The exchange is a process, not an investment.
Section 1031 generally allows a taxpayer to exchange U.S. real property held for business or investment for other like-kind U.S. real property and defer recognition of gain at that time.
In a deferred exchange, the owner normally transfers the sold property to a buyer, while a qualified intermediary — not the owner — receives and holds the proceeds. The intermediary then uses those funds to acquire the replacement property for the owner. Receiving or controlling the proceeds can jeopardize the exchange.
Buyer sends funds to the QI.
Name replacement real estate in writing.
The QI sends funds to the replacement seller.
What property may qualify?
Both the relinquished and replacement properties generally must be real property held for productive use in a trade or business or for investment. “Like-kind” is broad within U.S. real estate: improved and unimproved real estate can be like-kind, even when the property types differ.
Common examples
- Rental homes and apartment buildings
- Industrial, retail, and office property
- Certain long-term leasehold interests
Usually outside Section 1031
- A primary residence used only personally
- Real estate held primarily for sale
- Stocks, bonds, partnership interests, and most securities
- Foreign real estate exchanged for U.S. real estate
The 45-day and 180-day periods begin together.
Day 0 is the date the relinquished property transfers. Replacement property must generally be identified within 45 calendar days and received by the earlier of 180 calendar days or the applicable federal tax-return due date, including extensions.
The qualified intermediary and exchange agreement should be in place before the sale closes. The clock normally does not pause while financing, diligence, or offering availability is resolved.
Three common identification limits
Three-property rule
Identify no more than three replacement properties, regardless of value.
Two-hundred-percent rule
Identify any number when their total fair market value at the end of Day 45 does not exceed 200% of the total fair market value of all relinquished properties on their transfer dates.
Ninety-five-percent exception
If both limits are exceeded, receive by the exchange deadline at least 95% of the total fair market value of everything identified.
Property received during the 45-day identification period is treated as identified. The 95% test looks to property actually received by the exchange deadline and uses specific fair-market-value measurement dates. Identification must also satisfy technical content, signature, timing, and delivery requirements. Review the actual identification with your QI and advisers.
Full deferral usually requires attention to both equity and debt.
A common planning objective is to acquire equal-or-greater replacement value, reinvest all net exchange proceeds, and offset debt relief with replacement debt or additional cash. Money or other non-like-kind property received — often called “boot” — may cause taxable gain.
Understand equity, debt, and boot →Replacement real estate still needs to stand on its own.
Direct property or another replacement structure approved by your tax and legal advisers may fit the exchange. Each route changes control, financing, minimums, availability, diligence, costs, liquidity, and execution risk.
Deferral changes when tax is recognized; it does not erase the history.
Carryover basis
In a fully nontaxable exchange, the replacement property generally takes the adjusted basis of the relinquished property, with transaction-specific adjustments. The unrecognized gain is therefore carried forward rather than eliminated.
Reporting still matters
A like-kind exchange is reported on IRS Form 8824 even when no gain is recognized. Keep the closing statements, identification, exchange agreement, basis records, and replacement-property documents with the tax file.
A direct or indirect exchange with a related person can be undone if either party disposes of the exchanged property within two years, subject to limited exceptions. Related-party and same-taxpayer questions require transaction-specific tax and legal advice before closing.
Common ways an exchange can fail
- Engaging the qualified intermediary after the sale closes
- Receiving or controlling the exchange funds
- Missing the 45-day identification or 180-day acquisition deadline
- Changing title or taxpayer identity without transaction-specific advice
- Using the taxpayer, an agent, or another disqualified person as the intermediary
- Identifying property that cannot close, finance, or pass diligence
- Assuming that “1031 eligible” means a property is suitable or low risk
Primary educational sources
This page summarizes general federal rules. It does not address every exception or state-law issue.
IRS Instructions for Form 8824 ↗IRS Publication 544 ↗IRS Like-Kind Exchanges: Real Estate Tax Tips ↗