Tax Code Section 1031: Deadlines, Intermediaries, and Form 8824

The Section 1031 like-kind exchange rules let you sell real property held for business or investment and defer the capital gains tax by rolling the proceeds into similar real property, provided you use a qualified intermediary, identify replacement property within 45 days, close within 180 days, and reinvest the full value and debt of what you sold.¹ Miss any of those requirements and the entire deferral collapses. The rules reward precision and punish improvisation, so it helps to work through each one before you list the first property.

What Property Qualifies

The statute covers any real property held for productive use in a trade or business or for investment. Treasury Regulations treat “like kind” as a reference to the nature of the property, not its grade or quality, and improved and unimproved real estate are like kind to each other. You can exchange an apartment complex for raw land, a strip mall for a single-family rental, or a warehouse for farmland. A beneficial interest in a Delaware Statutory Trust also qualifies, since it is treated as direct ownership of real property for tax purposes.

What does not qualify matters just as much. Real property held primarily for sale is excluded by statute, which knocks out house flippers and developers who build to sell.¹ Your primary residence does not qualify, because you live in it rather than hold it for investment. A vacation home you barely rent out will fail the investment-use test. And U.S. real property is not like kind to foreign real property — the exchange has to stay domestic or stay foreign on both sides. Since 2018, personal property, vehicles, equipment, and intangibles have been out entirely; the Tax Cuts and Jobs Act limited Section 1031 to real property, and that change is permanent.²

Why You Need a Qualified Intermediary

You cannot sell one property and use the cash to buy another. If you receive or control the sale proceeds at any point, the IRS treats the deal as a taxable sale followed by a separate purchase. Treasury Regulations provide a safe harbor when a qualified intermediary holds the funds under a written exchange agreement.³ The intermediary is assigned into both sides of the transaction, receives the proceeds from the buyer of your old property, and then sends those funds to the seller of your replacement property at closing. Formal written notice of the assignments goes to every party involved. That paper trail is what stops the IRS from recharacterizing the exchange.

Not everyone can serve as your intermediary. Anyone who has acted as your employee, attorney, accountant, investment banker, or real estate agent within two years before the exchange is disqualified, because those relationships give you indirect control over the funds.³ Someone whose only past service to you was facilitating prior exchanges is fine, and so are routine services from financial institutions or title companies.

One risk that gets less attention than the tax rules: qualified intermediaries are not federally regulated. There is no licensing requirement, no mandatory bonding, and no government agency supervising how they handle your money. If the intermediary goes bankrupt or misappropriates funds during the exchange, you may have no practical recourse, and the IRS will still treat the exchange as failed. Before turning over six- or seven-figure proceeds, verify that the intermediary carries a fidelity bond, keeps client funds in separate escrow accounts, and has a track record you can independently confirm.

The 45-Day Identification Deadline

The day you close on the sale of your old property, a 45-calendar-day clock starts. Within that window you must formally identify potential replacement properties in a signed writing delivered to someone involved in the exchange who is not a disqualified person. Most investors send it directly to the intermediary. Each property has to be described clearly enough for the IRS to verify it, meaning a street address or legal description rather than a general reference.⁴

The IRS caps how many properties you can identify through three alternative rules:

The three-property rule lets you identify up to three replacement properties regardless of their combined value. Most investors use this one.
The 200% rule lets you identify more than three properties as long as their combined fair market value does not exceed twice the value of the property you sold.
The 95% exception lets you identify any number of properties at any value, but you must actually acquire at least 95% of the total value you identified. Falling short by any meaningful amount disqualifies the entire exchange, so this rule is rarely useful in practice.

Missing the 45-day deadline by a single day kills the exchange. There is no appeal and no reasonable-cause exception. Relief only comes when a federally declared disaster affects the taxpayer, the property, or a party to the transaction, and even then the IRS grants at most a 120-day extension or a specific later date.

The 180-Day Closing Deadline

You must take title to the replacement property within 180 calendar days of selling the old one, or by the due date of your federal tax return (including extensions) for the year of the sale, whichever comes first.¹ That “whichever is earlier” language catches people. If you sell a property in October and your return is due April 15, you have fewer than 180 days unless you file an extension. For any late-year exchange, filing an extension is effectively mandatory.

The 180-day window runs alongside the 45-day identification period, not after it. So once you identify, you actually have about 135 days left to negotiate and close. Financing delays, title problems, and reluctant sellers do not earn you extra time. Coordinate with your lender and title company early, because the intermediary only releases the held funds to the closing agent when the deal is ready to record.

Reinvesting the Full Value and the Debt

Full deferral requires reinvesting everything. The replacement property must be worth at least as much as the net sale price of the property you gave up, and all of the net cash proceeds held by the intermediary must go into the purchase. Any cash left over is called boot, and boot is taxable. The gain you recognize is limited to the boot you receive, so you do not owe tax on the entire deferred gain just because some cash leaked out.¹

Debt counts the same way. If you had a $500,000 mortgage on the old property and take on only a $400,000 mortgage on the new one, that $100,000 of debt relief is treated as boot, exactly as if someone had handed you the cash. The fix is straightforward: contribute additional personal funds at closing to close the gap. Investors who overlook the debt side often end up with an unexpected tax bill even though everything else went right.

Basis Carryover and the Tax You Eventually Owe

Section 1031 defers tax; it does not erase it. The mechanism is basis carryover. The tax basis of your replacement property equals the basis of the property you gave up, adjusted for any boot received and gain recognized.⁵ If you bought a property for $300,000, depreciated it down to $200,000, and exchanged it for one worth $600,000 in a fully deferred exchange, your basis in the new property is $200,000. Your depreciable basis is far lower than what you actually paid, and the deferred gain waits for you.

When you eventually sell without exchanging, the accumulated depreciation returns as unrecaptured Section 1250 gain, taxed at a maximum federal rate of 25%.⁶ The remaining gain is taxed at long-term capital gains rates of 0%, 15%, or 20% depending on your taxable income.⁷ Investors with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly) also owe the 3.8% net investment income tax on the gain.⁸

Hold exchanged property until death and the picture changes entirely. Your heirs receive a stepped-up basis equal to the property’s fair market value at the date of death, and the entire deferred gain disappears. The heirs can sell immediately at that stepped-up value and owe no capital gains tax. That is why many long-term real estate investors plan never to sell outside of another 1031 exchange.

The Two-Year Rule for Related Party Exchanges

Exchanges between family members or entities you control carry an extra restriction. If you do a 1031 exchange with a related party and either side disposes of the property within two years, the deferred gain snaps back and becomes taxable as of the date of that later disposition.¹ Related parties include siblings, spouses, ancestors, lineal descendants, and entities in which you own more than a 50% interest. The two-year holding requirement does not apply if either party dies, if the property is taken through an involuntary conversion like condemnation, or if the IRS is satisfied that tax avoidance was not a principal purpose of the transaction. Related party exchanges must also be reported on Form 8824 for the two tax years after the exchange.⁴

Reverse and Improvement Exchanges

Sometimes the replacement property becomes available before you can sell the old one. A reverse exchange uses an Exchange Accommodation Titleholder to park the new property. The EAT takes title and holds the replacement while you arrange the sale of your relinquished property. Revenue Procedure 2000-37 provides a safe harbor for these arrangements as long as you complete the exchange within 180 days.⁹ The same 45-day identification and 180-day completion deadlines apply, just in mirror image. Reverse exchanges cost more to execute because of the EAT structure, legal documentation, and the possibility of carrying two properties at once.

An improvement exchange (sometimes called a build-to-suit exchange) uses a similar parking structure. The EAT takes title to the replacement property, and exchange funds pay for construction of improvements before the property transfers to you. Both the property and the planned improvements must be identified within 45 days, and everything — acquisition and construction — must be complete within 180 days. The finished value must equal or exceed the value of what you sold for full deferral. That construction window is tight, which makes improvement exchanges impractical for major development but workable for renovations and build-outs.

Reporting the Exchange on Form 8824

Every 1031 exchange must be reported on Form 8824, filed with your federal tax return for the year you transferred the relinquished property.¹⁰ The form requires descriptions of both properties, the dates of identification and transfer, the relationship between the parties where applicable, and a detailed calculation of any recognized gain, deferred gain, and the basis of the replacement property.⁴ Part I covers the property details and timeline. Part II applies only to related party exchanges. Part III walks through the gain calculation and the new basis.

Failing to file Form 8824 does not automatically disqualify the exchange, but it invites scrutiny. Without the form, the IRS has no way to verify your compliance with the identification rules, the timeline, or the intermediary requirements. Keep every document from the exchange, including the written exchange agreement, identification letters, assignment notices, closing statements for both properties, and intermediary account records. If the IRS audits the transaction years later, you carry the burden of proving every requirement was met.

1
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
2
Internal Revenue Service. Tax Cuts and Jobs Act – A Comparison for Businesses
3
Internal Revenue Service. Rev. Proc. 2003-39
4
Internal Revenue Service. Instructions for Form 8824 (2025)
5
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
6
Internal Revenue Service. TD 8836 – Section 1(h) Capital Gains Rate
7
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
8
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
9
Internal Revenue Service. Rev. Proc. 2000-37
10
Internal Revenue Service. About Form 8824, Like-Kind Exchanges