A 1031 exchange defers all capital gains tax when you sell investment real estate and roll the proceeds into replacement property within IRS deadlines: 45 days to identify, 180 days to close, no dollar cap on the amount deferred.
A 1031 like-kind exchange defers all federal capital gains tax when you sell investment real estate and reinvest in replacement property within IRS deadlines: 45 days to identify, 180 days to close, a Qualified Intermediary to hold the funds. The tax is deferred, not eliminated — but investors who keep exchanging and hold until death often avoid it permanently through stepped-up basis.
A 1031 like-kind exchange lets you sell investment real estate and defer all capital gains taxes — indefinitely — by rolling the proceeds into replacement property within IRS-specified deadlines. The gain doesn't disappear; it moves with you into the replacement property's adjusted basis. Investors who continue exchanging and ultimately hold until death often avoid the deferred gain permanently: heirs receive a stepped-up basis to fair market value, and the accumulated tax may never be collected.
The name comes from IRS Internal Revenue Code Section 1031. The Tax Cuts and Jobs Act of 2017 narrowed the provision significantly — 1031 exchanges now apply only to real property, not to equipment, vehicles, artwork, or other personal property. In 2026, the rules for real property exchanges are unchanged from recent years.
"Like-kind" for real property is broader than the name suggests. Per IRS like-kind exchange rules, any U.S. real property held for investment or productive business use qualifies — regardless of property type:
Both the relinquished property and the replacement property must be located in the United States. U.S. real estate cannot be exchanged for foreign real estate under Section 1031.
What doesn't qualify in 2026: - Your primary residence (not held for investment or business use) - Property held primarily for resale — flip inventory is excluded - Stocks, bonds, securities, and partnership interests - Personal property: equipment, vehicles, artwork — eliminated from 1031 eligibility by TCJA in 2017
The test that runs throughout: the property must be held for investment or productive use in a trade or business, both at the time of the exchange and going forward.
The IRS 1031 exchange timeline runs on two strict deadlines. Missing either one disqualifies the entire exchange and makes the full gain taxable in the year of the original sale.
Clock 1 — 45-day identification window. Starting the day after the relinquished property closes, you have exactly 45 calendar days to identify the replacement property in writing. No extensions for weekends, holidays, or market conditions. The written identification must describe the property with enough specificity that it cannot be confused with another property.
Identification rules (choose the one that fits your situation): - Three-property rule — identify up to 3 replacement properties of any combined value. Most exchangers use this. Simplest to document and execute. - 200% rule — identify any number of properties, as long as their combined fair market value does not exceed 200% of the relinquished property's value. - 95% rule — identify any number of properties at any combined value, but you must actually close on at least 95% of that total identified value.
Clock 2 — 180-day exchange window. You must close on the replacement property within 180 calendar days of the relinquished property's closing — or by the due date (including extensions) of your federal tax return for the year of the sale, whichever comes first. If your relinquished property closes in late October and your return is due April 15, you have fewer than 180 days unless you file for a six-month extension.
The single most common error that kills a 1031 exchange: the seller receives the sale proceeds before reinvesting them. The moment you have actual or constructive receipt of the funds — even briefly — the IRS treats the exchange as a taxable sale.
A Qualified Intermediary (QI) — also called an exchange accommodator — is the required neutral third party. The QI:
1. Enters an exchange agreement with you before the relinquished property closes 2. Receives the net proceeds at closing (the title company wires directly to the QI) 3. Holds the funds in a segregated, FDIC-insured account during the exchange period 4. Transfers the funds to close the acquisition of the replacement property
Your attorney, CPA, real estate agent, or any close family member cannot serve as your QI — they must be a disinterested third party. QI fees for a standard exchange typically run $800–$2,000. For complex or high-value exchanges, fees may be higher. QI selection matters: their account controls should include segregated trust accounts and fidelity bonding. Industry members of the Federation of Exchange Accommodators (FEA) follow a voluntary code of ethics and publish member directories.
You don't have to reinvest 100% of the proceeds — but anything you don't roll over becomes "boot" and triggers tax in the year of the exchange.
Cash boot: If the QI releases any proceeds to you rather than reinvesting them, that amount is taxable as capital gain in the current year.
Mortgage relief (debt boot): If the replacement property carries a smaller mortgage than the relinquished property, the IRS treats the reduction in debt as boot — even if you rolled over all the cash.
Example: You sell a rental for $700,000 with a $300,000 mortgage outstanding. Net cash proceeds: $400,000. You buy a replacement property for $600,000 with a $150,000 mortgage. You rolled all $400,000 in cash. But the old debt was $300,000 and the new debt is $150,000 — you were relieved of $150,000 in debt. That $150,000 is boot, taxable this year even though no cash left the exchange.
How to neutralize debt boot: Add cash to the replacement acquisition equal to the debt relief, or take on equal or greater debt on the replacement property.
A 1031 exchange defers your capital gain — but it does not eliminate depreciation recapture.
When you own rental real estate, you deduct depreciation each year: 27.5 years for residential property, 39 years for commercial. When you sell, the IRS taxes prior depreciation deductions through Section 1250 recapture rules at a maximum rate of 25% — a rate that applies regardless of your ordinary income tax bracket and regardless of whether you execute a 1031 exchange.
What the 1031 exchange does with recapture: it defers it, along with the capital gain. You carry a reduced depreciable basis into the replacement property (the prior property's adjusted basis, already reduced by all accumulated depreciation). The replacement property starts with lower depreciable basis and a higher embedded gain — which includes the recapture amount you didn't pay.
This is why the 1031 exchange works best as a long-term compounding strategy: keep exchanging into more valuable real estate, keep deferring gain and recapture, and hold through death — when heirs receive stepped-up basis and the accumulated deferred tax may never be collected.
For small business owners looking to upgrade into owner-occupied commercial property, a 1031 exchange can serve as the equity piece in a larger financing structure — converting the gain from an investment property sale into equity in the new commercial building.
The SBA 504 loan is designed for owner-occupied commercial real estate, covering up to 90% of acquisition cost (roughly 50% conventional lender + 40% SBA 504 debenture). A 1031 exchange covering 10% or more of the purchase price in rolled equity can reduce or eliminate the cash required at closing.
Two coordination points if you're combining a 1031 with SBA 504:
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This content is educational and does not constitute tax or legal advice. Consult a licensed CPA or qualified tax attorney before structuring an exchange. See also: Capital Gains Tax on Investment Sales 2026 | SBA 504 Loan: Buying Commercial Property in 2026 | Capital Gains on Selling a House 2026
A 1031 exchange (formally a like-kind exchange) lets you sell investment or business real estate and defer all federal capital gains tax by reinvesting the proceeds in a replacement property within IRS-specified deadlines. Under IRS Section 1031 rules, the gain is deferred — not forgiven — but deferral can be renewed through a series of exchanges. If you hold the final replacement property until death, your heirs receive a stepped-up basis to fair market value and the deferred gain may never be collected.
For real property, "like-kind" is broader than the name implies: any U.S. real property held for investment or productive business use can be exchanged for any other U.S. real property held for the same purpose — a residential rental for a commercial building, vacant land for an apartment complex, office for industrial warehouse. What does not qualify: primary residences, property held primarily for resale (flip inventory), foreign real estate, stocks and securities, partnership interests, or any personal property (equipment, vehicles, artwork — eliminated from 1031 eligibility by TCJA 2017). Per IRS like-kind exchange guidance, the key test is whether each property is held for investment or productive use in a trade or business.
No — a primary residence does not qualify because it is not held for investment or business use. However, a former primary residence can potentially qualify if you convert it to a rental and hold it for investment purposes before exchanging (most tax advisors recommend at least one to two years of documented rental use). There is a separate exclusion for primary residences: the Section 121 exclusion lets single filers exclude up to $250,000 in capital gains (married couples $500,000) on a qualifying home sale. If a property has served both as a primary residence and as a rental, Section 121 and Section 1031 can sometimes be combined — consult a CPA for the specifics.
The exchange is disqualified. The IRS does not grant extensions for missed identification or completion deadlines under normal circumstances — the full gain becomes taxable in the year of the relinquished property's sale. Narrow exceptions exist for federally declared disasters, which trigger automatic deadline extensions under specific IRS revenue procedures for exchange properties in disaster areas. Outside those circumstances, the deadlines are firm. This is why engaging a Qualified Intermediary and locking in the timeline before the first closing is essential.
Yes. Even when no tax is owed, you must report the exchange using IRS Form 8824 (Like-Kind Exchanges), attached to your federal return for the year the exchange occurred. Form 8824 computes the deferred gain, the adjusted basis carried into the replacement property, and any boot (cash or mortgage relief you didn't reinvest) taxable in the current year. Keep Form 8824 in your permanent records — the carryover basis and deferred gain affect every future exchange and the gain calculation on any eventual taxable sale.