The guide

How a 1031 exchange works

A Section 1031 like-kind exchange lets a real estate investor sell business or investment real property and reinvest the proceeds into other "like-kind" real property without paying capital gains tax (and depreciation recapture) at the time of sale. The tax is deferred, not eliminated, the gain carries over into the basis of the replacement property and is recognized later if that property is sold in a taxable transaction (though many investors keep exchanging and ultimately pass property to heirs at a stepped-up basis). Since the 2017 Tax Cuts and Jobs Act, Section 1031 applies only to real property held for productive use in a trade or business or for investment; it no longer covers personal or intangible property, and it never covered a personal residence, second home, inventory, or property held primarily for sale. To get full deferral, the investor must follow strict IRS timing rules and typically use a Qualified Intermediary to hold the sale proceeds.

By the 1031.com editorial team · grounded in IRS guidance & 26 U.S.C. §1031 · independent professional review pending · how we source content

Find your 1031 service

Six requirements for full tax deferral

Miss any of these and you can owe tax on some, or all, of your gain. The deadlines in particular are strict and calendar-based.

45-Day Identification Window

The investor has 45 calendar days from the date the relinquished property is sold to identify potential replacement property in writing, signed and delivered to the Qualified Intermediary (or another party to the exchange). Notice only to your own agent, attorney, accountant, or broker is not sufficient. Real estate must be clearly described by legal description, street address, or distinguishable name. This deadline is strict and is not extended for weekends, holidays, or hardship (only federally declared disasters can extend it). Most exchangers use one of three identification rules: the Three-Property Rule (up to three properties of any value), the 200% Rule (any number of properties as long as their total fair market value does not exceed 200% of the relinquished property value), or the rarely-used 95% Rule (identify more than allowed but actually acquire at least 95% of the total identified value).

180-Day Completion Window

The replacement property must be received and the exchange fully closed no later than 180 calendar days after the sale of the relinquished property, OR the due date (including extensions) of the tax return for the year of the sale, whichever is earlier. The 45-day and 180-day periods start on the same day and run concurrently (the 45 days are part of the 180, not added to it). Like the 45-day rule, this deadline cannot be extended except for federally declared disasters. The property received must be substantially the same as what was identified within the 45 days.

Like-Kind Real Property Requirement

Both the relinquished and replacement properties must be real property held for use in a trade or business or for investment. Real property is broadly like-kind to other real property regardless of grade or quality, for example, raw land is like-kind to an apartment building, and a rental house is like-kind to commercial property. Two limits: U.S. real property is not like-kind to real property located outside the United States, and a primary residence, second home, vacation home, or property held primarily for resale (inventory) does not qualify.

Same-Taxpayer Rule

The taxpayer who sells the relinquished property must be the same taxpayer who acquires the replacement property, the name/tax ID on title must match on both sides of the exchange. This preserves continuity of ownership. (A single-member LLC that is disregarded for tax purposes is treated as the same taxpayer, which is a common planning point, but the underlying taxpayer must be consistent.)

Use of a Qualified Intermediary (QI)

In a deferred exchange the investor cannot take actual or constructive receipt of the sale proceeds without disqualifying the exchange. A Qualified Intermediary (also called an accommodator or facilitator) is an independent third party that holds the proceeds, acquires the replacement property, and transfers it to the investor under an exchange agreement. The investor cannot act as their own QI, and a disqualified person, your agent, attorney, accountant, real estate broker, employee, family member, or anyone who acted for you in those roles within the prior two years, cannot serve as QI. Because there is no federal licensing of QIs and some have failed or gone bankrupt, choosing a financially sound, bonded QI is critical.

Equal-or-Greater Value and Debt Replacement

To defer 100% of the gain, the investor must (1) buy replacement property of equal or greater value than the property sold, (2) reinvest all of the net sale proceeds/equity, and (3) replace any debt that was paid off, either with new debt of equal or greater amount or by adding equivalent cash. Falling short on value, equity, or debt creates 'boot.' Cash taken out is cash boot; debt that is reduced and not replaced is mortgage boot. Receiving boot does not void the exchange, but the boot is taxable up to the amount of the realized gain, making it a partial exchange with partial deferral.

Types of 1031 exchanges

Two architectural property models, keys, and a navy closing folder on a real estate finance desk.

Delayed (Forward) Exchange

The most common structure. You sell (relinquish) your property first, a Qualified Intermediary holds the proceeds, and you then identify replacement property within 45 days and close on it within 180 days. Use this when you are selling before you have lined up the exact property you want to buy.

A new replacement property model in front of an older property model on a real estate planning desk.

Reverse Exchange

You acquire the replacement property before selling the relinquished one. Because you cannot hold title to both at once, an Exchange Accommodation Titleholder 'parks' one of the properties (usually the new one) for up to 180 days while you sell the old one. Use this in a competitive market when you must lock in the replacement property right away, or when timing forces you to buy first.

A commercial building model set beside plans, a ruler, and construction planning materials.

Improvement (Construction/Build-to-Suit) Exchange

Used when the replacement property is worth less than the relinquished property and you want to use exchange funds to build improvements or make renovations to reach equal-or-greater value. The property is parked with an accommodator while improvements are made, and all construction must be completed and the property received within the 180-day window. Use this when the ideal replacement needs work or costs less than your sale to fully use up your proceeds.

A diversified set of institutional real estate models arranged on a conference table.

DST Exchange (Delaware Statutory Trust)

A passive option in which you exchange into fractional beneficial interests in a DST that owns institutional-grade real estate (IRS Revenue Ruling 2004-86 confirms DST interests qualify as like-kind real property). Use this when you want to defer tax but avoid active management, need a backup/fractional option to absorb leftover proceeds and meet the 45-day deadline, or want to diversify across larger assets you could not buy alone.

Frequently asked

Is a 1031 exchange tax-free?

No. It is tax-deferred, not tax-free. The capital gains tax (and depreciation recapture) is postponed, not erased, the deferred gain rolls into the basis of the replacement property and becomes taxable if you later sell without doing another exchange. Beware of promoters who advertise '1031' as 'tax-free'; the IRS specifically warns about this.

Can I do a 1031 exchange on my home or vacation house?

No. Section 1031 applies only to real property held for use in a trade or business or for investment. A primary residence, a second home used for personal enjoyment, or property held primarily for resale does not qualify. (A separate provision, Section 121, may exclude gain on a primary residence, and a vacation property can sometimes qualify if it is genuinely held as a rental/investment and meets safe-harbor use limits.)

Do I have to reinvest all the money to defer all the tax?

Yes, for full deferral. You must buy replacement property of equal or greater value, reinvest all of your net equity, and replace any debt that was paid off (with new debt or additional cash). Any shortfall, cash you keep, or debt you don't replace, is taxable 'boot.' Receiving boot doesn't disqualify the exchange; it just makes that portion taxable, resulting in a partial deferral.

What happens if I miss the 45-day or 180-day deadline?

The exchange fails and the entire gain becomes taxable in the year of the sale. These deadlines are strict and calendar-based, they are not extended for weekends, holidays, or personal hardship. The only exception is relief the IRS grants for federally (presidentially) declared disasters.

Why do I need a Qualified Intermediary, and can my CPA or attorney be one?

In a deferred exchange you cannot touch the sale proceeds without disqualifying the exchange, so an independent Qualified Intermediary must hold the funds and handle the property transfers. You cannot act as your own QI, and 'disqualified persons' cannot serve either, including your agent, attorney, CPA, real estate broker, employee, family members, or anyone who worked for you in those capacities in the prior two years. Choose a QI carefully, since QIs are largely unregulated at the federal level and some have failed or gone bankrupt.

What does 'like-kind' actually mean for real estate?

For real property, like-kind is interpreted very broadly: almost any real property held for business or investment is like-kind to any other such real property, regardless of type, grade, or quality. Raw land can be exchanged for a rental house, an apartment building for retail space, and so on. The main limits are that U.S. property is not like-kind to foreign property, and both sides must be held for business/investment rather than personal use.

How do I report a 1031 exchange to the IRS?

You report the exchange on Form 8824, Like-Kind Exchanges, filed with your tax return for the year the exchange occurred. It captures the property descriptions, the identification and transfer dates, any relationship between the parties, the value of like-kind and other property received, cash and liabilities involved, your adjusted basis, and the realized and recognized gain. You also carry over (with adjustments) your basis into the new property and track it for the future.

Glossary

1031 / Like-Kind Exchange: An IRS Section 1031 transaction that lets you swap one investment/business real property for another 'like-kind' property and defer (postpone) capital-gains tax.
Qualified Intermediary (QI) / Accommodator / Exchange Facilitator: The neutral third party legally required to hold your sale proceeds and handle the paperwork so you never 'touch' the money (touching it kills the tax deferral).
Relinquished Property: The property you're selling (the 'old' property) in the exchange.
Replacement Property: The property you're buying (the 'new' property) with the proceeds.
45-Day Identification Period: You have 45 days after selling to formally identify, in writing, the property/properties you intend to buy. Hard deadline, no extensions.
180-Day Exchange Period: You must close on the replacement property within 180 days of selling the old one. Hard deadline.
Boot: Any leftover cash or debt relief you don't reinvest - it's taxable. To fully defer tax, buy equal-or-greater value and reinvest all the proceeds.
Like-Kind: For real estate, almost any U.S. investment real property counts as like-kind to any other (e.g., land for an apartment building); it doesn't have to be the same type.
Delayed / Forward Exchange: The standard exchange: sell first, then buy within the deadlines. Most common type.
Reverse Exchange: You buy the new property before selling the old one; a special titleholder (EAT) parks the property until the sale closes.
Improvement / Build-to-Suit / Construction Exchange: You use exchange funds to build on or renovate the replacement property before you take title, so the improvements count toward the exchange value.
Exchange Accommodation Titleholder (EAT): An entity that temporarily holds title to a property in reverse/improvement exchanges under the Rev. Proc. 2000-37 'safe harbor.'
Qualified Escrow Account / Qualified Trust: A legally protected account (under Treas. Reg. 1.1031(k)-1(g)(3)) holding your funds, shielded from the QI's creditors and requiring your consent to release.
Delaware Statutory Trust (DST): A trust that owns institutional real estate and sells fractional interests; qualifies as 1031 replacement property (Rev. Rul. 2004-86), letting you own passively instead of managing property.
721 Exchange / UPREIT: Contributing property (often DST interests) into a REIT's operating partnership for OP units - tax-deferred, more liquid, but it ends your ability to do future 1031 exchanges on those proceeds.
DST Sponsor: The professional real estate firm that finds, buys, and manages the properties inside a DST.
Accredited Investor: An investor allowed to buy DSTs/private placements - generally $1M+ net worth (excluding home) or $200K+ annual income.
Fidelity Bond: Insurance that pays you back if the QI's people steal or defraud (intentional bad acts).
E&O / Professional Liability Insurance: Insurance covering honest mistakes (errors and omissions) by the QI.
FEA (Federation of Exchange Accommodators): The national trade group for QIs; membership signals ethics standards and background-checked practitioners.
CES (Certified Exchange Specialist): The top professional certification for individual 1031 practitioners, granted by the FEA.
Performance Guaranty / Letter of Assurance: A written promise (often from a big parent company) that exchange funds will be there when you need them.

Reference sources

Primary references for this guide

The guide is written from official tax sources first, then checked against recognized exchange-industry reference material.

Reference sources only. 1031.com is not affiliated with, endorsed by, or partnered with these organizations.

IRS

Ready to find your firm?

Answer five quick questions and get matched with the right qualified intermediary, DST sponsor, or specialist.

Get matched