IRS Publication on 1031 Exchanges: Deadlines, QIs, and Boot

A 1031 exchange lets you defer capital gains tax when you sell investment or business real estate, provided you reinvest the proceeds into like-kind U.S. real property through a Qualified Intermediary, identify the replacement within 45 days, and close within 180. The 1031 exchange rules under Section 1031 of the Internal Revenue Code are strict: miss a deadline, take control of the cash, or receive anything that isn’t like-kind property, and part or all of the gain becomes taxable that year.¹

What Property Qualifies

Since the Tax Cuts and Jobs Act took effect in 2018, Section 1031 applies only to real property. Equipment, vehicles, artwork, and other personal property no longer qualify.²

Within real estate, “like-kind” is read broadly. The test looks at the nature of the property, not its grade or quality. A rental house is like-kind to a commercial warehouse. Vacant land is like-kind to an apartment complex. A strip center is like-kind to farmland. All of them are real property held for business or investment use.³

Both the relinquished property (what you sell) and the replacement property (what you buy) must be located in the United States. Domestic real estate is not like-kind to foreign real estate.²

Property That Does Not Qualify

Real property held primarily for sale is excluded. Flippers, developers selling finished lots, and anyone treating real estate as inventory cannot use Section 1031 on those properties.² Personal-use property is also out. Your primary residence and a vacation home used only for personal enjoyment don’t qualify, and neither do stocks, bonds, partnership interests, or promissory notes.³

You Cannot Touch the Money

In a deferred exchange, you sell first and buy later. During the gap, the sale proceeds have to be held by someone other than you. If you take receipt of the cash, even briefly, the IRS treats you as having constructive receipt of the funds and the exchange fails.

A Qualified Intermediary solves this. The QI takes the sale proceeds at closing, holds them in a segregated account, and later uses them to buy the replacement property on your behalf. The QI also prepares the exchange agreement and assignment documents that convert what would otherwise be a sale followed by a purchase into a single 1031 exchange.

Who Cannot Serve as Your QI

Treasury regulations define “disqualified persons” barred from acting as your QI. Anyone who has served as your employee, attorney, accountant, investment banker, real estate agent, or broker within the two years before the exchange is disqualified. A narrow exception covers routine financial, title insurance, escrow, or trust services, which don’t count toward disqualification.⁴

QI Funds Are Not Federally Protected

No federal agency licenses, bonds, or oversees QIs. A handful of states regulate them; most do not. If a QI mismanages or steals your funds, you lose both the money and the tax deferral. Before hiring one, ask about fidelity bond coverage, whether exchange funds sit in segregated accounts, and what internal financial controls are in place. A standard deferred exchange typically runs $600 to $1,200 in QI fees.

The 45-Day and 180-Day Deadlines

Two deadlines run from the day after you close on the relinquished property. Neither can be extended.

45 Days to Identify

You have 45 calendar days to identify potential replacement properties in writing. The identification must be signed by you and delivered to the QI or another party to the exchange, and it cannot be delivered to a disqualified person.² Your identification must fit one of three rules:

Three-Property Rule. Identify up to three replacement properties, regardless of their combined value. This is the option most exchangers use.
200% Rule. Identify any number of properties, as long as their total fair market value does not exceed 200% of the value of the relinquished property.⁵
95% Rule. If you blow past both of the above, the exchange still works only if you actually acquire at least 95% of the aggregate value of everything you identified. It is very hard to satisfy in practice.

180 Days to Close

You must close on the replacement property within 180 calendar days of selling the relinquished property. The 180 days run from the sale, not from the end of the identification window, so the identification is due at day 45 inside that same 180.³

There is a trap. The real deadline is the earlier of 180 days or the due date, including extensions, of your federal income tax return for the year you sold the relinquished property.² Sell in October and your return is due the following April 15, which is roughly 165 days out. Filing a tax extension preserves the full 180 days, and most exchange professionals recommend doing so as a matter of course.

Boot: How You Still End Up With a Tax Bill

“Boot” is anything you receive in the exchange that isn’t like-kind real property. Boot doesn’t sink the whole exchange, but the boot itself becomes taxable. You owe tax on the lesser of the boot received or the total gain realized on the sale.³

It shows up in two main forms:

Cash boot. Any sale proceeds you don’t reinvest. Sell for $450,000 and reinvest $400,000, and the extra $50,000 is taxable. Paying non-exchange expenses out of exchange funds can also create cash boot.
Mortgage boot, also called debt relief. If the debt on the replacement property is less than the debt on the relinquished property, the difference is boot. Trading out of a $300,000 mortgage into a $250,000 mortgage produces $50,000 of mortgage boot.

If you claimed depreciation on the relinquished property, boot is taxed first as depreciation recapture at a 25% federal rate under Section 1250. Anything above that is taxed at your applicable long-term capital gains rate of 0%, 15%, or 20%.⁶ The 3.8% net investment income tax may also apply.

The Deferred Gain Follows You

Section 1031 defers tax; it does not erase it. The gain you didn’t recognize gets built into the basis of the replacement property. In shorthand: replacement basis equals fair market value minus the deferred gain.

Say you bought a rental for $200,000, depreciated it to a $150,000 adjusted basis, and exchanged it for a $400,000 replacement with no boot. Your basis in the replacement is $150,000, not $400,000. The $250,000 gap is deferred gain waiting on the next sale, whether that comes through depreciation recapture along the way or a taxable disposition later.

Related Party Exchanges

Exchanges with related parties, meaning family members, entities you control, and the other relationships described in Sections 267(b) and 707(b), trigger a special two-year holding rule. If either you or the related party disposes of the property received within two years of the last transfer, the deferred gain snaps back and becomes taxable in the year of that disposition.⁷

You must file Form 8824 for the year of the exchange and each of the following two years so the IRS can track compliance with the holding period.⁸ Document the business purpose thoroughly; related party exchanges draw scrutiny.

Reverse and Improvement Exchanges

Sometimes the replacement shows up before the relinquished property sells. A reverse exchange handles that under Revenue Procedure 2000-37: an Exchange Accommodation Titleholder takes title to either the replacement or the relinquished property while you finish the transaction. The same 45- and 180-day clocks apply. If the arrangement misses any element of the revenue procedure, the IRS may refuse to treat the EAT as the property owner, and the exchange can fall apart.⁹

An improvement exchange, sometimes called build-to-suit, lets you spend exchange funds constructing or renovating the replacement before you take title. The EAT holds title while work is done, and any improvements not finished within the 180-day window don’t count toward the value of the replacement property. Reverse and improvement structures cost meaningfully more in intermediary fees than a standard deferred exchange.

Vacation Homes: The Safe Harbor

Second homes are neither pure investment nor pure personal use. Revenue Procedure 2008-16 provides a safe harbor that qualifies a dwelling unit for 1031 treatment if certain conditions are met on both sides of the exchange, measured over a 24-month window:¹⁰

Own the property for at least 24 months, before the exchange for the relinquished property and after for the replacement.
Rent it at fair market value for at least 14 days in each of the two 12-month periods inside that window.
Keep personal use in each 12-month period to no more than the greater of 14 days or 10% of the days it was rented.

If you claim the safe harbor and the replacement property later fails to meet the requirements, the IRS expects you to file an amended return and report the gain.¹⁰

Reporting the Exchange

Every 1031 exchange is reported on Form 8824, filed with your federal income tax return for the year you transferred the relinquished property.¹¹ The form walks through the realized gain, any recognized gain from boot, and the adjusted basis of the replacement property. You’ll need the transfer dates, descriptions of each property, and details of any cash, debt relief, or non-like-kind property involved.

If you completed more than one exchange in the same tax year, a summary Form 8824 with a statement showing each individual exchange is acceptable. Related party exchanges require Form 8824 filings for two additional years so the IRS can monitor the holding requirement.⁸

One boundary worth flagging: not every state conforms to the federal deferral. A small number of states either don’t follow Section 1031 or apply claw-back provisions that can trigger state tax even when the federal exchange qualifies. If your exchange crosses state lines or involves property in an income-tax state, confirm the state’s treatment before assuming you owe nothing beyond the federal deferral.

1
Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets
2
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
3
Internal Revenue Service. IRS FS-2008-18 – Like-Kind Exchanges Under IRC Section 1031
4
Internal Revenue Service. Treasury Decision 8982 – 26 CFR Part 1
5
eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
6
Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
7
Internal Revenue Service. Revenue Ruling 2002-83
8
Internal Revenue Service. Instructions for Form 8824
9
Internal Revenue Service. Revenue Procedure 2000-37
10
Internal Revenue Service. Revenue Procedure 2008-16
11
Internal Revenue Service. About Form 8824, Like-Kind Exchanges