1031 Exchange FAQ

A like-kind exchange under IRC Section 1031 that lets you defer capital gains tax by reinvesting the proceeds of an investment-property sale into other like-kind real estate. The tax is deferred and your basis carries over into the replacement property.

45 days from the sale to identify replacement property in writing, and 180 days to close. Both deadlines run from your closing date and cannot be extended on request (absent limited federal disaster relief).

Yes. A qualified intermediary must hold the proceeds so you never take constructive receipt. Engage one before your relinquished property closes; doing so after is too late and fails the exchange.

Yes, but any cash you keep is taxable boot. A partial exchange is allowed — you defer the reinvested portion and pay tax on the cash and any unreplaced debt. To fully defer, reinvest everything and replace your debt.

U.S. real property held for investment or business — apartments, commercial buildings, land, net-lease properties, DSTs, and similar. Primary residences, property held for sale, and (since 2017) personal property do not qualify.

Yes. Section 1031 remains fully available for real property in 2026; the 2025 OBBBA made the framework permanent, and no limiting legislation has passed.

No. A primary residence is personal-use property and doesn't qualify. The relevant tax break for a home is the Section 121 exclusion (up to $250k/$500k of gain). A former home converted to a genuine rental can become 1031-eligible over time.

Yes. For real estate, like-kind is broad — you can exchange a rental for an apartment building, commercial property, land, or a DST. You're not limited to the same property type you sold.

Any non-like-kind value you receive — typically cash you keep or debt you don't replace. Boot is taxable up to your gain, even within a valid exchange. To avoid it, reinvest all equity, acquire equal-or-greater value, and replace your debt.

To fully defer, yes. Debt paid off on the relinquished property must be replaced with new debt or offsetting cash; otherwise the unreplaced amount is taxable mortgage boot. A leveraged DST can replace debt without you qualifying for a loan.

Federal capital gains (up to 20%), depreciation recapture (up to 25%), the 3.8% NIIT, and state tax (0% to over 13%). Combined, the effective rate can exceed a third of the gain in a high-tax state — all deferred by exchanging.

No — it defers it during your lifetime. The deferred gain comes due if you sell without exchanging again. It can be eliminated only through a step-up in basis at death, the basis of the 'swap till you drop' strategy.

A Delaware Statutory Trust — a passive, fractional ownership of institutional real estate that qualifies as 1031 replacement property under Rev. Rul. 2004-86. DSTs are fast-closing, can diversify a single exchange, and replace debt without qualifying. They're for accredited investors via a private placement memorandum.

You can identify up to three properties of any value (3-property rule), more than three within 200% of your sale value (200% rule), or any number if you acquire 95% of the identified value (95% exception). Most exchangers use the 3-property rule.

Yes. A reverse exchange lets you acquire the replacement before selling, using an exchange accommodation titleholder to park a property under the IRS safe harbor (Rev. Proc. 2000-37). It's more complex and costly than a standard forward exchange.

Through an improvement (construction) exchange, yes — exchange funds can build or renovate the replacement, with all work completed and paid for within 180 days. It's complex and timeline-constrained, requiring an exchange accommodation titleholder.

The exchange generally fails — the sale becomes taxable and the qualified intermediary returns the funds. There's no grace period, which is why pre-identifying a fast-closing DST backup is valuable insurance.

Not directly — the partnership is the taxpayer, so it must do the exchange. When partners want different outcomes, techniques like a drop-and-swap exist but require advance planning with counsel.

On Form 8824, filed with your tax return for the year the relinquished property was sold. It reports the exchange, the dates and values, any boot, and the carryover basis in your replacement property. Your CPA handles it.

Yes. Qualifying perpetual oil and gas mineral and royalty interests are real property and like-kind to other investment real estate. They can serve as replacement property, often as a higher-yield, depletion-sheltered sleeve.

The taxpayer (or disregarded entity) that sells the relinquished property must be the one that acquires the replacement. Title must match, which complicates partnership and multi-member LLC situations.

No statutory minimum, but the property must be held for investment, not primarily for sale. Many advisors suggest holding at least a year (across two tax years) as a practical guideline to demonstrate investment intent.

Yes. You can exchange repeatedly over a lifetime, each one deferring the accumulated gain, to trade up, diversify, or shift to passive ownership. Holding the final property until death can eliminate the deferred gain for heirs.

Tax on the gain attributable to depreciation you took, taxed up to 25% (unrecaptured Section 1250 gain) on sale — often the largest layer on a long-held rental. A 1031 defers it along with the capital gain.

Decide if it fits your goals, estimate your deferred tax, engage a qualified intermediary before selling, and build a replacement shortlist (including a DST backup). Then sell, identify within 45 days, close within 180, and report on Form 8824.

Yes, if held for investment. Investment land is like-kind to most real estate, so it can be exchanged into income property or a DST. Land held primarily for sale (subdivided lots, dealer inventory) doesn't qualify.

A QI holds your sale proceeds between the sale and the purchase so you avoid constructive receipt, prepares the exchange documents, and disburses funds to acquire the replacement. It's a custodian and facilitator, not a tax or investment advisor.

Refinancing right before a sale specifically to pull cash can be recharacterized as boot — risky. Refinancing the replacement property after the exchange is complete is generally cleaner. Both are fact-specific, so consult your CPA and attorney.

Yes — you can exchange property in one state for property in another, as long as both are U.S. real property. Be aware of state clawback rules (like California's) that track deferred gain on property exchanged out of state.

A deferral under Section 1033 for gain from an involuntary conversion — property condemned, taken, or destroyed — by reinvesting the compensation. It's different from a 1031: no qualified intermediary required and much longer replacement periods.

Qualified intermediary fees are modest — typically a base fee plus per-property charges — and small relative to the tax deferred, which often runs into six figures. A CPA's and advisor's fees add to the total but remain trivial next to the deferred tax.

Usually, if you have meaningful gain and want to stay in real estate — the deferred tax is often large enough to justify the effort and fees. It's less worthwhile if your basis is high, you need the cash, or you can't find replacement property worth owning.

A single-member LLC is disregarded for tax, so its property can be exchanged by the owner (satisfying the same-taxpayer rule). A multi-member LLC or partnership is an entity, and its interest generally doesn't qualify, requiring advance planning to address.

Taking constructive receipt of proceeds, missing the deadlines, exchanging non-like-kind or personal-use property, a same-taxpayer mismatch, invalid identifications, or violating related-party holding rules can all disqualify an exchange.

A qualified intermediary (required, holds funds), a CPA (tax and Form 8824), and ideally an independent advisor (sources and vets replacement property, coordinates deadlines). The three roles rarely overlap and together make an exchange far more likely to succeed.

There's no statutory minimum holding period, but the property must be held for investment, not primarily for sale. A very short hold can suggest dealer intent or a flip, which disqualifies the exchange. Many advisors suggest holding at least a year, across two tax years, to demonstrate investment intent.

Only if it's genuinely held for investment — rented at fair value (often at least 14 days a year) with personal use within strict safe-harbor limits. A vacation home used primarily for personal enjoyment qualifies for neither a 1031 nor the Section 121 exclusion.

An identification rule letting you identify more than three replacement properties, as long as their combined value doesn't exceed 200% of what you sold. It's used by investors diversifying into several properties or DSTs.

Yes. Adding cash can help you reach equal-or-greater value and offset debt relief (avoiding mortgage boot), and it leaves you with a less-leveraged replacement. Many investors contribute cash to replace debt they don't want to carry as new financing.

A DST that carries pre-arranged, non-recourse debt at the trust level, so your interest includes its share of that debt — replacing your old leverage without you applying for or guaranteeing a new loan. It's a common solution for replacing debt in an exchange.

Not easily within one exchange — a partnership is the taxpayer, so it must do the exchange. Partners wanting different outcomes use techniques like a drop-and-swap, distributing tenancy-in-common interests before the sale, but these require advance planning with counsel.

Generally, you continue depreciating the carried-over basis on its existing schedule and depreciate any additional basis from new investment separately. So depreciation continues, with the carried-over portion on its original timeline and new basis depreciated fresh.

Exchanging repeatedly across a lifetime to keep deferring gain, then holding the final property until death. At death, a step-up in basis can eliminate the accumulated deferred gain for heirs entirely, making the lifetime of deferral permanent.

Not directly — REIT shares are securities, not like-kind property. But you can exchange into a DST and later contribute it to a REIT via a 721 (UPREIT) exchange for OP units, deferring gain. That's a one-way door, though — you can't 1031 back into direct real estate afterward.

An exchange where you deliberately take some boot — for example, keeping some cash — while deferring the rest of the gain. You defer the reinvested portion and pay tax on the boot. It's a valid choice when you want some liquidity and accept the tax on it.

Start searching before you sell, build a shortlist, and identify a fast-closing DST backup that can close in days. An independent advisor with broad coverage and ready inventory can surface options that fit your dollar amount and deadline when time is short.

A simple rule of thumb for full deferral: buy equal or greater in value and equal or greater in equity (reinvest all your cash and replace your debt). If both 'lines' on the napkin go up or stay equal, you've generally avoided boot.

Yes. Farmland and agricultural land held for investment or farming qualify and are like-kind to other investment real estate. Note that since 2017 only the real property qualifies — equipment and livestock must be handled separately to avoid boot.

Yes. Commercial property (office, retail, industrial, hospitality) held for investment or business use qualifies and is like-kind to other investment real estate, including residential, land, net-lease, and DSTs.

If you identified backups (especially a fast-closing DST), you can close one of those within the 180-day window and complete the exchange. If you identified only the failed property and it's after day 45, the exchange generally fails and the sale becomes taxable — which is why backups matter.

Yes, if held for investment — but inherited property usually has a stepped-up basis to date-of-death value, so a sale soon after inheriting may produce little gain, making a 1031 less necessary. If the property appreciated meaningfully since you inherited it, an exchange to defer that newer gain can make sense.

Holding the final replacement property until death can pass it to heirs with a stepped-up basis, eliminating the deferred gain. Passive, divisible property like DSTs, or a 721 UPREIT, can ease estate division while preserving deferral until the step-up resolves it.

An IRA already enjoys tax-deferred or tax-free growth, so a 1031 exchange (which defers tax) is generally unnecessary inside one. 1031 exchanges are most relevant for taxable, directly-held investment property. Discuss IRA real-estate situations with your CPA and custodian.

An improvement (construction) exchange used to construct a property or substantial improvements to your specifications, using exchange funds, with all work completed and paid for within 180 days. It's complex and timeline-constrained, requiring an exchange accommodation titleholder.

No — it's a long-standing, intentional part of the tax code (since 1921) reflecting that an investor who continues their investment in real estate hasn't cashed out. It defers tax (legitimately), doesn't avoid it during life, and is used by investors of every size.

Yes. Under the identification rules you can acquire several replacement properties or DSTs, diversifying a single exchange across sectors and markets. The combined value, your reinvested equity, and the debt assumed must meet or exceed the targets to fully defer.

The standard and most common 1031 structure: you sell the relinquished property first, the qualified intermediary holds the proceeds, and you acquire the replacement within the 45/180-day windows. 'Delayed' distinguishes it from a simultaneous swap or a reverse exchange.

Yes, but related-party exchanges carry a two-year holding rule on both sides, and certain structures draw IRS scrutiny. Plan such exchanges carefully with counsel to avoid retroactive disqualification if either party disposes of its property within two years.

Before you list the relinquished property. Use the pre-sale time to decide whether an exchange fits, estimate your deferred tax, assemble your QI, CPA, and advisor, and build a replacement shortlist including a DST backup. Early planning is the biggest predictor of a smooth exchange.

Yes. Investors of every size use 1031 exchanges, from a single rental owner to large portfolios. DSTs in particular have accessible minimums (often $25,000–$100,000 for accredited investors), letting even a modest exchange diversify across institutional properties.

Baker 1031's Learning Center and the guides in this series cover the rules, deadlines, replacement options, and strategy in depth, and the calculators estimate your deferred tax and targets. For your specific situation, consult a qualified intermediary and your CPA before acting.

Only if it's genuinely held for investment rather than personal use. A second home you use personally generally doesn't qualify. The IRS offers a safe harbor (Rev. Proc. 2008-16) requiring the property to be rented at fair value for a minimum number of days and limiting personal use. A true investment vacation rental that meets those tests can qualify; a personal-use second home cannot.

A structure where you acquire the replacement property before selling the relinquished one. Because you can't hold title to both, an exchange accommodation titleholder 'parks' one property under Rev. Proc. 2000-37 until the sale completes, typically within 180 days. Reverse exchanges are more complex and costly but invaluable when you find the ideal replacement before your sale closes.

Yes. You can divide your proceeds across several replacements to diversify by asset type or geography, as long as you respect the identification rules (the 3-property rule, 200% rule, or 95% rule) and reinvest enough total value and equity to avoid boot. Many investors trade one management-intensive property for several passive ones, including DSTs.

Any cash you take rather than reinvest is boot and is taxable up to your gain. This includes proceeds you pull out, debt relief you don't replace, or non-like-kind property received. To fully defer, reinvest all equity and replace all debt; if you knowingly want some cash, plan it as an intentional partial exchange with your CPA so there are no surprises.

The federal deferral applies everywhere, but state treatment varies. Most states conform, but a few (notably Pennsylvania historically) have differed, and several (including California) impose 'clawback' reporting that taxes the deferred gain if you later sell an out-of-state replacement without another exchange. Your CPA can confirm how your state and any clawback rules apply to your specific exchange.