A 1031 exchange defers capital gains tax when an investment property is sold and replaced with another. You have 45 days from closing to identify replacements in writing and 180 days to complete the purchase. Proceeds must go to a qualified intermediary and never to you.
A 1031 exchange defers capital gains tax on an investment property sale. The rules are unforgiving and the deadlines do not move. What qualifies, what the two clocks are, and where exchanges usually fail.
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A 1031 exchange lets an investor sell one investment property and reinvest into another without paying capital gains tax at the time of sale. The tax is deferred rather than forgiven, and it is deferred only if every requirement is met exactly. The rules are unforgiving, the deadlines do not move, and most failures are procedural rather than financial.
What follows is general information, not tax advice. Anyone contemplating an exchange should have a qualified intermediary and a tax advisor engaged before the relinquished property goes under contract.
The property must be real property held for productive use in a trade or business, or for investment. Since the 2017 tax law, personal property no longer qualifies — the provision applies to real estate only.
A primary residence does not qualify. That is a different provision entirely. A vacation home occupies awkward ground: it can qualify, but only where the pattern of use looks like investment rather than personal enjoyment, which generally means genuine rental activity and limited personal days.
Like-kind is broader than people expect. An apartment building can be exchanged for raw land, a retail property for a ranch. Within US real property, almost anything held for investment is like-kind to almost anything else.
These are the ones that end exchanges.
Forty-five days to identify. From the closing of the property you sell, you have 45 days to identify replacement candidates in writing, signed and delivered to your intermediary.
One hundred and eighty days to close. From that same closing date, you have 180 days to complete the purchase — or the due date of your tax return for that year including extensions, whichever comes first. That second condition catches people who sell late in the year and do not file an extension.
Both are calendar days. Weekends and holidays count. There is no discretionary extension; relief exists only in federally declared disaster situations.
You must identify under one of three tests.
The three-property rule. Identify up to three properties of any value. This is what most exchanges use.
The 200 percent rule. Identify any number, provided their combined fair market value does not exceed twice the value of what you sold.
The 95 percent rule. Identify any number of any value, but you must actually acquire at least 95 percent of the total value identified. This is a fallback, rarely used deliberately.
This is the requirement people most often break without realizing. Proceeds must go directly to a qualified intermediary at closing and stay there until they fund the replacement purchase.
If the funds reach you, your attorney, your agent, or an account you control — even briefly, even in escrow you can direct — the doctrine of constructive receipt applies and the exchange fails. The intermediary must be engaged before the first closing, not after. There is no retroactive fix.
To defer the entire gain, the replacement property must be equal or greater in value, and you must replace the debt as well as the equity.
Anything you take out is boot and is taxable. Cash boot is obvious. Mortgage boot is less so: if you sell a property with a $2 million loan and buy one with a $1.2 million loan, that $800,000 of debt relief is treated as boot unless you bring equivalent cash to the purchase.
A partial exchange is permitted. It just means partial deferral, and people are frequently surprised by the bill.
Starting late. The intermediary must be in place before the relinquished property closes.
Identifying loosely. The identification must be specific enough that the property is unambiguous. An address, not a description of what you are looking for.
Running out of inventory. Forty-five days is short in a tight market. Buyers who have not lined up candidates before selling are negotiating from a visibly weak position, and sellers of replacement property know it.
Related party transactions. Exchanging with a related party brings a two-year holding requirement on both sides, and disposal inside that window can unwind the deferral.
A reverse exchange lets you acquire the replacement before selling, with an exchange accommodation titleholder parking the property in the interim. An improvement exchange lets exchange funds pay for construction on the replacement. Both are legitimate, both cost more, and both need specialist handling.
Engage a qualified intermediary and speak with your tax advisor before you list. On the property side, we can help line up replacement candidates ahead of the 45-day window rather than inside it, which is the single change that most improves the outcome.
No. The property must be held for investment or business use. A primary residence falls under a different provision. A vacation home can qualify only where its use pattern genuinely looks like investment rather than personal enjoyment.
The exchange fails and the gain becomes taxable in the year of sale. Both deadlines are calendar days and there is no discretionary extension outside federally declared disasters.
No. Proceeds must go directly to a qualified intermediary. If they reach you or an account you control, even briefly, constructive receipt applies and the exchange fails. The intermediary must be engaged before the first closing.
Only if you want full deferral. The replacement must be equal or greater in value and you must replace the debt as well as the equity. Anything you take out is boot and is taxed.
No. Within US real property held for investment, like-kind is interpreted broadly. An apartment building can be exchanged for land, or a retail property for a ranch.
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