How does a 1031 like-kind exchange work?
Generally available when the rules are followed
IRC §1031 defers gain when real property held for business or investment is exchanged for like-kind real property held for the same purposes. You must identify replacement property within 45 days and receive it within 180 days, or by your return due date if earlier. A qualified intermediary typically holds the proceeds. Cash or debt relief you do not replace is taxable boot.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- Since 2018, only real property qualifies; property held primarily for sale does not.
- Deadlines: 45 days to identify, and the earlier of 180 days or the return due date (with extensions) to close.
- Gain is deferred, not eliminated; the replacement property takes a carryover basis.
- Cash received or debt not replaced is taxable boot.
- Exchanges with related parties have a 2-year holding rule under §1031(f).
What it is
A like-kind exchange lets you sell investment or business real estate and buy other real estate without recognizing the gain at that time. The gain carries into the replacement property through its basis and is recognized when you later sell in a taxable transaction. Like-kind is broad for U.S. real property: an apartment building, raw land, and a commercial building are generally like-kind to each other. U.S. and foreign real property are not.
What the law says
IRC §1031(a)(1) provides nonrecognition for real property exchanged solely for like-kind real property, both held for productive use in a trade or business or for investment. IRC §1031(a)(2) excludes real property held primarily for sale. IRC §1031(a)(3) sets the identification and receipt deadlines. The Tax Cuts and Jobs Act limited §1031 to real property for exchanges completed after December 31, 2017.
Treas. Reg. §1.1031(k)-1 governs deferred exchanges, including qualified intermediaries, identification rules, and the rule that you must not have actual or constructive receipt of the proceeds. IRC §1031(b) taxes boot, and IRC §1031(d) sets the basis of the replacement property.
Requirements and tests
A deferred exchange qualifies only if all of these are met:
- Both properties are real property held for business or investment, not a personal residence or dealer property.
- A qualified intermediary or other safe harbor is in place before the relinquished property closes, so you never receive the proceeds.
- Replacement property is identified in writing within 45 days after the transfer, generally up to three properties or within the 200% or 95% rules.
- Replacement property is received by the earlier of 180 days or the due date, including extensions, of your return for the year of transfer.
- The same taxpayer that sold the old property acquires the new one.
- Related-party exchanges meet the 2-year holding requirement of §1031(f).
How it works
Before closing on the sale, you sign an exchange agreement with a qualified intermediary and assign the sale contract to it. The intermediary receives the sale proceeds and later uses them to buy the replacement property for you. You report the exchange on Form 8824.
To defer all of the gain, you generally buy replacement property of equal or greater value, reinvest all the net proceeds, and replace any debt paid off with new debt or added cash. Any cash you keep, or any net reduction in debt, is boot and taxable up to the amount of your gain. Depreciation recapture can also be triggered in some exchanges.
The replacement property's basis generally equals the basis of the property you gave up, plus any additional cash you invest and gain you recognize, minus any boot received. Heirs who inherit the property generally receive a basis equal to fair market value at death.
Variations exist for different situations. In a reverse exchange, an exchange accommodation titleholder acquires the replacement property before you sell, under the safe harbor in Rev. Proc. 2000-37. In an improvement exchange, the replacement property is improved before you receive it, but only improvements completed within the 180-day period count toward value. Owners of property held in a partnership face extra complexity, because the partnership, not the individual partners, must be the exchanging taxpayer, and partnership interests themselves do not qualify.
Assumptions: Tax year 2026; relinquished property sold for $1,000,000 with an adjusted basis of $600,000 and no mortgage.; Replacement property costs $1,200,000; $1,000,000 comes from the intermediary and $200,000 is new cash.; Deadlines are met and no cash is received; selling costs are ignored.
| Realized gain ($1,000,000 − $600,000) | $400,000 |
|---|---|
| Gain recognized in 2026 | $0 |
| Basis of replacement property ($600,000 + $200,000) | $800,000 |
| Deferred gain built into the new property ($1,200,000 − $800,000) | $400,000 |
| If $100,000 of proceeds were kept as cash: recognized gain | $100,000 |
With full reinvestment the $400,000 gain is deferred, not eliminated; keeping $100,000 in cash would make $100,000 taxable.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
Missed deadlines, access to the proceeds, and incorrect identification are the most common reasons exchanges fail. The deadlines are not extended for weekends, and extensions are available only for federally declared disasters. Property held briefly or bought to resell may not meet the holding-purpose requirement. Exchanges with related parties are reviewed for basis shifting.
Who it is not for
A §1031 exchange does not apply to a personal residence, stock, partnership interests, or other personal property. It is not for sellers who need the cash from the sale, for sellers who have already closed and received the proceeds, or for developers and flippers whose property is held primarily for sale. It may also not be worth the cost when the gain is small, or when you expect to be in a lower bracket at the time of sale than you would be after years of deferral. Investors who want to diversify out of real estate, or into a fund rather than a specific property, should look at other options, such as an installment sale or an opportunity zone investment.
How ebotCPA helps
We plan the exchange before the sale, coordinate with your qualified intermediary and title company, track the deadlines, calculate boot and basis, and prepare Form 8824. We coordinate with your attorney, who drafts the legal documents.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
We coordinate with your attorney, who drafts the legal documents.
Frequently asked questions
What are the 1031 exchange deadlines?
You must identify replacement property within 45 days of the sale and receive it by the earlier of 180 days or the due date, including extensions, of your return for the year of the sale.
Can I do a 1031 exchange on my home?
No. A personal residence is not held for business or investment. A different exclusion under IRC §121 may apply to a home sale.
What is boot in a 1031 exchange?
Boot is cash or other non-like-kind property you receive, including net debt relief. It is taxable up to the amount of your realized gain.
Does a 1031 exchange eliminate tax?
No. It defers the gain into the replacement property's basis. The gain is taxed when you sell in a taxable transaction, although heirs generally receive a basis equal to fair market value.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.