What Is Not Allowed in a 1031 Exchange: Property, Boot, Deadlines

A 1031 exchange is not allowed on anything other than real property held for business or investment use, and even a qualifying property can be knocked out of the exchange by mishandled money, missed deadlines, the wrong intermediary, or a related-party sale that unwinds too soon. Since the Tax Cuts and Jobs Act took effect in 2018, personal property, financial instruments, inventory-type real estate, and homes you use yourself are all outside the rules, and a long list of procedural requirements can turn an otherwise valid deferral into a fully taxable sale.¹

Property Types That Don’t Qualify

The starting point is what counts as like-kind property. Only real property qualifies. Equipment, vehicles, office furniture, machinery, artwork, and every other form of tangible personal property were removed from Section 1031 in 2018 and can no longer be exchanged tax-deferred.²

Financial assets are also excluded outright. Stocks, bonds, notes, other securities, partnership interests, and certificates of trust cannot be used on either side of an exchange.¹

Even when a property is real estate, two categories still fall outside the rules:

Real property held primarily for sale. Fix-and-flip houses, spec-built homes, and developer inventory don’t qualify because they aren’t held for investment or productive use.¹
Personal-use property. A primary residence or a vacation home you keep only for your own family doesn’t meet the investment-or-business requirement, no matter how much it has appreciated.

Geography matters too. Real property inside the United States and real property outside the United States are not like-kind to each other. Selling a commercial building in Chicago and buying a replacement in London or Mexico City won’t defer the gain, and the rule works the same way in reverse. Foreign-for-foreign exchanges are allowed; it’s the border crossing that breaks the exchange.¹

Vacation Homes That Aren’t Really Rentals

Mixed-use vacation properties are the gray area most likely to trip up a would-be exchanger. Revenue Procedure 2008-16 sets a safe harbor for both the relinquished and replacement property. During each of the two 12-month periods within the required 24-month window (immediately before the exchange for the property you’re selling, immediately after for the one you’re buying), you must:³

Rent the property at fair market value for at least 14 days.
Keep personal use to no more than the greater of 14 days or 10 percent of the days it was rented at fair market value.

Missing either threshold in even one of the four 12-month periods costs you the safe harbor, and the IRS can challenge the exchange on the basis that the home wasn’t really held for investment.

Touching the Money or Using the Wrong Intermediary

You cannot take possession of the sale proceeds at any point during the exchange. Actual or constructive receipt of the funds turns the whole transaction into a taxable sale, even if you later use the money to buy replacement property.⁴ The standard workaround is a qualified intermediary (QI) who holds the proceeds and uses them to acquire the replacement property on your behalf.⁵

Not just anyone can play that role. Treasury regulations bar any “disqualified person” from serving as your QI, including anyone who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two years before the exchange.⁵ Someone whose services for you have been limited to prior 1031 exchanges, or to routine financial, title insurance, escrow, or trust work, is not automatically disqualified. Related parties are also blocked from serving as QI, and the ownership threshold for that is only 10 percent (much lower than the 50 percent threshold that governs related-party exchange rules).

Missing the 45-Day or 180-Day Deadline

Two deadlines run in calendar days, weekends and holidays included, and blowing either one makes the entire gain taxable:⁶

Within 45 days after selling the relinquished property, you must identify your potential replacement properties in a written document signed by you and delivered to the qualified intermediary or another party involved in the exchange.
You must close on the replacement property by the earlier of 180 days after the sale or the due date of your tax return (with extensions) for the year of the sale. Selling late in the year and skipping an extension can quietly cut the 180 days short.

Extensions apply only when the IRS issues specific relief for a federally declared disaster area. Ordinary hardship, financing delays, and title problems don’t qualify.⁶

Identifying Too Many Properties

You can’t hedge by listing an unlimited slate of candidates. Treasury regulations give you three alternatives, and you must fit within one:⁵

Three-property rule. Up to three replacement properties, regardless of value.
200-percent rule. Any number of properties, as long as their combined fair market value doesn’t exceed 200 percent of what you sold.
95-percent rule. If you go over both limits, your identifications are void unless you actually acquire properties totaling at least 95 percent of everything you identified.

Exceeding the first two limits without hitting the 95-percent threshold voids all identifications, and the exchange fails as if you had designated nothing.

Related-Party Sales That Unwind Too Soon

Exchanges between related parties are allowed, but they carry a two-year holding requirement on both sides. Related parties include siblings, spouses, parents, children, grandchildren, and any entity in which either party owns more than 50 percent. If either you or the related party sells or otherwise disposes of the exchanged property within two years, the deferred gain becomes taxable in the year of the disposition.¹

Narrow exceptions cover a disposition after the death of either party, an involuntary conversion (such as fire or condemnation) that predated the exchange, and transactions the IRS determines were not motivated by tax avoidance.⁷ Any structure designed to sidestep the related-party rules disqualifies the exchange entirely; the IRS treats the whole thing as a taxable sale.⁸

Building on Land You Already Own

Exchange proceeds cannot be used to construct improvements on land you already hold and then counted as replacement property. IRS guidance treats a building put up on the taxpayer’s own land as improvements to existing holdings rather than the acquisition of a new property interest, so it isn’t like-kind replacement. If you want to use exchange funds for construction, the improvements generally have to be made on property held by your qualified intermediary or an exchange accommodation titleholder, not on property already in your name.⁹

Cash and Debt Relief (Boot)

Getting anything other than like-kind real property in the exchange doesn’t necessarily kill the deferral, but it does create immediate tax on the value received, up to the amount of gain.¹⁰ The two common forms:

Cash boot. Any sale proceeds you pull out instead of reinvesting. Even a small withdrawal triggers tax.
Mortgage boot. If the debt on the replacement property is lower than the debt on the property you sold, the difference is treated as boot. You can offset a debt reduction by adding cash to the deal, but adding debt on the replacement side won’t offset a shortfall in cash equity.

Boot only makes the boot amount taxable; the rest of the exchange can still qualify for deferral. Long-term capital gains rates of 0, 15, or 20 percent apply depending on your income, and high earners may also owe the 3.8 percent net investment income tax.¹¹

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
Internal Revenue Service. Revenue Procedure 2008-16
4
Internal Revenue Service. Sales Trades Exchanges
5
eCFR. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
6
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
7
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
8
Internal Revenue Service. Instructions for Form 8824 (2025)
9
Internal Revenue Service. Revenue Procedure 2000-37
10
Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets
11
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed