1031 Exchange Rules: Timelines, Like-Kind Property and What Gets Deferred

What Gets Deferred

The deferred amount is the full gain on the sale, which includes depreciation taken while owning the property. Here is the arithmetic on the $425,000 duplex I use across this site. The sale price is a round hypothetical chosen to show the mechanics, not a forecast.

With 20% of the price allocated to land, the building basis is $340,000, which depreciates at $12,364 a year. After ten years of ownership:

Depreciation taken     $340,000 ÷ 27.5 × 10 = $123,636
Adjusted basis         $425,000 − $123,636 = $301,364
Hypothetical sale      $525,000
Total gain             $525,000 − $301,364 = $223,636

That $223,636 has two parts. $123,636 is depreciation, taxed as unrecaptured Section 1250 gain at up to 25%, so up to $30,909. The remaining $100,000 is price appreciation, taxed at the long-term capital gains rate that applies to the seller's income, plus the 3.8% net investment income tax for sellers above its threshold. Selling costs, state tax, and suspended passive losses all change the real figure, which is why I stop the arithmetic at the gain. The recapture side is covered in the rental property depreciation guide.

A completed exchange defers both parts. That is the whole value of the mechanism: the full equity moves to the next property instead of the equity minus the tax.

Where the Deferred Gain Goes

The deferred gain is carried into the replacement property by lowering its basis. In the simplest case, with no boot and no added complications:

Replacement basis = Replacement price − Deferred gain

If the duplex is exchanged into a $600,000 property, the new basis is $600,000 − $223,636 = $376,364, not $600,000. Depreciation on the new property runs off that lower number, so the exchange trades a tax bill today for smaller deductions later and a larger gain if the replacement is ever sold outright. This is the part of the mechanism that the phrase "tax-free exchange" hides. Form 8824, filed with the return for the year of the exchange, is where the IRS sees this calculation.

The Like-Kind Rule

Since 2018, Section 1031 applies only to real property. Personal property such as equipment and vehicles no longer qualifies.

Within real property, "like-kind" is broad. It refers to the nature of the property, not its grade or use. A rental house can be exchanged for an apartment building, raw land, a retail building, or a warehouse, as long as both properties are held for investment or for use in a business. What does not qualify:

• A primary residence, which is held for personal use
• Property held primarily for resale, such as a fix-and-flip, which is inventory
• Real property in the US exchanged for real property outside the US

Holding intent is a facts-and-circumstances question, and it is one of the first things a CPA will ask about.

The Two Deadlines

Most exchanges are delayed exchanges: the old property sells first, and the replacement closes later. Two clocks start on the day the relinquished property transfers.

45 days to identify. The replacement property has to be identified in writing, signed, and delivered to the qualified intermediary or another permitted party by midnight of day 45. The description has to be unambiguous, such as a street address or legal description.

180 days to close. The replacement has to be received by the earlier of 180 days after the sale or the due date of the tax return for the year of the sale, including extensions.

Two dated examples:

Sale closes March 2, 2026
  Identify by   April 16, 2026   (day 45)
  Close by      August 29, 2026  (day 180)

Sale closes December 1, 2026
  Identify by   January 15, 2027 (day 45)
  Day 180       May 30, 2027
  Return due    April 15, 2027

The second example is the trap in the 180-day rule. A sale late in the year gives the seller fewer than 180 days unless the return for the year of sale is put on extension, because the return due date comes first. The 45 days also run inside the 180, not before them.

Neither deadline moves for weekends or holidays. The only extensions are for federally declared disasters and similar events under IRS guidance, and they are not something to plan around.

How Many Properties Can Be Identified

The regulations give three ways to identify, and the identification has to satisfy at least one:

• Three-property rule. Up to three properties of any value.
• 200% rule. Any number of properties, as long as their combined value does not exceed 200% of the value of the property sold.
• 95% rule. Any number of properties at any value, as long as the properties actually acquired add up to at least 95% of the total identified.

The three-property rule is the one most exchanges use, because it has no value test. The identified list is locked at midnight on day 45, so a deal that falls through after that date can only be replaced by another property already on the list.

The Qualified Intermediary and Constructive Receipt

The seller cannot receive the sale proceeds, even briefly. If the money is paid to the seller, or the seller has the right to direct it, the IRS treats it as received and the exchange fails. This is constructive receipt, and it is why the proceeds go from the closing directly to a qualified intermediary (QI), who holds them and sends them to the replacement closing.

The exchange agreement with the QI has to be in place before the sale closes. It cannot be set up afterward with money that already reached the seller.

The QI also cannot be a disqualified person. That includes anyone who acted as the seller's agent within the two years before the exchange, such as their attorney, accountant, real estate broker, or employee, with narrow exceptions for routine services. The QI holds the entire equity from the sale, so how the intermediary safeguards funds is worth the same diligence as the property itself.

Equal Value and Boot

To defer all of the gain, two conditions both have to hold:

1. The replacement costs at least as much as the net sale price of the property sold.
2. All of the net cash proceeds are reinvested.

Anything the seller receives that is not like-kind property is boot, and boot is taxable up to the amount of the gain. Boot comes in two common forms.

Cash boot is proceeds not reinvested. Taking $20,000 out of the exchange makes $20,000 taxable.

Mortgage boot is debt relief that is not replaced. On the duplex example, the original $340,000 loan at 7% has about $291,762 left after ten years. Selling at $525,000 and ignoring costs leaves $233,238 of equity with the QI.

Replacement at $525,000: $233,238 equity + $291,762 new loan. No boot.
Replacement at $500,000: $233,238 equity + $266,762 new loan.
  Debt relieved $291,762 − new debt $266,762 = $25,000 mortgage boot

Buying down by $25,000 makes $25,000 of the gain taxable. Replacement debt does not have to match dollar for dollar. Added cash can offset a smaller loan. Cash taken out, however, cannot be offset by taking on more debt. The netting rules are specific, and this is exactly where a CPA earns the fee.

Same Taxpayer

The taxpayer who sells has to be the taxpayer who buys. An individual who sells cannot have a new LLC or a partnership take title to the replacement. A single-member LLC that is disregarded for federal tax purposes is treated as its owner, which is why that particular structure change can work where others do not. Changing ownership around an exchange is legal-structure territory.

Types of Exchanges

Delayed. Sell first, buy within the 45 and 180 day windows. The structure described above.

Simultaneous. Both closings on the same day. No identification period, but both transactions have to close together.

Reverse. Buy first, sell later. An exchange accommodation titleholder takes title to one of the properties, and the same 45 and 180 day limits apply under IRS Revenue Procedure 2000-37. More documents and higher fees than a delayed exchange.

Improvement. Exchange proceeds fund improvements to the replacement property, held by an accommodation titleholder during construction. Only improvements completed and in place by the time the replacement is received count toward the exchange value.

DST interest. An interest in a Delaware statutory trust can qualify as replacement real property under IRS Revenue Ruling 2004-86. It is passive ownership with no control over the property, and it is often used when the identification deadline is close.

Where Exchanges Fail

Each failure mode lands in the same place: the gain the exchange was built to defer becomes taxable in the year of the sale.

• A missed day 45 or day 180, including the tax-return trap on late-year sales
• Proceeds paid to the seller or accessible to them, even for a day
• A replacement titled to a different taxpayer
• Exchanges with related parties, where either side disposes of the property within two years
• Relinquished or replacement property that was held for resale rather than investment
• Buying down or pulling cash, which does not fail the exchange but makes the boot taxable

When Deferral Ends

Deferral carries forward through each exchange until a replacement is sold outright. At that point, the gains from every property in the chain are recognized together, including all depreciation taken along the way.

Under current law, property held until death receives a basis stepped up to its fair market value at death under Section 1014, and the deferred gain is not taxed to the heirs. That is why exchanges are often discussed as a lifetime structure. It rests on estate tax rules that Congress can change.

FAQ

How long do I have to complete a 1031 exchange?

45 days from the sale to identify replacement property in writing, and the earlier of 180 days or the tax return due date, including extensions, to close.

Does a 1031 exchange defer depreciation recapture?

Yes, when the replacement is real property. The depreciation from the old property is part of the deferred gain and reduces the replacement's basis. It comes due when the chain ends in a taxable sale.

Can I exchange my primary residence?

Not the personal-residence portion. A property that has been both a residence and a rental can sometimes use both the home sale exclusion and a 1031 exchange under IRS Revenue Procedure 2005-14. This is CPA territory.

Can I take some cash out?

Yes, but the cash is boot and taxable up to the amount of the gain. The rest of the exchange still defers.

Does a 1031 exchange work on a flip?

No. Property held primarily for resale is inventory, not investment property.

How is a 1031 exchange reported?

On Form 8824, filed with the return for the year the relinquished property was sold.

Related Reading

• Rental Property Depreciation: the recapture the exchange defers
• IRR Explained: comparing a hold against a sale once timing is counted
• BRRRR Strategy Guide: the other common way investors pull equity out of a property without selling it