A 1031 exchange allows a property owner to defer capital gains tax on the sale of real property by reinvesting proceeds into 'like-kind' replacement property under IRC Section 1031. After the Tax Cuts and Jobs Act of 2017 (TCJA), like-kind exchanges are limited to real property — personal property (equipment, vehicles) no longer qualifies.
IRC Section 1031 allows taxpayers to defer — not eliminate — federal capital gains tax on the sale of business or investment real property, provided the proceeds are reinvested into replacement real property meeting specific timing and structure requirements. The tax basis carries over to the new property; the deferred gain is recognized only when the replacement property is eventually sold without a subsequent 1031. Key 1031 rules: (1) The taxpayer must identify replacement property within 45 days of the relinquished property closing (Identification Period). Up to three properties may be identified (the 3-property rule) or any number of properties whose total value does not exceed 200% of the relinquished property value (the 200% rule). (2) The replacement property must be acquired within 180 days of the relinquished property closing (Exchange Period). (3) To fully defer all gain, the taxpayer must acquire replacement property of equal or greater value using all net equity (no 'boot' — taxable cash or non-like-kind property received). Post-TCJA (effective January 1, 2018): Section 1031 applies only to real property (Section 1250/1231 property). Tangible personal property (equipment, vehicles, aircraft, artwork, collectibles) is no longer eligible for like-kind exchange. This change significantly affected small businesses that previously exchanged equipment fleets, construction equipment, and heavy machinery. The IRS provides detailed guidance in Revenue Procedure 2000-37 (exchange accommodator titleholder rules) and Treasury Regulations Section 1.1031. See IRS Publication 544 (Sales and Other Dispositions of Assets) for practical guidance.
No longer, since the Tax Cuts and Jobs Act of 2017. Prior to 2018, personal property could be exchanged under Section 1031 for like-kind personal property (e.g., a bulldozer for a bulldozer). After TCJA, only real property qualifies. For business equipment, Section 179 and bonus depreciation provide accelerated deductions as an alternative tax strategy.
For real property, like-kind is broadly defined — virtually any U.S. real estate held for business or investment qualifies as like-kind to any other U.S. real estate held for the same purpose. A ranch can be exchanged for a downtown office building; a rental house for a commercial warehouse. The key requirement is that both properties are held for business use or investment (not personal use). Foreign real property is not like-kind to U.S. real property.
The exchange is disqualified — the entire gain becomes taxable in the year of sale. No extensions are granted (except in presidentially declared disasters). The 45-day clock begins the day after closing on the relinquished property and runs without pause — including weekends and holidays. Most QIs provide tracking systems to monitor deadlines.