Like-Kind Exchanges: Deadlines, Intermediaries, and Form 8824

A like-kind exchange under Section 1031 lets you sell one investment or business real property and buy another while deferring the federal capital gains tax and depreciation recapture that would otherwise come due. The like-kind exchange rules are strict on what qualifies, who can handle the money, and how fast you have to move: you get 45 days to identify a replacement, 180 days to close, and you cannot touch the sale proceeds in between. Miss any of those, and the deferral is gone.

The tax isn’t forgiven. It rides forward in the basis of your new property and comes due whenever you eventually sell without doing another exchange.

What Property Qualifies

Both the property you give up and the one you receive must be real property held for business use or investment.¹ The IRS reads “like kind” broadly for real estate: vacant land is like-kind to a residential rental, and a strip mall is like-kind to a single-family rental.² What matters is the nature of the asset, not its grade or use.

The Tax Cuts and Jobs Act of 2017 narrowed Section 1031 to real property only. Equipment, vehicles, artwork, and other tangible personal property no longer qualify. Sell a delivery truck and the gain is taxable now, regardless of what you buy next.³

Several categories of real estate are still excluded:

Property held primarily for sale, such as developer inventory or house-flipping stock.¹
Your primary residence, because you live in it rather than hold it for investment.
Stocks, bonds, notes, and partnership interests.³
Foreign real estate. Domestic property is not like-kind to property outside the United States.²

The 45-Day and 180-Day Deadlines

Two clocks start the day title to the relinquished property actually transfers to the buyer, not the day you list it or sign the contract.¹

You have 45 calendar days from that date to identify replacement properties in writing. The identification must go to the qualified intermediary or another party involved in the exchange, not just your accountant. Weekends and federal holidays don’t extend the deadline, and the only recognized exception is a presidentially declared disaster.²

The second deadline is 180 calendar days from the transfer, or the due date of your tax return (including extensions) for the year of the sale, whichever comes first. This catches people off guard. Sell in January without filing an extension and your return is due April 15, well short of 180 days. A tax extension pushes the return due date out and preserves the full window.¹

The two periods run concurrently. You get 180 days total, and your identification has to be locked in by day 45.

How to Identify Replacement Properties

The IRS gives you three identification methods, and you only need to meet one:⁴

The three-property rule. Identify up to three properties regardless of their combined value. This is the most commonly used method.
The 200% rule. Identify any number of properties as long as their total fair market value doesn’t exceed 200% of what you sold.
The 95% rule. Identify any number of properties with no cap on value, but you must actually acquire at least 95% of the total identified value. Miss it and the entire exchange fails.

Each property must be described specifically enough to remove ambiguity. A legal description or street address works; “a rental property in Phoenix” does not.

The Qualified Intermediary

You cannot touch the sale proceeds at any point. If the money hits your account or falls under your control, the IRS treats it as constructive receipt and the deferral disappears.⁵ A qualified intermediary solves this by holding the funds and using them to buy the replacement property on your behalf.

The intermediary has to be in place before you close on the relinquished property. You sign an exchange agreement, the intermediary receives the proceeds at closing, and later applies them to your identified replacement. The intermediary is typically also the party who receives your written identification within the 45-day window.

Not everyone can serve. Treasury regulations disqualify anyone who has acted as your employee, attorney, accountant, investment banker, broker, or real estate agent within the two years before the exchange.⁴ The regulations carve out prior work that was itself 1031-related, and routine services from title companies, escrow agents, and financial institutions. The industry is largely unregulated at the federal level, so vet your intermediary carefully. If they go bankrupt while holding your money, you can lose both the funds and the exchange.

Reinvest Everything, or You Owe Tax on the Difference

A fully deferred exchange requires you to reinvest all the equity and match or exceed the debt. Anything you receive that isn’t like-kind real property is called “boot,” and it’s taxable up to the amount of your realized gain.³ Boot comes in two forms.

Cash boot is straightforward. Sell for $500,000, reinvest $450,000, and the leftover $50,000 gets released to you and taxed. The fix is to reinvest all the proceeds.

Mortgage boot is subtler. If the debt on your replacement is lower than the debt on the property you sold, the IRS treats that debt reduction as boot even though no check changed hands. Trade a property with a $350,000 mortgage for one with a $300,000 mortgage and the $50,000 shortfall is taxable.¹ You can offset mortgage boot by adding your own cash at closing on the replacement. The working rule: your total investment in the replacement (equity plus debt) should equal or exceed what you had in the property you gave up.

Depreciation Recapture Rides Along

If you’ve been depreciating a rental or commercial property, selling it also triggers unrecaptured Section 1250 gain on the portion of profit attributable to prior depreciation deductions. That layer is taxed at a maximum federal rate of 25%, higher than the 15% long-term capital gains rate most investors pay.⁶

A properly executed 1031 exchange defers recapture along with the capital gain, but the obligation doesn’t vanish. It transfers into the replacement property through the basis calculation. When you eventually sell without exchanging, accumulated depreciation from every property in the chain comes due at that 25% rate.

Your New Property’s Basis (and Why You Must Keep Old Records)

The basis of your replacement property is not its purchase price. It carries forward the basis of the property you gave up, adjusted for any boot paid or received and any gain recognized.² That lower basis is exactly how the deferred gain stays alive: a larger taxable gain waits for you at the eventual sale.

Because basis carries forward, recordkeeping stretches far beyond the usual three-year audit window. The IRS expects you to keep records on both the old and the new property until the statute of limitations runs on the year you finally dispose of the replacement in a taxable sale.⁷ Chain several exchanges over 20 years and you need closing statements and basis calculations going all the way back to the first property.

Exchanges With Related Parties

Exchanging with a family member or an entity you control adds a two-year holding requirement on both sides. If either party disposes of the exchanged property within two years of the final transfer, the deferred gain snaps back into income for the year of that disposition.⁸ “Related” is defined under Sections 267(b) and 707(b)(1), which sweeps in siblings, spouses, ancestors, lineal descendants, and entities where the same people own more than 50% of both parties.

Routing a related-party exchange through a qualified intermediary to disguise it as arm’s-length does not work. An anti-avoidance provision collapses transaction chains structured to sidestep the rule.⁹ Exceptions exist for dispositions caused by death, involuntary conversions like condemnation, and transactions where tax avoidance was not a principal purpose.

When the Order Is Reversed: Reverse and Improvement Exchanges

A standard exchange sells first, then buys. Deals don’t always cooperate with that order.

Reverse Exchanges

In a reverse exchange, you acquire the replacement first and sell the relinquished property later. The IRS provides a safe harbor under Revenue Procedure 2000-37, which requires an Exchange Accommodation Titleholder. The EAT “parks” the replacement by taking legal title while you work on selling the old property. As long as the parked property transfers within 180 days, the IRS will not challenge the exchange’s qualification.¹⁰ Costs run meaningfully higher than a forward exchange because the EAT holds title, often finances the property, and manages it during the parking period. The 45-day and 180-day deadlines still apply.

Improvement Exchanges

An improvement exchange (also called build-to-suit) uses exchange proceeds to fund construction on the replacement property before the exchange closes. The EAT takes title, improvements are built while the EAT holds it, and the improved property transfers to you at its higher value. All improvements must be complete within the 180-day period. Labor or materials not yet incorporated into the real property by day 180 don’t count toward exchange value and can be treated as boot. Your written identification during the 45-day window has to describe both the property and the planned improvements, and the finished value (land plus improvements) needs to equal or exceed what you sold.

What Happens If the Exchange Fails

Miss the 45-day identification, blow past the 180-day close, or otherwise fall short and the transaction becomes a taxable sale. You lose deferral on the full package: capital gains, depreciation recapture, and the 3.8% net investment income tax if your income clears the threshold. There is no partial credit for almost completing an exchange.

Filing a tax extension is the cheapest insurance available for a 1031 exchange. It costs nothing and prevents an April 15 return deadline from shortening the 180-day window. Most exchange professionals recommend filing one automatically whenever an exchange spans a tax year-end.

Reporting on Form 8824

Every like-kind exchange gets reported on IRS Form 8824, attached to the return for the year the exchange began.¹¹ The form asks for the fair market values of both properties, the adjusted basis of the relinquished property, boot received or paid, liabilities assumed on each side, and the realized and recognized gain. Related-party exchanges require additional disclosure, including whether the replacement was previously owned by the related party.

You file Form 8824 for the year the relinquished property transferred, even if the replacement closes in the following calendar year because the 180-day window spanned December 31. Keep the form with your closing statements, exchange agreement, identification notices, and intermediary records for as long as you hold the replacement property, plus the limitations period after you eventually sell it in a taxable transaction.⁷

1
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
2
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
3
Office of the Law Revision Counsel. 26 US Code 1031 – Exchange of Real Property Held for Productive Use or Investment
4
eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
5
Internal Revenue Service. Sales Trades Exchanges 2
6
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
7
Internal Revenue Service. How Long Should I Keep Records
8
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
9
Internal Revenue Service. Rev. Rul. 2002-83
10
Internal Revenue Service. Rev. Proc. 2000-37
11
Internal Revenue Service. Instructions for Form 8824