Section 103-50: Like-Kind Exchange Deadlines and Intermediaries

A 1031 like-kind exchange lets you defer capital gains tax and depreciation recapture when you sell investment or business real estate, provided you roll the proceeds into other qualifying real estate through a qualified intermediary, identify the replacement property in writing within 45 days of your sale, and close on it within 180 days. The tax isn’t erased. It carries forward into the new property’s basis and stays deferred as long as you keep exchanging.

What Property Qualifies

Both sides of the trade must be real property held for investment or productive use in a business. The “like-kind” standard is loose about property type and strict about purpose. Vacant land for an apartment building, a strip mall for a warehouse, rental condos for farmland — all qualify, because what the IRS cares about is how the property is held, not what it is.¹

Two categories are out. A home you live in doesn’t qualify because it isn’t held for investment. Property you bought to flip is inventory, and inventory is carved out of Section 1031 by statute.¹

Before 2018, Section 1031 also covered equipment, vehicles, artwork, and other personal property. The Tax Cuts and Jobs Act narrowed the rule to real property only, so exchanges of anything other than real estate no longer qualify.

The 45-Day and 180-Day Deadlines

Two clocks start on the day you transfer the relinquished property to its buyer, and they run in parallel, not back to back. Miss either and the sale is fully taxable. Weekends, holidays, and escrow delays don’t extend them.

45 Days to Identify

Within 45 calendar days of the sale, you must identify potential replacement properties in writing and deliver that identification to someone involved in the exchange, typically the qualified intermediary or the seller of the replacement property. The description has to be specific enough to leave no ambiguity, meaning a street address or legal description rather than a general area.²

180 Days to Close

You must actually receive the replacement property within 180 calendar days of the transfer, or by the due date of your tax return for the year of the sale (including extensions), whichever comes first. Because both clocks start together, the gap between identifying a property and closing on it can be as short as 135 days.¹

The tax-return piece matters most when you sell late in the year. Close in October and your 180-day window can run past April 15. Filing an extension pushes the outer deadline out to October 15. Skip the extension and the return due date can cut your exchange window short.

The IRS can extend both deadlines for taxpayers affected by a federally declared disaster, but the relief isn’t automatic and isn’t granted for every declaration. When granted, the extension is typically the greater of 120 days or a postponement date set for that disaster. If your deadlines fall inside a covered period, check the IRS disaster relief notice for your area.

How Many Properties You Can Identify

Treasury Regulations set three alternative rules for the identification list, and you only need to satisfy one:³

Three-property rule. Up to three replacement properties, regardless of combined value. This is what most exchangers use.
200-percent rule. More than three properties, but their total fair market value can’t exceed 200% of what you sold.
95-percent rule. Any number of properties at any value, provided you actually acquire at least 95% of the total value you identified. Rarely used, because it’s hard to satisfy.

Listing too many properties without meeting any of these tests invalidates the whole exchange.

Using a Qualified Intermediary

A delayed exchange requires a qualified intermediary (QI) to hold the sale proceeds. The point is to keep you from touching the money. If you have access to the funds at any point, the IRS treats you as having received them and the exchange fails. The QI takes the proceeds at closing, holds them in a separate escrow or trust account, prepares the exchange paperwork, and wires the funds directly to the seller of the replacement property.²

Not just anyone can serve. Treasury Regulations disqualify anyone who has acted as your employee, attorney, accountant, investment banker, real estate broker, or other agent within the two years before the exchange. Someone that close to you holding the funds is treated as too close to you holding them yourself. There’s an exception for professionals whose only prior service was handling an earlier exchange, and for financial institutions or title companies providing routine escrow or title insurance services.³

One thing worth knowing before you pick one: QIs are not regulated at the federal level, and most states don’t regulate them either. Before signing, confirm that your funds will sit in segregated accounts rather than commingled with the QI’s operating money, ask what type of account is used, and check whether the QI carries fidelity bonds or errors-and-omissions insurance. A QI going insolvent while holding your proceeds is not a problem the IRS will help you solve.

Reinvest the Full Amount, or Pay Tax on the Difference

A fully tax-deferred exchange requires you to reinvest all of the net sale proceeds and buy replacement property worth at least as much as what you sold. Any shortfall is called “boot,” and boot is taxable. The exchange doesn’t collapse; it just becomes partially taxable to the extent of the boot.¹

Boot usually shows up in one of two forms. Cash boot is proceeds that end up in your pocket instead of the new property. Debt-relief boot is the gap when the mortgage on your replacement property is smaller than the one paid off on the relinquished property. Pay off a $500,000 mortgage and take on a $400,000 one, and the $100,000 difference is treated as money received.

Tax on boot is capped at your total realized gain, so you’ll never owe more than you would have without any exchange. Inside that cap, depreciation you previously claimed is recaptured at up to 25%, and that recapture obligation compounds across every exchange in the chain until you finally trigger a taxable sale. Investors who focus only on the capital gains number are often surprised by how much of a long-held rental’s gain is actually recapture.

Exchanges With Related Parties

You can exchange with a family member, a business you control, or another related party, but a two-year holding requirement kicks in. If either side sells the exchanged property within two years, the deferral is revoked and the gain becomes taxable as of the later sale.¹

“Related party” reaches broadly: siblings, spouses, parents, children, grandchildren, and entities in which you own more than 50%. The two-year rule has narrow exceptions for the death of either party, an involuntary conversion like a natural disaster, and a showing to the IRS that tax avoidance wasn’t a principal purpose. That last one is a hard argument to win without strong documentation.¹

Reverse and Improvement Exchanges

Not every exchange starts with a sale. Two variations change the sequence, and both cost more and carry more moving parts.

In a reverse exchange, you acquire the replacement property first and sell the relinquished property afterward. Because you can’t own both at once and still qualify, an Exchange Accommodation Titleholder (EAT) takes title to one property and “parks” it until you complete the exchange. Under the IRS safe harbor, the parked property must transfer within 180 days, and the 45-day identification period still applies.⁴

An improvement exchange (also called build-to-suit or construction) uses exchange proceeds to acquire a property and build improvements on it so the total value matches or exceeds what you sold. All construction must be finished inside the 180-day window. Work still in progress when the clock runs out doesn’t count toward exchange value, and any shortfall becomes boot. An EAT holds title during construction, because the improvements have to actually exist on the property before you take ownership. Pre-paying contractors or escrowing money for future work doesn’t satisfy the requirement.

Reporting the Exchange

Every 1031 exchange gets reported to the IRS on Form 8824, filed with the return for the year the exchange began. The form captures both properties, the timeline, any boot received, and the basis of the replacement property.⁵

Related-party exchanges require Form 8824 for three years running: the year of the exchange and each of the two years after it. Keep your QI agreement, identification letters, closing statements, and construction records. The IRS can audit an exchange years later, and reconstructing the paper trail after the fact is not a comfortable place to be.

Holding Until Death

Chaining exchanges throughout an investing career can build up a large deferred tax balance. If the final property is held until death, heirs receive it with a basis stepped up to fair market value on the date of death, which erases the deferred capital gains and depreciation recapture accumulated across every exchange in the chain.⁶ That is why many long-term investors never stop exchanging. With the right estate plan, the deferred tax may never come due at all.

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
eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
4
Internal Revenue Service. Revenue Procedure 2000-37
5
Internal Revenue Service. Instructions for Form 8824
6
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent