A 1031 exchange lets you sell real property held for investment or business use and defer the capital gain and depreciation recapture by buying other like-kind real property. You must use a qualified intermediary, identify the replacement property within 45 days of the sale and close on it within 180 days. Cash or debt reduction you walk away with, called boot, is taxable.
- A 1031 exchange defers capital gain and depreciation recapture on investment real estate.
- You must identify replacement property within 45 days and close within 180 days.
- A qualified intermediary has to hold the proceeds; you can't touch the cash.
- Cash you keep or debt that goes down (boot) is taxable.
What Property Qualifies for a 1031 Exchange?
- Both properties must be real property held for investment or for use in a business. Your home and property held mainly for resale, like a fix-and-flip, don't qualify.
- "Like-kind" is broad for real estate. A rental house can be exchanged for an apartment building, raw land or a commercial property.
- Since 2018, only real property qualifies. Equipment and other personal property can't be exchanged under Section 1031.
What Are the 1031 Exchange Deadlines?
| Deadline | What must happen |
|---|---|
| Day 45 | Identify replacement property in writing. You can generally name up to three properties of any value, or more if their total value is no more than 200% of what you sold. |
| Day 180 | Close on the replacement property. The deadline is 180 days after the sale or your tax return due date for that year, including extensions, whichever comes first. |
These deadlines are strict. Weekends and holidays don't extend them.
Why Do I Need a Qualified Intermediary?
You can't receive the sale proceeds, even briefly. A qualified intermediary holds the money between the sale and the purchase. The intermediary has to be engaged before the sale closes, which is why planning has to start before you list.
When Is Part of a 1031 Exchange Taxable?
To defer all of the gain, you generally need to reinvest all of the net proceeds and buy property of equal or greater value, replacing any debt you paid off with new debt or added cash. Cash you keep and debt that goes down are boot, and boot is taxable up to the amount of your gain.
What Are the Most Common 1031 Exchange Mistakes?
- Closing the sale before hiring a qualified intermediary
- Missing the 45-day identification deadline while searching for the "right" property
- Taking title to the new property in a different name or entity than the one that sold
- Exchanging with a related party without understanding the extra holding requirements
- Forgetting that the deferred gain carries over: your new property's basis is lower, and so is its future depreciation
Exchanges are reported on Form 8824 with your tax return for the year of the sale.
Common Questions
Can I do a 1031 exchange on my primary residence?
No. Section 1031 applies to investment and business property. Your home may qualify for a separate exclusion of up to $250,000 of gain, or $500,000 for married couples filing jointly, under Section 121.
Does a 1031 exchange eliminate the tax?
No, it defers it. The deferred gain carries into the replacement property. If you hold property until death, your heirs may receive a stepped-up basis under current law, which can eliminate the deferred gain.
How long do I need to hold a property for a 1031?
The law doesn't set a specific period. What matters is that you held it for investment or business use, and a longer holding period makes that intent easier to support.