Tax-Free Exchanges Under Section 1031: Deadlines, Boot, and Form 8824

A Section 1031 tax-free exchange lets you sell investment or business real estate and defer the federal capital gains tax by reinvesting the proceeds into other real estate of like kind, provided you follow a strict set of rules and deadlines: the replacement property must be identified in writing within 45 days of the sale, the purchase must close within 180 days, the funds must pass through a qualified intermediary rather than through your hands, and you must reinvest the full sale value and match the debt to avoid a taxable balance. Miss any of those, and the deferral collapses.

What Property Qualifies

Section 1031 defers gain only when you exchange real property held for business use or investment for other real property also held for business use or investment.¹ Both properties have to meet that test. A home you live in does not qualify. A property you bought to renovate and resell does not qualify either, because the IRS treats it as inventory rather than an investment asset.

“Like-kind” refers to the nature of the asset, not its physical form. A multi-family building is like-kind to raw land, which is like-kind to a shopping center, which is like-kind to a single-tenant office. Almost any U.S. real estate is like-kind to almost any other U.S. real estate, so long as both sides satisfy the holding requirement.

Since the Tax Cuts and Jobs Act took effect in 2018, Section 1031 applies only to real property. Machinery, vehicles, equipment, artwork, and other personal property no longer qualify.² Older guides that suggest otherwise are describing pre-2018 law. Partnership interests are also outside the rules, even where the partnership’s only asset is real estate.¹

The IRS looks at how you actually used a property, not just what you said when you bought it. There is no statutory minimum holding period, but a short hold makes it harder to argue investment intent, and short holds draw scrutiny. Mixed-use property has to be split: if you live in half a duplex and rent the other, only the rental side is exchange-eligible.

The 45-Day and 180-Day Deadlines

Two clocks run from the day you close the sale of the property you are giving up. Both are set by statute, and neither the IRS nor a court can extend them for a sympathetic reason.¹

Within 45 days you must deliver written notice identifying the replacement property or properties you intend to acquire. The notice goes to your qualified intermediary and must include a legal description or street address for each property. If midnight on day 45 passes without a valid identification, the exchange fails and the full gain becomes taxable.

Within 180 days you must close on the replacement property, or by the due date of your tax return for the year of the sale, including extensions, whichever comes first. That second cutoff catches late-year sellers. Sell in October, and unless you file an extension, the April 15 return due date arrives before your 180 days do.

The 45-day and 180-day periods run at the same time. The identification window sits inside the exchange window; it is not added on top.

How Many Replacement Properties You Can Identify

The Treasury regulations give you three ways to count replacement properties during the 45-day window.³

The three-property rule lets you identify up to three properties regardless of their combined value. Most investors use this option because it removes the math risk.
The 200-percent rule lets you identify any number of properties, provided their combined fair market value does not exceed 200 percent of what you sold.
The 95-percent rule applies if you blow past both of the above; you must then actually acquire properties worth at least 95 percent of everything you identified. In practice it is rarely satisfied and functions more as a penalty for over-identifying.

The common approach is to name a first choice and two backups under the three-property rule, then close on whichever deal comes together.

You Cannot Touch the Money

If you receive the sale proceeds at any point, even briefly, the IRS treats the transaction as a sale rather than an exchange and the deferral is gone.⁴ To keep the money out of your hands, the proceeds flow through a qualified intermediary (QI), an independent third party who holds the funds in a segregated account until the replacement property closes.

Not just anyone can serve as your QI. The regulations disqualify anyone who was your employee, attorney, accountant, investment banker, broker, or real estate agent within the two years before the exchange.³ Prior work that consisted only of other 1031 exchanges does not disqualify a person, and routine services by financial institutions, title companies, and escrow companies are also outside the two-year lookback.

No federal license is required for a qualified intermediary, and only a handful of states impose bonding or registration rules of their own. Because the QI may be sitting on millions of dollars with no federal oversight, verifying fidelity bond coverage and errors-and-omissions insurance is basic diligence. Exchange funds have been lost to intermediary insolvency in the past, and those losses are not FDIC-insured.

How the Exchange Flows from Start to Finish

Before you list the property you plan to sell, you sign two agreements with the QI: an exchange agreement setting up the arrangement, and an assignment agreement transferring your rights under the sale contract to the intermediary. At closing, the net proceeds wire directly from the closing agent to the QI’s segregated account. Not to you.

You then identify replacement properties within 45 days and negotiate the purchase. When the replacement property is ready to close, the QI wires the held funds to that closing agent. Title transfers directly from the seller to you; the QI never takes title to the real estate. Any leftover exchange funds that come back to you are taxable boot.

Keep every signed document: the exchange agreement, the assignment, the identification notice, and the settlement statements. Together they support the position that you never had access to the proceeds, and you will need them for both the tax return and any later audit.

Reverse Exchanges When You Buy First

Sometimes the replacement property becomes available before you have a buyer for the old one. Revenue Procedure 2000-37 provides a safe harbor for reverse exchanges: an exchange accommodation titleholder (EAT) acquires and holds the replacement property on your behalf while you market the relinquished property.⁵ The same 45-day and 180-day deadlines apply, running from the date the EAT takes title, and the arrangement must be papered in a written qualified exchange accommodation agreement within five business days of that acquisition. Reverse exchanges cost more and involve more moving parts because the EAT holds legal title and often has to arrange separate financing.

When Boot Triggers a Tax Bill

“Boot” is anything you receive in the exchange that is not like-kind real property. If you receive boot, your gain becomes taxable up to the amount of boot; the deferral covers only what you actually reinvested in qualifying property.¹

Boot shows up two common ways. Cash boot arises when the replacement property costs less than the net proceeds from the sale and the leftover comes back to you. Sell for $1,000,000 and buy for $950,000, and you have $50,000 of taxable cash boot. Mortgage boot arises when the debt on the replacement property is lower than the debt on the property you sold; the IRS treats that reduction in liabilities the same as receiving cash. To avoid mortgage boot, take on equal or greater debt on the new property, or add enough of your own cash to close the gap.

Boot is taxed as capital gain. For 2026, the long-term rates are 0 percent on taxable income up to $49,450 (single) or $98,900 (married filing jointly), 15 percent up to $545,500 or $613,700, and 20 percent above those thresholds.⁶ Higher-income taxpayers may also owe the 3.8 percent net investment income tax on recognized gains if their modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), which pushes the top effective rate on boot to 23.8 percent.⁷

Depreciation Recapture Carries Forward

If you have been depreciating the property you are exchanging, and nearly every investment property owner has, the deferred gain includes a depreciation recapture piece. Outside a 1031, gain attributable to prior depreciation on real property is taxed at a maximum 25 percent rate as unrecaptured Section 1250 gain, separate from and in addition to the regular capital gains rate.⁸

In a fully deferred exchange, the recapture is deferred along with the rest of the gain and rolls into the replacement property. But if boot produces recognized gain, the IRS may treat part of that gain as recapture taxed at 25 percent rather than at the lower capital gains rate. Investors who used cost segregation to accelerate depreciation need to watch this closely, because building components reclassified as personal property (Section 1245 assets) create recapture exposure that must be matched by equivalent property in the replacement.

Basis Rolls Over to the New Property

A 1031 exchange defers tax; it does not erase it. The mechanism that preserves the government’s future claim is the basis calculation on the replacement property. Your basis in the new property equals your basis in the old property, decreased by any cash you received and increased by any gain you recognized.¹ Debt assumed by the other party counts as cash received for this purpose.

So if you had $200,000 of built-in gain on the old property and completed a fully deferred exchange, the replacement property’s basis is $200,000 lower than its purchase price. That translates to smaller annual depreciation deductions and a larger taxable gain when you eventually sell without exchanging. The IRS’s own phrasing is gain deferred, not forgiven.⁹

After several successive exchanges, the basis tracking gets complicated. Each exchange carries forward the deferred gain from the prior one, so an investor with four or five exchanges spread over decades may hold a property with a basis far below its market value. Losing that paper trail is a common and expensive mistake.

Related Party Exchanges Have a Two-Year Lock

You can exchange with a family member or related entity, but a two-year holding requirement attaches. If either you or the related party disposes of the property received within two years of the exchange, the deferred gain snaps back and becomes taxable as of the date of the disposition.¹ “Related party” reaches family members described in Section 267(b) — siblings, spouses, ancestors, and lineal descendants — as well as entities that meet the ownership thresholds under Section 267(b) or 707(b)(1).

Three exceptions apply. The two-year rule is lifted if the disposition follows the death of either party, results from an involuntary conversion such as a natural disaster, or the taxpayer can show that neither the exchange nor the later sale had tax avoidance as a principal purpose. The IRS also expects Form 8824 to be filed for each of the two years after a related-party exchange, not just the year of the exchange itself.¹⁰

Reporting on Form 8824

Every 1031 exchange gets reported on IRS Form 8824, filed with the tax return for the year the relinquished property was transferred.¹⁰ The form walks through the realized gain (the total profit built into the transaction), the recognized gain (the taxable portion from any boot), and the adjusted basis of the replacement property. Exchanges involving multiple properties or any non-like-kind property require a separate statement showing how each figure was calculated.

Recognized gain flows from Form 8824 to Schedule D, Form 4797, or Form 6252, depending on whether the property is a capital asset, business property, or an installment sale. The date of the exchange, not the date you identified or closed on the replacement, controls the reporting year. Skipping Form 8824 does not by itself disqualify the exchange, but it flags the return for audit selection and leaves you without the contemporaneous record the IRS expects to see.

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 – Real Estate Tax Tips
3
eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
4
Internal Revenue Service. Revenue Procedure 2003-39
5
Internal Revenue Service. Revenue Procedure 2000-37
6
Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
7
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
8
Internal Revenue Service. Treasury Decision 8836 – Unrecaptured Section 1250 Gain
9
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
10
Internal Revenue Service. 2025 Instructions for Form 8824