Understanding 1031 Exchanges
Section 1031 of the Internal Revenue Code (IRC) is a U.S. tax provision that allows real estate investors to defer capital gains, depreciation recapture, and state taxes when they exchange one investment or business-use property for another “like‑kind” property.
A 1031 exchange goes by many names. It is often referred to as a tax‑deferred exchange, a like‑kind exchange, a forward exchange, or a delayed exchange, which means the same thing. You can be eligible for a 1031 Exchange when you sell real estate that meets these requirements.
Like-Kind Requirement
Generally, all U.S. real estate is like-kind to other types or kinds of U.S. real estate. Like-kind real estate refers to any real property held for investment or for productive use in a trade or business that can be exchanged for any other real property meeting the same criteria under Section 1031 of the Internal Revenue Code.
The term does NOT mean the properties have to be identical. They only need to be of the same nature or character—which, for real estate, is interpreted very broadly.
Use of a Qualified Intermediary
Using a Qualified Intermediary (QI) or an unrelated third party* isn’t optional—it’s a legal requirement under IRS rules and is one of the most important safeguards in a successful 1031 exchange. A taxpayer cannot utilize their realtor, lawyer, accountant or a related party, an agent as a QI.
A QI is used to ensure full IRS compliance and proper documentation. The executed Exchange Agreement between the QI and the exchanger provides the legal framework for the IRS to recognize the exchange.
Additionally, several states require that QIs be compliant with regulatory requirements regarding insurance, bonding, and the manner in which exchange funds are held, state licensing, etc.
* An unrelated third party cannot be a ‘disqualified person” under the IRS rules.
Time Limits & Identification Requirement
A 1031 exchange is governed by two strict, non‑negotiable IRS deadlines:
- The 45‑Day Identification Period
- The 180‑Day Exchange Period
Both timelines begin the day after the Relinquished (sold) property closes, generally at the sales recording date. This deadline includes weekends and holidays—no extensions are granted except in rare IRS disaster‑related cases.
The 45‑Day Identification Period
After the close of the Relinquished property, the exchanger has 45-calendar days to formally identify potential Replacement properties, they do not have to purchase the identified property or properties in the 45 days but may do so.
The Identification is via a written document that recognizably identifies the replacement property must be signed by the taxpayer and received by the Qualified Intermediary on or before the 45th day. Properties acquired within the 45-day designation period are deemed to be identified.
The 180-Day Exchange Period
The 180‑calendar‑day exchange period is the IRS‑mandated time frame—or the due date for filing taxes for the year the Relinquished property was sold, whichever comes first—during which the exchanger must acquire and close on the Replacement property in a 1031 exchange.
If the Relinquished property is sold late in the year, the taxpayer’s normal tax‑filing deadline may occur before the full 180 days have elapsed. In that case, the exchange period is shortened unless the taxpayer files for a tax‑filing extension to preserve the full 180 days.
Example
If a Relinquished property is sold on December 15, the 180th day would fall on June 13 of the following year.
However, the taxpayer’s federal tax return for that same tax year would be due on April 15, which occurs before the 180‑day deadline. This means:
- The exchange period would end on April 15, unless
- The taxpayer files for an extension of their tax return.
By filing an extension, the taxpayer can take full advantage of the entire 180‑day exchange period.
1031 Exchange
important tips
45
days
After the close of the Relinquished property, the exchanger has 45-calendar days to formally identify potential Replacement properties, they do not have to purchase the identified property or properties in the 45 days but may do so. The Identification is via a written document that recognizably identifies the Replacement property must be signed by the taxpayer and received by the Qualified Intermediary on or before the 45th day. Properties acquired within the 45-day designation period are deemed to be identified.
180
days
You have 180-calendar days after the sale of your Relinquished property to purchase your Replacement property(ies). The 180-day requirement is strictly enforced with no option for extension. Additionally, your exchange period could be shorter if your tax return due date is prior to the expiration of the 180 days, if that is the case you will want to file an extension on your tax filing.
ID
rules
The IRS provides three rules in which the exchanger may identify their Replacement property(ies). The most common being is the 3-property rule, which allows identification of up to three Replacement properties regardless of their fair market value. The 200% rule allows exchangers to identify more than three properties so long as the fair market value of all the properties does not exceed 200% of the value of the Relinquished property(ies) sold. Lastly, the 95% rule states that if the exchanger over‑identifies Replacement properties beyond the limits allowed under the first two identification rules, then the exchanger automatically falls under the 95% Rule. In that case, the exchanger must acquire properties totaling at least 95% of the aggregate fair market value of all the properties identified.
Like
kind
For a 1031 exchange to be valid, your properties must be like-kind. As it pertains to real estate, all real estate is like-kind to other real estate. Some examples would include: an apartment complex exchanged for a cell tower easement; an office building for farmland; or a rental home for water rights. Generally speaking, the only real estate that does not qualify under a 1031 exchange is a vacation home with exclusive personal usage and a personal primary residency.
ID
rules to
purchase
You have the option to purchase one or all of the properties you identified; you are not required to purchase all identified properties. Identifying more than one property just provides you with more options to ensure you have a replacement property within the 180-day exchange period. Additionally, you need to state how many properties you plan to purchase on your ID form.
1031 Exchange Topics
Secure Exchange – Who We Are
What is a 1031 Exchange
1031 Basics
Save vs Exchange
1031 Qualifying Factors
1031 Process
1031 Closing Costs
1031 Identification Rules
1031 Checklist
Should I do a 1031 worksheet
1031 Capital Gains Taxes
1031 Vacation Homes: Into or Out Of
Multiple Properties Exchange
Lifestyle, Legacy and Financial Freedom
Delaware Statutory Trusts – DSTs – What are they
Annamarie Kooning, VP Secure Exchange
Reverse (Parking) Exchanges
Seller Financing
Build to Suit Improvement 1031s