What Is a 1031 Exchange in Real Estate: Rules, Deadlines, and Basis

A 1031 exchange in real estate is a provision of the federal tax code that lets you sell an investment property and defer every dollar of capital gains tax, as long as you reinvest the proceeds into another investment property and follow a specific process. The name comes from Section 1031 of the Internal Revenue Code, and the deferral works because the IRS treats the transaction as a swap of investment assets rather than a sale, so no taxable gain is triggered at closing. Since the Tax Cuts and Jobs Act took effect in 2018, only real property qualifies. Equipment, vehicles, and other personal property no longer do.¹ The deferral can roll forward through one exchange after another for as long as you keep investing, and in some cases the tax never comes due at all.

What Property Qualifies

Both the property you sell (the relinquished property) and the property you buy (the replacement property) must be held for investment or for productive use in a business. A rental house you collect income on qualifies. A house you live in does not.² Property you hold primarily to resell, like a fix-and-flip project, also fails the test because it counts as inventory rather than an investment.

The “like-kind” label is far broader than it sounds. Nearly any U.S. real property counts as like-kind to any other U.S. real property. You can trade an apartment building for raw land, a strip mall for a single-family rental, or a warehouse for an office park. What matters is the investment purpose, not the property type.²

Some categories are explicitly excluded. Stocks, bonds, notes, and partnership interests cannot be exchanged under Section 1031. Both properties must also sit in the United States. Trading domestic real estate for foreign real estate, or the reverse, does not qualify.² A vacation home used purely for personal enjoyment does not qualify either, though a separate IRS safe harbor lets a dwelling unit count if you rent it out enough and keep personal use below set limits.³

How the Exchange Actually Works

The version almost every investor uses is called a delayed exchange. You sell the old property first, the proceeds are held by a third party, then you buy the replacement within the statutory deadlines.

At closing on the relinquished property, the sale proceeds wire directly to a qualified intermediary’s escrow account. Not to you. The closing documents reflect the exchange structure, and the purchase contract typically includes cooperation language requiring the buyer to work with your intermediary.

Within the identification window, you name your replacement property in a signed written notice sent to the intermediary. When you’re ready to close on the new property, you enter a purchase agreement and assign the contract rights to the intermediary. The intermediary then uses the held funds to pay the seller at the replacement closing. Title passes directly to you, but the money flows through the intermediary. That separation is what keeps the deferral intact.²

Certain closing costs can be paid out of exchange funds without creating a tax problem. Brokerage commissions, title and escrow fees, attorney fees, intermediary fees, and transfer taxes all count as legitimate exchange expenses. Loan-related charges such as mortgage origination fees and prorated property taxes do not. Paying those from exchange funds without covering the gap with new debt or fresh cash creates taxable “boot,” discussed below.

The 45-Day and 180-Day Deadlines

Two statutory deadlines control every deferred 1031 exchange, and both start ticking the day the relinquished property transfers to the buyer. There are no general extensions.

The first deadline is 45 calendar days to formally identify potential replacement properties in writing. The identification must be specific — a street address or assessor’s parcel number — and signed. Handing it to your qualified intermediary is the standard approach. Miss this deadline by a single day and the entire exchange fails. The IRS treats the proceeds as a taxable sale.²

The second deadline is 180 calendar days to close on the replacement property. The 45-day window runs inside the 180-day window; they run concurrently, not sequentially.² Neither pauses for weekends or holidays.

There’s a trap here that catches people every year. The statute says the exchange must be completed by the earlier of 180 days or your tax return due date (including extensions) for the year you sold the relinquished property.² Sell on October 20 and your 180 days run until mid-April, right around when your return is due. Without filing a tax extension, your real deadline shrinks to the April filing date, potentially cutting weeks off your exchange period. Anyone exchanging property in the fourth quarter should file an extension as a matter of course.

The only routine exception to these deadlines applies in federally declared disaster areas, where the IRS may postpone the 45-day and 180-day periods through a formal notice. Local or state emergencies alone don’t trigger an extension.

How You Identify Replacement Properties

Inside the 45-day window, you must follow one of three identification rules. Which one applies depends on how many properties you name and their combined value.

The three-property rule lets you identify up to three replacement properties regardless of their value. This is the most commonly used option and the simplest.
The 200-percent rule lets you identify more than three properties as long as their combined fair market value stays at or below twice the sale price of the relinquished property. An investor who sold for $800,000, for instance, could identify five properties as long as their total value stays at or below $1.6 million.
The 95-percent rule lets you identify any number of properties of any total value, but you must actually acquire at least 95 percent of the total identified value by the end of the exchange period. In practice this rule is rarely used because the margin for error is razor-thin. If any single deal falls through, you risk blowing the threshold and disqualifying the entire exchange.

Most investors stick with the three-property rule. Naming a backup or two protects you if your first-choice deal collapses, without the arithmetic risk of the other methods.

Why You Need a Qualified Intermediary

In a deferred exchange you cannot touch the sale proceeds at any point. If you do, even briefly, the IRS treats you as having received the money and the exchange fails. A qualified intermediary solves this problem by holding the funds in a segregated account between the sale and the purchase. Treasury regulations establish the intermediary arrangement as a “safe harbor” that protects the tax-deferred status of the exchange.⁴ For any deferred, reverse, or improvement exchange, using one is effectively required.

The intermediary can’t be someone who already has a financial relationship with you. Your accountant, attorney, real estate agent, and family members are all disqualified. The intermediary must be an independent third party whose only role is facilitating the exchange.

Fees for a standard delayed exchange typically run $600 to $1,200. Complex structures like reverse or improvement exchanges can run $3,000 to $8,500 or more. One underappreciated risk is that intermediary funds are generally not FDIC-insured beyond standard bank deposit limits, and no federal licensing body regulates intermediaries. If one goes bankrupt or misappropriates funds, investors may have little recourse. Choosing an intermediary with fidelity bond coverage, segregated accounts, and a verifiable track record is worth the diligence.

When Part of the Exchange Gets Taxed

A fully tax-deferred exchange requires you to reinvest all of the proceeds and acquire replacement property of equal or greater value. Fall short on either count and the shortfall is called “boot,” which is immediately taxable.⁵

Boot shows up in two common forms. Cash boot is any sale proceeds you don’t reinvest into the replacement property. Sell for $500,000 and buy a replacement for $450,000 and that leftover $50,000 is boot, taxed as a capital gain. Mortgage boot is debt relief: if the mortgage on your replacement is smaller than the mortgage on the property you sold, the difference counts as boot. Selling with a $300,000 mortgage and buying with a $200,000 mortgage creates $100,000 in mortgage boot. You can offset it by putting more cash into the replacement purchase or taking on enough new debt to cover the gap.

You can also receive boot in the form of non-like-kind property included in the deal, such as personal property the buyer throws in. Any value attributed to those items is taxable.

The practical rule is simple. Trade up or across, never down. The replacement property’s total value and your equity in it should both equal or exceed what you had in the relinquished property. When that math works, boot is zero and the entire gain defers.

What Happens to Your Cost Basis

The tax deferral isn’t free. It’s built into the basis of your new property. Your replacement property takes on the adjusted basis of the relinquished property, with modifications for any boot received or gain recognized.⁵ In plain terms: if you bought your original property for $200,000, took $60,000 in depreciation, and exchanged it for a $500,000 replacement with no boot, your basis in the new property is $140,000, not $500,000. The deferred gain lives inside that low basis, waiting to surface when you eventually sell without exchanging.

Two practical consequences follow. Your annual depreciation deductions on the replacement property are calculated from the carryover basis, not the purchase price. And if you later sell outright, you owe taxes on all the accumulated deferred gain plus any new appreciation.

Every 1031 exchange gets reported on IRS Form 8824, filed with your tax return for the year you transferred the relinquished property, even if you don’t acquire the replacement until the following year.⁶ The form captures the property descriptions, transfer and acquisition dates, the 45-day identification date, any boot received, the realized and recognized gain, and the basis of the replacement property.

Two taxes are at stake when an exchange fails or is only partially deferred. Long-term capital gains rates for 2026 range from 0 to 20 percent depending on income. On top of that, any depreciation you previously claimed on the relinquished property gets recaptured at a maximum rate of 25 percent.⁷ On a property held for years and depreciated aggressively, the recapture alone can produce a surprisingly large tax bill. That’s often the stronger motivation for exchanging in the first place.

The Estate Planning Payoff

This is the feature that turns 1031 exchanges from a deferral strategy into a potential permanent elimination of capital gains taxes. Under Section 1014 of the tax code, when you die your heirs inherit your property at its fair market value on the date of death, not at your carryover basis.⁸ All that deferred gain from years or decades of 1031 exchanges simply vanishes.

Consider an investor who bought a property for $200,000 in 1995, exchanged it for a $600,000 property in 2005, and exchanged again into a $1.2 million property in 2015. The carryover basis might be $150,000 after depreciation. If that investor dies when the property is worth $1.5 million, the heirs inherit it at a $1.5 million basis. They can sell the next day and owe zero capital gains tax. The $1.35 million in deferred gain is gone. This is why many investors keep exchanging for their entire lives rather than cashing out.

Other Exchange Structures

Delayed exchanges dominate the market, but three other structures exist for situations where the timing doesn’t line up.

A simultaneous exchange closes both properties on the same day. This was the original format but is rare now because coordinating two identical closings is logistically brutal.

A reverse exchange happens when you acquire the replacement property before selling the old one. Because you can’t own both simultaneously for exchange purposes, a third-party “exchange accommodation titleholder” takes title to the new property and holds it until the old property sells.

An improvement exchange uses exchange funds to build on or renovate the replacement property before you take title. The construction costs count toward the total exchange value, but all work must finish within the 180-day deadline.

Reverse and improvement exchanges cost more, with intermediary fees often running two to four times higher, but they solve real problems when the perfect replacement appears before your current property has a buyer.

1
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
2
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
3
Internal Revenue Service. Revenue Procedure 2008-16
4
LII / Legal Information Institute. Qualified Intermediary
5
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
6
Internal Revenue Service. Instructions for Form 8824
7
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
8
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent