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How a 1031 exchange works — and how it can affect your situation

A 1031 exchange lets you sell investment or business real estate and buy more without paying tax on the gain yet. It defers the tax rather than erasing it, and it only works if the rules are followed exactly.

Last reviewed September 2026 · General information, not advice for your situation

In short

  • For exchanges completed after December 31, 2017, only real property held for investment or business use qualifies — not equipment, vehicles or other personal property (IRC §1031(a)(1) and 2017 amendment notes).
  • You have 45 days after transferring your property to identify replacement property in writing, and 180 days (or less — see below) to receive it (IRC §1031(a)(3)).
  • Receiving the sale proceeds yourself can turn the exchange into a sale, or make part of it taxable. A qualified intermediary normally holds them (Treas. Reg. §1.1031(k)-1(f)(2), (g)(4)).
  • Cash you keep, and debt you’re relieved of that isn’t offset, is “boot”: gain is taxable up to its amount (IRC §1031(b); Treas. Reg. §1.1031(d)-2).
  • The gain carries into the new property through a lower basis (IRC §1031(d)). It’s deferred, not forgiven — though it may never be taxed if the property is held until death, when the heir’s basis is generally its value at that date (IRC §1014(a)(1)).

What a 1031 exchange does

Normally, when you sell property for more than your basis, you pay tax on the gain. Section 1031 of the Internal Revenue Code makes an exception: no gain or loss is recognized when real property held for productive use in a business or for investment is exchanged solely for real property of a like kind that will also be held for business or investment.

In practice, almost nobody swaps buildings directly with another owner. Most exchanges are deferred exchanges: you sell your property, the proceeds go to an intermediary, and the intermediary uses them to buy your replacement property. Done correctly, this is treated as an exchange rather than a sale followed by a purchase (Treas. Reg. §1.1031(k)-1(g)(4)(i)).

The tax isn’t eliminated. Your unrecognized gain reduces the tax basis of the new property (IRC §1031(d)), so it comes back if you later sell that property in a taxable sale. That’s why it’s often described as a deferral.

What qualifies

  • Real property only. For exchanges completed after December 31, 2017, §1031 applies only to real property. Machinery, vehicles, artwork and other personal property no longer qualify. The change was made by the 2017 Tax Cuts and Jobs Act (Public Law 115-97, §13303(c), in the notes to §1031); the Form 8824 instructions describe the real-property-only rule. The §1031 source credits list no amendment by the 2025 tax law (Public Law 119-21) (IRC §1031).
  • “Like kind” is broad for real estate. It refers to the nature of the property, not its grade or quality (Treas. Reg. §1.1031(a)-1(b)). Generally, one kind of US investment or business real estate can be exchanged for another — a rental house for an apartment building, land for a warehouse. Regulations define real property to include land and improvements to land (Treas. Reg. §1.1031(a)-3).
  • US for US. Real property in the United States and real property outside it are not like kind (IRC §1031(h)).
  • Held for investment or business — both sides. The property you give up and the property you get must both be held for productive use in a business or for investment (IRC §1031(a)(1)).
  • Not property held for sale. Real property held primarily for sale — a flip, or lots a developer is selling — doesn’t qualify (IRC §1031(a)(2)).
  • Not your home. Section 1031 doesn’t apply if the property you gave up was used solely as your personal residence at the time of the exchange (Form 8824 instructions, “Property Used as Home”).

Whether property is held “for investment” or “primarily for sale” depends on the facts — how long you held it, what you did with it, what you intended. There’s no fixed minimum holding period in the statute (IRC §1031(a)). Property bought shortly before an exchange, or converted to personal use shortly after, invites the question.

The deadlines: 45 days and 180 days

The clock starts on the day you transfer the property you’re giving up. Both deadlines are in the statute (§1031(a)(3)) and end at midnight on the last day (Treas. Reg. §1.1031(k)-1(b)):

  1. Identify within 45 days. Replacement property must be identified in a written document you sign, describing it clearly (a legal description, street address or distinguishable name), and delivered either to the person obligated to transfer the replacement property to you (whether or not that person is a disqualified person) or to anyone else involved in the exchange who is not a disqualified person — typically the intermediary (Treas. Reg. §1.1031(k)-1(c)(2)–(3)).
  2. Receive it within 180 days — or by your tax return’s due date, if earlier. The exchange period ends on the earlier of the 180th day or the due date, including extensions, of your return for the year you transferred the property (IRC §1031(a)(3)(B)).

The due-date rule catches exchanges that start late in the year. If a calendar-year individual transfers property in November, the 180 days would run into May — but that individual’s return is due in April (IRC §6072(a)). Without an extension, the exchange period ends on the April due date; with the automatic six-month extension, it can run the full 180 days (Treas. Reg. §1.1031(k)-1(b)(3), example).

Nothing in the statute extends them because a closing slips, a lender is slow or a deal falls through. The IRS can, however, postpone both periods after a federally declared disaster (IRC §7508A; Rev. Proc. 2018-58, §17).

How many properties you can identify

You can identify more than one potential replacement, within limits (Treas. Reg. §1.1031(k)-1(c)(4)):

  • Three-property rule: up to three properties, of any value.
  • 200% rule: any number of properties, as long as their combined value doesn’t exceed 200% of the value of what you sold.
  • 95% exception: if you exceed both, the identification still works only if you actually acquire identified properties worth at least 95% of the total value of everything you identified.

If you identify too much and don’t meet the 95% exception, you’re treated as having identified nothing.

Don’t touch the money: qualified intermediaries

If you actually or constructively receive money for the full amount of what you sold, the transaction is a sale, not a deferred exchange — even if you meet the 45- and 180-day deadlines. Receiving only part of it is boot: gain is taxed up to that amount. Money you can draw upon counts as constructively received (Treas. Reg. §1.1031(k)-1(f)(2); IRC §1031(b)), and the intermediary safe harbor below also requires that you have no right to receive, pledge or borrow against the funds (Treas. Reg. §1.1031(k)-1(g)(6)).

The regulations provide a safe harbor using a qualified intermediary: a party who, under a written exchange agreement, takes on the sale and purchase and holds the proceeds, with your rights to the money restricted until the exchange ends (Reg. §1.1031(k)-1(g)(4)). Some people can’t serve as your intermediary — 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 transfer, and certain related parties. There are narrow exceptions, such as for routine title, escrow and banking services (Treas. Reg. §1.1031(k)-1(k)(2)–(3)).

An intermediary holds the exchange funds, often for months, so who serves in that role and how the funds are held can matter.

Boot: when part of the gain is taxed now

If you receive anything other than like-kind property — cash, a note, personal property — that’s commonly called boot. You recognize gain up to the amount of boot you receive (IRC §1031(b)). You can’t recognize a loss in an exchange (IRC §1031(c)).

Debt is where people get caught. When the buyer takes over or pays off your mortgage, the debt you’re relieved of is treated as cash received (Treas. Reg. §1.1031(d)-2). Taking on a new mortgage on the replacement property offsets it, and so does adding your own cash. But the offset only works in one direction: cash you receive is not offset by taking on a larger mortgage.

A rule of thumb follows from these rules: deferring all of the gain generally takes replacement property of equal or greater value, reinvestment of all the net cash, and replacement of the debt paid off with new debt or additional cash. An exchange short of that is likely to be partly taxable (IRC §1031(b); Treas. Reg. §1.1031(d)-2).

Furniture, appliances or equipment that come with a building are personal property, not real property, so they aren’t like kind. Their value is boot. The regulations let small amounts of such incidental property (up to 15% of the value of the larger property — a percentage fixed in the regulation) be disregarded for identification and, for exchanges beginning after December 2, 2020, for the intermediary safe harbor — but they are still taxable boot (Reg. §1.1031(k)-1(c)(5), (g)(7)(iii), (g)(8), (g)(9)).

Basis, depreciation and recapture

The replacement property’s basis starts from the basis of the property you gave up, decreased by any money you received and increased by any gain you recognized (IRC §1031(d)). Money you pay in increases it (Publication 544). The effect is that the deferred gain is embedded in the new property: a lower basis means lower depreciation going forward and a larger gain if you sell.

Depreciation recapture generally carries over too, rather than being triggered, when real property is exchanged for real property — though some can still be triggered if not enough §1250 property is acquired (IRC §1250(d)(4), including (d)(4)(C)). There is one well-known trap: building components that count as real property for §1031 but as “section 1245 property” for depreciation — common after a cost segregation study. Recapture on those can be triggered even when no boot is received, if the replacement property doesn’t include enough §1245 property (IRC §1245(b)(4); Form 8824 instructions, line 21). Because the result turns on what the replacement property contains, the order of steps can matter for property that has had a cost segregation study.

Related parties, reverse exchanges and vacation homes

  • Exchanges with family or related entities. If you exchange with a related person (as defined in §1031(f)(3)) and either of you disposes of the property received within two years, the deferred gain becomes taxable in the year of that later disposition. There are exceptions for death, involuntary conversions and transactions without a tax-avoidance purpose, and an anti-abuse rule for arrangements structured around the two-year rule (IRC §1031(f)(1)–(4)). Related-party exchanges are also reported on Form 8824 for the two following years (Form 8824 instructions, “When To File”).
  • Buying before you sell (reverse exchanges). The IRS provides a safe harbor in Rev. Proc. 2000-37 where an “exchange accommodation titleholder” holds title to the new property while you sell the old one. The timing works differently: the 45 days run from when the titleholder takes the replacement property, and what must be identified within them is the property you’re giving up; a 180-day limit also applies (Rev. Proc. 2000-37, §4.02). Rev. Proc. 2004-51 excludes replacement property you owned within the 180 days before its transfer to the titleholder (Form 8824 instructions).
  • Vacation and second homes. A home used partly personally isn’t clearly “held for investment.” Rev. Proc. 2008-16 gives a safe harbor: owned for 24 months before (or after, for the replacement) the exchange, rented at a fair rent for 14 days or more in each of the two 12-month periods, and personal use not more than the greater of 14 days or 10% of the days rented in each period. The revenue procedure doesn’t decide cases outside the safe harbor; those depend on the facts.
  • A former rental you later move into. If you acquire a property in an exchange and later make it your home, the home-sale exclusion under §121 isn’t available if you sell it within five years of acquiring it in the exchange (IRC §121(d)(10)). When a property has been both a home and a rental, Rev. Proc. 2005-14 explains how §121 and §1031 can apply together, with §121 applied first.

Reporting, state rules, and the long view

Form 8824. An exchange is reported on Form 8824 with your return for the year you transferred the property, even if no gain is recognized (Publication 544; Form 8824 instructions, “When To File”).

States. State rules can add their own requirements. California, whose law conforms to the Internal Revenue Code as of January 1, 2025, requires an annual Form FTB 3840 from anyone who exchanges California property for property outside California, generally for every year until the deferred gain is recognized, and keeps that gain taxable by California when it is (FTB 3840 instructions (2025)). Other states’ rules weren’t reviewed for this guide; the rules of the state where the property given up is located can matter.

The long view. Investors sometimes exchange repeatedly over decades, rolling the deferred gain from property to property. If property is held until death, the heir’s basis is generally its fair market value at the date of death (IRC §1014(a)(1)), so the deferred gain may never be taxed as income. That outcome depends on the basis rules at death in effect at the time, and on what happens to the property before then.

Whether an exchange makes sense depends on more than the tax: the property you want to own next, the cost of the intermediary and the time pressure, what you’d pay without an exchange (which depends on your other income that year — see our guide to capital gains), and whether you’d rather have the cash.

Common questions

What are the 1031 exchange deadlines?

You must identify replacement property in writing within 45 days after transferring the property you’re giving up, and acquire it within 180 days — or by the due date (including extensions) of your tax return for that year, if that comes first. Both periods run from the same transfer date (IRC §1031(a)(3); Treas. Reg. §1.1031(k)-1(b)(2)).

Can I do a 1031 exchange on my primary residence?

Not if the property was used solely as your personal residence at the time of the exchange (Form 8824 instructions, “Property Used as Home”). A home sale may qualify for the separate §121 exclusion instead. Property that was partly a residence and partly a rental can involve both rules (Rev. Proc. 2005-14).

What is boot in a 1031 exchange?

Boot is anything you receive that isn’t like-kind real property — cash, a note, personal property, or debt relief that isn’t offset by new debt or added cash (Treas. Reg. §1.1031(d)-2). Gain is taxable up to the amount of boot received, and no loss is recognized (IRC §1031(b)–(c)).

Can I do a 1031 exchange with equipment or vehicles?

Not for exchanges completed after December 31, 2017. Section 1031 now applies only to real property (IRC §1031(a)(1) and 2017 amendment notes).

Sources

This guide is general information about how the rules work, last reviewed September 2026. It is not tax, legal or financial advice for your circumstances, and reading it doesn't create a client relationship. Tax rules, figures and thresholds change, and how they apply depends on your facts — talk to a tax professional before acting on anything here.

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