster. Under Revenue Procedure 2018-58, both the 45-day and 180-day periods can be pushed back by 120 days or to the end of the general disaster relief period announced by the IRS, whichever is later. The extension can never exceed one year or the due date, with extensions, of your tax return for the year of the sale.²

You qualify if you are an affected taxpayer under the IRS disaster announcement or if the disaster disrupts your ability to meet the deadlines, including situations where the replacement property, your intermediary’s office, or a lender is in the affected zone. The extension also applies when an already-identified replacement property suffers substantial damage from the disaster, even if the identification deadline has passed.²

What Property Qualifies

Only real property held for investment or productive use in a business qualifies. A rental house, a commercial warehouse, farmland, and a vacant lot all count. Your primary residence does not, because you live in it rather than hold it as an investment. Property you bought to flip also fails: if your intent is resale, the IRS treats it as inventory.³

The “like-kind” standard is broader than most people expect. It refers to the nature of the property, not its grade or quality.⁴ You can swap an apartment complex for raw land, or trade a retail strip mall for a single-family rental. Both properties just need to be real estate held for investment or business use and located in the United States. Stocks, bonds, notes, and partnership interests are specifically excluded.³

One boundary to be aware of: personal property no longer qualifies. Before the Tax Cuts and Jobs Act of 2017, you could exchange equipment, aircraft, and artwork. That ended January 1, 2018. Today Section 1031 applies exclusively to real property.³

How Long You Need to Hold the Property

The tax code sets no minimum holding period, and the IRS looks at the facts around your intent rather than counting months. A property held under 12 months raises red flags because it starts to look like a flip. Many tax advisors treat 24 months as a conservative benchmark. The longer you hold on both sides of the exchange, the harder it is for anyone to argue you weren’t a genuine investor.

Why You Need a Qualified Intermediary

You cannot touch the sale proceeds at any point during the exchange. If the money hits your account or you have the ability to withdraw it, the IRS treats you as having received the funds and the deferral collapses. This is the constructive receipt rule, and it is why every delayed exchange runs through a qualified intermediary.⁵

The intermediary is a neutral third party who holds the exchange funds in a restricted account under a written exchange agreement. When your relinquished property closes, the proceeds go directly from the title company to the intermediary. When you’re ready to buy, the intermediary wires the funds to the closing agent for the replacement property. You never control the money. Federal rules also prohibit using your attorney, accountant, real estate agent, or anyone who has worked for you in the prior two years.

Fees generally run $1,000 to $2,000 for a straightforward exchange with one replacement property. More complex transactions cost more. No federal agency licenses or regulates intermediaries, so you are trusting an unregulated entity with a large sum. Checking for fidelity bonding, segregated accounts, and financial audits is worth the effort; intermediary failures have wiped out exchange funds entirely.

How to Identify Replacement Properties

Your written identification must describe each property with enough specificity that there is no ambiguity. A street address or legal description works. You have three options for how many properties you can list:

Three-property rule. You can identify up to three replacement properties regardless of their combined value. This is the most commonly used approach.⁵
200% rule. You can identify any number of properties, but their combined fair market value cannot exceed twice the value of the property you sold.⁵
95% rule. If you blow past both limits above, you can still save the exchange by actually acquiring at least 95% of the total value of everything you identified. In practice this rule offers little margin for error and is rarely used on purpose.

If you identify more properties than the three-property and 200% rules allow and don’t meet the 95% threshold, the IRS treats your identification as void, as if you never named a single property. The safest path is staying within the three-property rule.

Step-by-Step Sequence of a Delayed Exchange

The mechanics follow a specific sequence designed to keep you at arm’s length from the sale proceeds:

Sign an exchange agreement with a qualified intermediary before your relinquished property closes.
Your property sells. The title company sends the net proceeds directly to the intermediary, not to you.
Within 45 days, identify replacement properties in writing and deliver the notice to your intermediary.
Negotiate a purchase contract for a replacement property. The contract is assigned to the intermediary.
The intermediary wires the exchange funds to the closing agent. The deed transfers directly from the seller to you.

Having the deed run directly from seller to you, skipping the intermediary, is standard and legally recognized. What matters for tax purposes is that the intermediary controlled the money. The whole process must wrap up within the 180-day window.¹

You report the exchange on Form 8824, filed with your federal return for the year you transferred the relinquished property. The form captures the dates of each transfer, descriptions of both properties, adjusted basis, and any gain recognized.⁶

When You Still Owe Tax (Boot)

A 1031 exchange defers tax; it does not eliminate it. And the deferral only works to the extent you reinvest everything. Any value you pull out, whether as cash or through debt reduction, is called “boot,” and it is taxable in the year of the exchange.¹

Boot shows up in two common ways. Cash boot is leftover sale proceeds you didn’t reinvest. Mortgage boot happens when the debt on your replacement property is lower than the debt on the property you sold. No cash changes hands, but the IRS treats that reduction in liability as money you received. Sell a property with a $500,000 mortgage, buy a replacement with only a $350,000 mortgage, and you have $150,000 of mortgage boot unless you make up the difference with additional cash.

Gain recognized on boot is taxed at your applicable capital gains rate. For 2026, long-term capital gains rates are 0%, 15%, or 20% depending on income, with the top 20% rate kicking in at $545,500 for single filers and $613,700 for joint filers.⁷ High earners also face the 3.8% net investment income tax on top of the capital gains rate, which applies to individuals with modified adjusted gross income above $200,000 single or $250,000 married filing jointly.⁸ Taking control of the funds before the exchange is complete is worse: the IRS can disqualify the whole transaction and make all gain immediately taxable.¹

Basis Carryover and Depreciation Recapture

Your tax basis carries over to the replacement property rather than resetting to the purchase price. If you bought a building for $300,000, took $80,000 in depreciation, and exchanged into a new property worth $500,000 with no boot, your basis in the replacement is $220,000, not $500,000. That lower basis means smaller annual depreciation deductions going forward and a larger taxable gain when you eventually sell without exchanging.³

Depreciation recapture is the other piece that catches people off guard. If you receive boot, the IRS may require you to recapture previously claimed depreciation as ordinary income rather than at the lower capital gains rate. For real property, unrecaptured Section 1250 gain, meaning depreciation taken on buildings, is taxed at a maximum rate of 25%, higher than most long-term capital gains rates.⁹ The calculation is reported on Form 8824, where you allocate the basis of the replacement property across the different types of property received.⁶

Special Situations

Related-Party Exchanges

You can do a 1031 exchange with a related party, such as a family member or a corporation you control, but a two-year holding period applies to both sides. If either party sells the exchanged property within two years of the last transfer, the deferral unwinds and the gain becomes taxable as of the date of that early sale.¹⁰ Exceptions exist for the death of a party, involuntary conversions such as condemnation or casualty loss, and transactions where the IRS determines tax avoidance was not a principal purpose.¹¹

Reverse Exchanges

If you find the replacement property before your current property sells, a reverse exchange handles the sequencing. An exchange accommodation titleholder acquires and parks the replacement property until you can sell the relinquished one. Revenue Procedure 2000-37 provides a safe harbor, and the same 45-day and 180-day deadlines apply.¹² Expect higher intermediary fees and potentially a bridge loan, because someone has to take title to and finance the parked property during the exchange period.

Converting Replacement Property to Personal Use

If you’re considering eventually living in the property you acquire, Revenue Procedure 2008-16 provides a safe harbor for dwelling units. The IRS will not challenge your investment intent if you hold the replacement property for at least 24 months after the exchange and, during each of those two 12-month periods, you rent it at fair market rates for at least 14 days and limit personal use to no more than 14 days or 10% of the days rented, whichever is greater. Converting to a personal residence before meeting these thresholds invites an IRS argument that you never intended to hold it as investment property, which would disqualify the exchange retroactively.

What Happens to the Deferred Gain

When a property owner dies, heirs receive the property with a basis stepped up to fair market value at the date of death under IRC Section 1014.¹³ Gain deferred through years or decades of 1031 exchanges effectively vanishes. The heirs’ basis is the current market value, not the original cost basis carried forward through each exchange. This is why many long-term real estate investors chain 1031 exchanges throughout their careers, deferring gain from property to property, knowing the appreciation may never be taxed if they hold real estate for life.

1
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
2
Internal Revenue Service. Revenue Procedure 2018-58
3
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Property Held for Productive Use or Investment
4
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
5
eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
6
Internal Revenue Service. Instructions for Form 8824
7
Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
8
Internal Revenue Service. Net Investment Income Tax
9
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
10
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Property Held for Productive Use or Investment – Section: Special Rules for Exchanges Between Related Persons
11
Internal Revenue Service. Revenue Ruling 2002-83
12
Internal Revenue Service. Revenue Procedure 2000-37
13
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent