Section 1031 of the Internal Revenue Code (IRC) allows a taxpayer to sell real estate held for business or investment use and reinvest the proceeds into another qualifying property, while deferring federal capital gains, depreciation recapture, and applicable state taxes.
A 1031 Exchange is also referred to as a tax‑deferred exchange, like‑kind exchange, forward exchange, or delayed exchange.
To qualify, the taxpayer must exchange like‑kind real property—real estate held for investment or business use. Strict IRS rules apply, and the exchanger may not receive or control sale proceeds. A Qualified Intermediary (QI) is required to facilitate the transaction under Treasury Regulation §1.1031(k)-1(g)(4) and §1.1031(k)-1(g)(6).
Traditional Investment Property Sale
- Taxpayer sells investment/business real estate and receives cash
- Sale is immediately taxable
- Capital gains and depreciation recapture taxes may apply
- Net proceeds are reduced by paying taxes
- No reinvestment requirement
- Purchasing power may decline due to taxes
1031 Like‑Kind Exchange
- Taxpayer sells real property used in a business or held for investment
- Sale proceeds are held by a Qualified Intermediary
- Taxpayer reinvests in like‑kind property used in a business or held for investment
- Taxes are deferred if all IRS rules are met
- Capital gains, state gains, and depreciation recapture are deferred
A 1031 Exchange allows taxpayers to:
- Preserve equity and increase purchasing power
- Upgrade, consolidate, or diversify real estate assets
- Improve long‑term investment growth
Like‑kind real estate must be held for business or investment use, including:
- Rental properties
- Commercial property
- Investment land
- Industrial, agricultural, or mixed‑use property
- Primary residences
- Second homes or vacation homes used exclusively for personal use
- Dealer property (fix‑and‑flip inventory, new construction built to sell)
- Personal property, including:
- Furniture, artwork, vehicles, aircraft, boats
- Stocks, bonds, notes
- REIT shares
- Not an exhaustive list.
A successful 1031 exchange is not a do‑it‑yourself transaction. A 1031 exchange must be facilitated by a Qualified Intermediary (QI), also known as an accommodator or facilitator and is an independent third party defined under Treasury Regulation §1.1031(k)-1(g)(4).
A QI prepares exchange documents, holds funds, and ensures compliance.
A fully tax‑deferred exchange requires replacing equal or greater:
- Value: Purchase equal or greater value
- Equity: Reinvest all net proceeds
- Debt: Replace equal or greater debt or contribute cash
Failure to meet these thresholds may result in taxable boot.
A 1031 exchange is governed by two strict, non‑negotiable IRS deadlines:
- 45‑Day Identification Period: Identify Replacement property(ies)
- 180‑Day Exchange Period: Complete purchase of Replacement property
Both deadlines begin the day after the Relinquished property closes and include weekends and holidays.
One of the critical parts of a 1031 Exchange is how the new Replacement Property is identified. The IRS imposes strict rules governing both the timing and the method of identification. A failure to comply with these rules will disqualify the exchange and trigger capital gains tax.
Taxpayers who wish to use a 1031 exchange to defer capital gains taxes must follow strict IRS timelines.
45‑Day Identification Period
After the sale of the Relinquished Property, the taxpayer has:
- 45 days to identify like‑kind Replacement Property(ies)
- No extensions allowed
- Identification must be written, unambiguous, and delivered to the QI
180‑Day Exchange Period
Beginning on the date of the sale of the Relinquished Property:
- Exchange must be completed within 180 days of the sale
- The 180 days include the 45‑day identification period
All Replacement property(ies) must be purchased, and the exchange must be fully completed, within this 180‑day statutory deadline.
Identification Rules
Taxpayer must choose one rule:
- Three Property Rule: Identify up to three properties of any value.
- 200% Rule: Identify four or more properties, provided total value does not exceed 200% of the value of the Relinquished property.
- 95% Rule: Acquire at least 95% of the value of all identified properties.
Identification Requirements
Identification must:
- Be in writing
- Clearly describe the property by address or legal description
- Be signed/dated
- Be delivered to the QI by midnight on Day 45
Revoking or Changing Identification
However, if additional properties are considered, they must still be listed and counted under the identification rules.
A taxpayer may revoke and replace identified properties if revisions are submitted within the 45‑day period.
If Replacement Property Is Purchased Within 45 Days
A written identification is not required for properties acquired before Day 45.
The taxpayer selling the Relinquished property must be the same taxpayer acquiring the Replacement property. Eligible taxpayers include:
- Individuals
- Married couples
- LLCs (single‑ or multi‑member)
- Partnerships
- Corporations
- Trusts and estates
This principle supports the IRS requirement of continuity of investment.
To achieve full tax deferral in a 1031 exchange, the taxpayer must reinvest all net equity and replace equal or greater debt. If either equity or debt is not fully replaced, the transaction may still qualify as a 1031 exchange; however, the taxpayer will generally incur a partial tax liability. This is known as a Partial Exchange. Taxpayers should consult their tax advisor to determine whether a Partial Exchange is appropriate for their individual situation.
Boot is a tax term, not footwear. Boot refers r to any non–like-kind value received in an exchange, including:
- Cash received at the sale
- Reduction in debt
- Non‑qualifying property
Boot is generally taxable dollar‑for‑dollar. Even when a transaction still qualifies under Section 1031, taxes may apply to any portion of equity or debt not fully reinvested.
Yes. A taxpayer may sell in one state and purchase in another while deferring taxes, provided all IRS 1031 requirements are met.
There is no minimum holding period specified in the Internal Revenue Code. The most important factor is intent—the property must be held for business or investment purposes.
Common planning guidelines include:
- Two years: Clear demonstration of investment intent
- One year and one day: Aligns with long‑term capital gains rules
No. Anyone who has provided non‑exchange services within the prior two years—including CPAs, attorneys, real estate agents, employees, or family members—is considered a disqualified person under Treasury Regulation §1.1031(k)-1(k).
No. A primary residence does not meet the IRS requirement that a 1031 property be “used in a busine or held for investment .” However, IRC Section 121 may allow taxpayers to exclude gain on the sale of their primary residence, including
- Up to $250,000 of gain for a single filer
- Up to $500,000 for married couples filing jointly
Specific use and ownership requirements apply.