Want the numbers for your own property? Run the sale through the calculator and see the deferred gain, any taxable boot, your carryover basis in the replacement, and the tax a straight sale would have cost.
Open the 1031 Exchange Calculator →A 1031 exchange lets you sell real property held for business or investment and reinvest the proceeds in like-kind replacement property without recognizing the gain now. Since 2018 it applies to real property only. You must identify the replacement in writing within 45 days and receive it within 180 days, or by your return due date including extensions, whichever comes first. A qualified intermediary must hold the proceeds, because touching the money yourself turns the deal into a taxable sale. You recognize gain only to the extent of boot, meaning cash you keep or a net reduction in debt, and you can never recognize a loss. The deferred gain reduces your basis in the replacement property, so the tax is postponed rather than erased.
- Real property only. The Tax Cuts and Jobs Act removed personal and intangible property from §1031 effective January 1, 2018.
- Two clocks, one start. Both the 45-day and 180-day periods begin on the day you transfer the relinquished property, and they run concurrently.
- Counting rules on identification. Three properties of any value, or any number within 200 percent of what you sold. Blow both and you are treated as having identified nothing.
- Never touch the money. Actual or constructive receipt of the proceeds destroys the exchange. A qualified intermediary is the standard safe harbor.
- Debt counts as boot. Reinvesting all your cash but borrowing less on the replacement creates taxable mortgage boot even though no cash reached you.
- Recapture goes first. Recognized boot is taxed first as unrecaptured §1250 gain at up to 25 percent, only then at capital gains rates.
- Deferral, not forgiveness. Carryover basis under §1031(d) carries the gain into the next property and every one after it.
What a 1031 exchange actually does
The IRS describes the mechanism plainly: when you exchange real property used for business or held as an investment solely for other business or investment property of the same type, you are generally not required to recognize a gain or loss under §1031. If you also receive other property or money as part of the exchange, you must recognize gain to the extent of that other property and money. You cannot recognize a loss.
Notice what that sentence does and does not say. It does not say the gain disappears. It says you do not recognize it. The gain is real, it is measured, it is reported on Form 8824, and it is then rolled into the basis of whatever you buy next. Section 1031 is a timing provision. Its entire economic value is that the money you would have handed to the Treasury this year stays invested in real estate instead.
That value is not small. On a $700,000 property with a $300,000 adjusted basis, $100,000 of prior depreciation, and $42,000 of selling costs, a full exchange defers $358,000 of gain. The federal tax avoided in the year of sale is roughly $76,600, being 25 percent on the $100,000 of recaptured depreciation plus 20 percent on the remaining $258,000. That $76,600 becomes equity in the replacement property, earning a return for as long as you keep exchanging.
The trade is a lower basis going forward. In that example the replacement property takes a $342,000 basis rather than its $700,000 cost, which means smaller depreciation deductions each year and a larger gain whenever you finally sell for cash. Whether the exchange is worth doing depends on how long you intend to hold and whether you expect to keep exchanging. Run both paths in the 1031 Exchange Calculator before committing.
What property qualifies now
This is where most outdated advice goes wrong. Before 2018, §1031 covered a wide range of assets: equipment, vehicles, artwork, collectibles, patents, and other business property. The Tax Cuts and Jobs Act removed all of it.
Effective January 1, 2018, §1031 applies only to exchanges of real property held for use in a trade or business or for investment. Exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property, and intangible business assets no longer qualify. A narrow exception survives for certain shares in a mutual ditch, reservoir, or irrigation company.
Four further limits apply to real property itself:
- Held for business or investment. Property held primarily for sale does not qualify. A developer's inventory and a fix-and-flip are outside §1031 regardless of how the deal is papered.
- Like-kind is broad within real property. Properties are like-kind if they are of the same nature or character even if they differ in grade or quality. Real properties are generally like-kind to one another whether improved or unimproved, so raw land can be exchanged for an apartment building.
- Domestic and foreign are not like-kind. Real property in the United States is not like-kind to real property outside the United States.
- No personal use. A primary residence or a personally used second home is not investment property. The main-home tax break is the separate §121 exclusion covered in our Home Sale Exclusion guide.
Since December 2, 2020, Regulations §1.1031(a)-3 supplies a formal definition of real property for §1031 purposes: land and improvements to land, unsevered natural products of the land, and water and air space above land. Items permanently affixed to real property and expected to remain so indefinitely are generally inherently permanent structures and count as real property, which is why fixtures usually travel with the building rather than falling outside the exchange.
The 45-day and 180-day clocks
A deferred exchange, meaning one where you receive the replacement after transferring what you gave up, only qualifies if you meet two timing requirements. Both start on the same day and run at the same time.
| Deadline | Requirement | Starts |
|---|---|---|
| Identification period | Identify replacement property in writing within 45 days | Day you transfer the relinquished property |
| Exchange period | Receive the replacement within 180 days, or by the due date of your return for that year including extensions, whichever is earlier | Day you transfer the relinquished property |
Three points cause real damage in practice.
First, the 45 days are not 45 business days and there is no grace period. There is no reasonable-cause relief, no extension for a deal that collapses on day 44, and no cure once the period lapses.
Second, the 180-day period is a ceiling, not a promise. The statute takes the earlier of 180 days and your return due date. If you sell in, say, November, your unextended return due date in April arrives well before day 180. Filing an extension is what preserves the full 180 days, and a taxpayer who files early by habit can accidentally shorten their own exchange period.
Third, the clocks run concurrently rather than consecutively. The 180 days include the 45. You do not get 45 days to identify and then a fresh 180 to close.
If you receive the replacement property before the 45-day period ends, you are automatically treated as having satisfied the identification requirement for that property.
The identification rules
Identification is not a phone call. Under Regulations §1.1031(k)-1(c), replacement property is identified only if it is designated in a written document signed by you and delivered before the end of the identification period to either the person obligated to transfer the replacement property to you, or any other person involved in the exchange who is not you or a disqualified person. Parties to the exchange, the intermediary, an escrow agent, and a title company all qualify as recipients.
The description must be unambiguous. Real property is generally unambiguous if described by legal description, street address, or a distinguishable name such as "the Mayfair Apartment Building." A vague description is treated as no identification.
How many you may identify
You may name more than one candidate, and you should. The regulation caps the number at whichever of these you prefer:
- The 3-property rule. Three properties, without regard to their fair market values.
- The 200-percent rule. Any number of properties, as long as their combined fair market value at the end of the identification period does not exceed 200 percent of the combined value of everything you relinquished.
Exceed both and the consequence is severe: you are treated as if no replacement property had been identified at all, which fails the exchange entirely. One rescue exists. Under the 95-percent rule, an over-identification still counts if you actually receive, before the end of the exchange period, identified replacement property whose fair market value is at least 95 percent of the aggregate value of everything you identified.
A worked illustration from the regulation itself: if you transfer property worth $100,000 and receive a $50,000 replacement before the identification period ends, that received property counts as identified. You may then identify either two more properties of any value, or any number of additional properties whose combined value does not exceed $150,000.
Changing your mind
You may revoke an identification at any time before the 45 days expire. The revocation must be in a signed written document sent to the same person who received the original identification. After day 45, the list is final.
Small items travel with the main asset. Property incidental to a larger item is not treated as separate from it if such property is typically transferred together in standard commercial transactions and its aggregate fair market value does not exceed 15 percent of the value of the larger item. The regulation's own example: furniture, laundry machines, and miscellaneous personal property in a $1,000,000 apartment building are not separate property if together they are worth no more than $150,000.
Why you need a qualified intermediary
Section 1031 requires an exchange, not a sale followed by a purchase. If you take actual or constructive receipt of the sale proceeds, even briefly, you have made a taxable sale and no subsequent paperwork can convert it back.
The qualified intermediary is the standard solution and one of the safe harbors in the deferred exchange regulations. The QI acquires the relinquished property from you, transfers it to the buyer, holds the cash, then acquires the replacement property and transfers it to you. Your right to receive the money is contractually restricted throughout. The IRS treats the transfer of the property given up and the receipt of like-kind property through a QI as a like-kind exchange.
Two cautions matter more than the mechanics.
Not everyone can serve. Related parties and agents of the taxpayer are disqualified persons and cannot act as your QI. That sweeps in the professionals a client would naturally call first: an attorney, accountant, investment banker, or real estate agent who has served you in that capacity within the two-year period ending on the transfer date is generally disqualified. Using your own longtime CPA as intermediary is a classic way to void an otherwise clean exchange.
QI failure is your problem. If you miss the timing requirements because of the intermediary, the transaction does not qualify and the gain may be taxable in the year you transferred the property. There is limited relief where the QI defaults through bankruptcy or receivership, under Revenue Procedure 2010-14, but that is a salvage rule and not a substitute for choosing a bonded, well-capitalized intermediary with segregated accounts.
Boot: the two ways tax gets in
Boot is anything you receive in the exchange that is not like-kind property. Gain is recognized to the extent of boot, capped at your realized gain. There are two kinds, and the second one blindsides people.
Cash boot
Cash boot is straightforward: money you pocket rather than reinvest, plus the fair market value of any non-like-kind property you receive. Exchange expenses reduce it, but not below zero.
Mortgage boot
Mortgage boot is net debt relief. If the mortgage on the property you gave up exceeds the debt you take on with the replacement, the difference is treated as money received, because someone else assumed a liability you no longer owe. Under the regulations the amount is the excess of liabilities assumed by the other party over the total of any liabilities you assumed, cash you paid, and the fair market value of other property you gave up.
This is the trap. An owner reinvests every dollar of equity, believes the exchange is fully sheltered, and then takes a smaller loan on the replacement property because interest rates rose. No cash ever reached them, and they still owe tax:
The taxpayer reinvested all cash and still recognized $150,000. The fix is to match the old debt on the replacement property or add outside cash to fill the gap. Note the ordering: the first $90,000 is prior depreciation taxed at 25 percent, not the 20 percent capital gains rate.
Recapture is taxed first
Recognized boot does not get the lowest available rate. It is taxed first as unrecaptured §1250 gain at up to 25 percent, to the extent of the depreciation you have claimed, and only then at your long-term capital gains rate. Because rental real estate accumulates depreciation year after year, a small amount of boot is very often taxed entirely at 25 percent. Higher-income taxpayers may also owe the 3.8 percent net investment income tax on the recognized amount, which our Net Investment Income Tax Calculator can size.
Carryover basis: deferral, not forgiveness
Under IRC §1031(d), your basis in the replacement property is a substituted or carryover basis. In practical terms it is the cost of the replacement property reduced by the gain you deferred.
Return to the earlier example. You buy a $700,000 replacement and defer $358,000 of gain, so your basis in the new property is $342,000 rather than $700,000. Two consequences follow, and both are easy to overlook when the exchange feels like a win.
- Smaller depreciation deductions. You depreciate the carried-over basis, not the purchase price. Your annual write-off on the new building is materially lower than a cash buyer's on an identical property.
- A larger gain later. The deferred gain is embedded in that reduced basis and surfaces in full on the first sale that is not itself an exchange.
Chain several exchanges together and the deferred gain compounds through each one. That is the origin of the phrase "swap until you drop": the strategy contemplates never selling for cash during your lifetime, because property passing through an estate generally receives a basis adjustment under IRC §1014. Whether that plan fits your circumstances is an estate question rather than an income tax question, and it should be tested with counsel rather than assumed.
Reverse and improvement exchanges
Sometimes the replacement property has to be secured before the relinquished property sells. You cannot simply own both and call it an exchange, so an exchange accommodation titleholder takes title to one of them in the interim. This is a parking transaction.
Revenue Procedure 2000-37 provides the safe harbor. Under it, the IRS will not challenge either the qualification of the parked property as replacement or relinquished property, or the treatment of the accommodation titleholder as the beneficial owner for federal income tax purposes, provided the property is held in a qualified exchange accommodation arrangement. The Form 8824 instructions confirm the practical effect: property transferred from the accommodation titleholder to you may be treated as property received in an exchange even where the replacement was acquired before you transferred what you gave up.
Two qualifications belong on the record. The safe harbor is exclusive to its own terms: the revenue procedure states that parking transactions can be accomplished outside the safe harbor, and draws no inference about how those are treated. And it is time-limited. The revenue procedure's own noncompliance provision gives, as its example of failure, property subject to a QEAA that "is not transferred within the time period provided," at which point ownership is determined without regard to the safe harbor at all.
An improvement or build-to-suit exchange uses the same parking machinery to let exchange funds pay for construction on the replacement property before you take title. Both structures cost considerably more than a forward exchange and involve lender consent, carrying costs, and tight sequencing. Neither should be attempted without a specialist intermediary and your own tax counsel.
Reporting the exchange on Form 8824
Every like-kind exchange is reported on Form 8824, Like-Kind Exchanges, filed with your return for the year in which you transferred the relinquished property. Parts I, II, and III cover the exchange itself: Part III figures the gain you must recognize in the current year if cash or non-like-kind property was involved, and the basis of the like-kind property you received.
The structure of Part III mirrors the arithmetic in this guide. Line 15 collects boot, being cash received plus the fair market value of other property plus net liabilities assumed by the other party, reduced by exchange expenses but not below zero. Line 18 collects your adjusted basis plus exchange expenses plus the net amount you paid. Line 19 is the realized gain. Line 20 is the recognized gain, which is generally the smaller of line 15 or line 19. That single comparison is the whole boot rule in one line.
Points worth knowing before filing:
- If you made more than one exchange, you may file a summary Form 8824 with your own statement attached showing the detail for each.
- For e-filed returns, lines 12a, 15a, and 25a through 25c are now on the form itself, so no separate attachment is needed for those items.
- If the property was also your main home for some period and you are claiming the §121 exclusion, there is a write-in space on line 19 for the exclusion, and separate worksheet Forms 8824 are used for the residence and business portions.
- Recognized gain is carried to Schedule D, Form 4797, or Form 6252 as applicable.
The instructions include an official worked example. Taylor exchanges an apartment building worth $220,000 with a $100,000 basis and an $80,000 mortgage for Finley's building worth $250,000 with a $150,000 mortgage, plus $40,000 cash. Taylor enters only the $40,000 cash on line 15, because the $80,000 of liabilities Finley assumed does not exceed the $150,000 Taylor assumed. Taylor's realized gain is $120,000 and the recognized gain is $40,000, the lesser of line 15 and line 19. It is a compact demonstration that debt nets against debt, and that only the excess becomes boot.
Common mistakes
- Letting the closing agent wire proceeds to you. Constructive receipt ends the exchange. Engage the intermediary before the relinquished property closes, not after.
- Treating identification as a formality. Identifying a single property means one failed inspection destroys the deferral. Identify the maximum the counting rules allow.
- Filing your return early after a late-year sale. The exchange period ends at your return due date if that comes before day 180. Extend the return to preserve the full period.
- Matching equity but not debt. Reinvesting all cash while borrowing less creates mortgage boot taxed first at 25 percent.
- Using your own CPA or attorney as intermediary. Advisers who served you within the prior two years are generally disqualified persons.
- Assuming the old rules still cover equipment. Personal and intangible property left §1031 on January 1, 2018.
- Exchanging into a property you intend to move into. Converting replacement property to personal use undercuts the required investment intent and has its own holding-period considerations.
- Forgetting the two follow-up filings. A related-party exchange requires Form 8824 in each of the two subsequent years.
- Ignoring state rules. Some states impose clawback, annual reporting, or withholding when you exchange out of in-state property.
Practitioner Insight (LMN Tax Inc.)
Failed exchanges almost never fail on the concept. They fail on sequencing. The single most common call is from an owner who has already signed a sale contract, sometimes already closed, and is now asking how to set up the exchange. By then there is often nothing to set up: if the proceeds touched their account the deferral is gone, and no amount of retroactive documentation fixes constructive receipt. The intermediary agreement has to be in place before the first closing. The second pattern is the debt gap. A client sells a property carrying an old low-rate mortgage, reinvests every dollar of equity into a replacement, and borrows less because current rates make the payment uncomfortable. They receive no cash and are genuinely shocked to owe tax on the difference, taxed at 25 percent because it lands in depreciation recapture before it ever reaches the capital gains rate. We run the debt side of the exchange before the client picks a replacement, not after. The third is quieter and shows up a year later: an exchange with a sibling or a family LLC, then a sale by the other side inside two years, which unwinds the deferral retroactively and produces a tax bill in a year with no cash to pay it.
When these rules may not apply
- Dealers and flippers: property held primarily for sale is excluded by §1031(a)(2). Whether a given owner is a dealer is a facts-and-circumstances question this guide cannot resolve.
- Partnership interests: an interest in a partnership is not real property for §1031 purposes, apart from a partnership with a valid §761(a) election. Partners wanting to go separate ways typically need a drop-and-swap analysis well before the sale.
- Mixed-use property: property used partly as a main home and partly for business requires two worksheet Forms 8824 and can involve both §121 and §1031.
- Multi-asset exchanges: transferring or receiving more than one group of like-kind properties follows special allocation rules under Regulations §1.1031(j)-1, and lines 12 through 18 of Form 8824 are replaced by your own statement.
- §1245 components: the 25 percent figure applies to unrecaptured §1250 gain on real property. Separately depreciated personal property components can carry §1245 ordinary-income recapture instead.
- Tax-exempt use property: §1031 does not apply to certain exchanges involving tax-exempt use property subject to a lease, per §470(e)(4).
- State conformity: most states follow the federal rule, but clawback, reporting, and withholding regimes vary and are not enumerated here.
- Opportunity zones: a §1400Z-2 qualified opportunity fund investment is a different deferral regime with different deadlines and outcomes, and OBBBA revised parts of it. It is an alternative to an exchange, not a variation of one.
Frequently Asked Questions
What To Do Next
Run the numbers first. Put your sale price, adjusted basis, accumulated depreciation, selling costs, and both mortgage balances into the 1031 Exchange Calculator. The figure to watch is not the deferred gain, it is the recognized boot. If that is above zero, you are trading down somewhere and can usually fix it before closing.
Engage a qualified intermediary before the relinquished property closes. Confirm they are bonded, hold funds in segregated accounts, and are not a disqualified person with respect to you.
Line up two or three realistic replacement candidates before the sale closes, so the 45-day list is a decision rather than a scramble. Diarise day 45 and day 180 the moment the sale funds.
Check the debt side explicitly. If the new loan will be smaller than the old one, plan to add cash or accept the boot knowingly rather than discover it at filing.
If the exchange involves a related party, a reverse structure, a partnership split, or property that was ever your home, get professional help before you sign. Those four fact patterns generate most of the failed exchanges we see.
Related Tools and Guides
- IRS - Like-kind exchanges, real estate tax tips - nonrecognition under §1031; gain recognized to the extent of other property and money received with no loss recognized; TCJA limiting §1031 to real property effective January 1, 2018; like-kind definition; US and foreign real property not like-kind; Form 8824 as the reporting form. Page last reviewed 01-May-2026.
- IRS Instructions for Form 8824 (2025) - 45-day identification and 180-day or return-due-date exchange periods; qualified intermediary safe harbor and disqualified persons; incidental personal property 15 percent limitation; related-party rules under §1031(f) including the two-year disposition test, the line 11 exceptions, tolling, and the two follow-up filings; QEAA and exchange accommodation titleholders; boot and basis mechanics for lines 15 through 25 with the official Taylor and Finley example; property held primarily for sale excluded under §1031(a)(2); §470(e)(4) tax-exempt use property.
- Treas. Reg. §1.1031(k)-1 (Cornell LII) - manner and description of identification; the 3-property rule, the 200-percent rule, and the 95-percent rule; the $100,000 and $150,000 worked illustration; revocation procedure; incidental property disregarded up to 15 percent with the apartment building example.
- Rev. Proc. 2000-37 - reverse exchange safe harbor; treatment of the exchange accommodation titleholder as beneficial owner where property is held in a qualified exchange accommodation arrangement; exclusivity of the safe harbor and the express statement that parking transactions can be done outside it; effect of noncompliance where property is not transferred within the time period provided.
- 26 U.S.C. §1031 - nonrecognition of gain on like-kind exchanges; §1031(b) and (c) boot and loss; §1031(d) basis; §1031(f) related persons; §1031(h) foreign real property (Cornell LII).
- 26 U.S.C. §1250 - gain from dispositions of certain depreciable realty (Cornell LII).
- 26 U.S.C. §1014 - basis of property acquired from a decedent (Cornell LII).
- IRS Publication 544 - sales and other dispositions of assets; qualified intermediaries, disqualified persons, and the two-year holding period discussion.