1031 Exchange Rules and Timeline: What the IRS Requires

Key takeaways

• Since 2018, only real property qualifies. Both the property you sell and the property you buy must be held for investment or for use in a business.
• Two clocks start the day your sale closes. You get 45 days to identify replacement property and 180 days to close. The 180 days can end sooner if your tax return comes due first.
• You can't touch the sale money. A qualified intermediary holds it under a written agreement, and your own CPA, attorney or broker can't fill that role.
• To defer all of the tax, buy property worth at least what you sold, reinvest all of the cash and replace the debt you paid off. Anything you keep is "boot," and boot is taxable.
• The same taxpayer that sells must buy. Deals with family members and your own companies have extra rules.
• You report the exchange on IRS Form 8824. This guide is general information, not tax or legal advice. Confirm your plan with your CPA, attorney and qualified intermediary.

What is a 1031 exchange, in plain English?

A 1031 exchange is a tax rule for real estate investors. It gets its name from Section 1031 of the Internal Revenue Code. When you sell an investment property at a profit, you normally owe tax on that profit. A 1031 exchange lets you put that tax off if you roll the money into other investment real estate.

The law is short. Section 1031(a)(1) says no gain or loss is recognized "on the exchange of real property held for productive use in a trade or business or for investment." The catch is the next part. The property must be "exchanged solely for real property of like kind" that you will also hold for business or investment.

A few terms come up again and again, so I'll define them now.

• Relinquished property is the property you sell.
• Replacement property is the property you buy.
• Gain is your profit for tax purposes. It is your sale price, minus selling costs, minus your adjusted basis.
• Adjusted basis is roughly what you paid, plus improvements, minus the depreciation you've taken.
• Boot is anything you receive in the exchange that isn't like-kind real estate. Cash is boot. So is debt relief you don't replace.
• Qualified intermediary, or QI, is the company that holds your sale money during the exchange.

The tax is deferred, not erased. Your old gain carries into the new property through a lower basis. If you later sell for cash, the deferred tax comes due. I'll come back to how that can change at death.

Almost every exchange I see today is a "delayed" or "deferred" exchange. You sell first, the QI holds the money, and you buy later. That's the structure this guide covers. A "reverse" exchange, where you buy before you sell, has its own rules. I cover those in a separate guide.

What does "like-kind" mean after the 2017 tax law?

Since January 1, 2018, only real property can be exchanged. The Tax Cuts and Jobs Act swapped the word "property" for "real property" in Section 1031. The change applies to exchanges completed after December 31, 2017. Before then, people exchanged airplanes, trucks, equipment and artwork. That door is closed.

Inside real estate, "like-kind" is broad. The Treasury regulation at 26 CFR §1.1031(a)-1 says the words refer to "the nature or character of the property and not to its grade or quality." Improved and unimproved real estate are like-kind. The same regulation says a leasehold "with 30 years or more to run" can be exchanged for real estate.

So the range of swaps is wide. You can sell raw land and buy an apartment building. You can sell a fourplex and buy a warehouse. You can sell farmland in the Central Valley and buy a net-leased store in Ohio. You can also buy an undivided share of a building held as a tenant in common.

What counts as "real property"?

The regulation at 26 CFR §1.1031(a)-3 defines real property as "land and improvements to land, unsevered natural products of land, and water and air space superjacent to land." Buildings and their structural parts count. So do growing crops and timber, until they are cut. Marina boat slips can count as water space.

Some things look like real estate but are personal property. Furniture in a leasing office is personal property. So are a hotel's linens and a restaurant's movable kitchen gear. Stock, notes and partnership interests aren't real property at all. That last point matters a lot if you own real estate through a partnership. I explain why later.

Two firm limits

There are two lines you can't cross.

• U.S. and foreign property aren't like-kind. Section 1031(h) says real property in the United States and real property outside it "are not property of a like kind." A rental in Phoenix can't be swapped for a rental in Lisbon.
• Property held mainly for sale doesn't qualify. Section 1031(a)(2) says the rule "shall not apply to any exchange of real property held primarily for sale." That covers dealer property. Think of lots a developer splits and sells, or houses a flipper buys to resell.

What counts as "held for investment or business use"?

Both sides of the exchange must be held for productive use in a business or for investment. The IRS looks at your intent at the time of the exchange. It judges that intent by what you actually did.

The statute sets no minimum holding period. You'll hear "one year" or "two years" quoted as if they were rules. They aren't. They are guideposts, because a longer hold is evidence of investment intent.

The vacation-home safe harbor

The one bright-line test the IRS has published is for homes. Rev. Proc. 2008-16 is a safe harbor for dwelling units, such as vacation homes. A safe harbor is a set of facts the IRS promises not to challenge. Here are its tests, in plain terms.

1. You own the property for at least 24 months before the exchange (for the home you sell) or after it (for the home you buy).
2. In each of those two 12-month periods, you rent it at a fair rent for at least 14 days.
3. Your personal use in each period stays at or below the greater of 14 days or 10% of the days it was rented at fair rent.

Meet those tests and the IRS won't question whether the home was held for investment. You still have to meet every other 1031 rule.

Property that doesn't qualify

The IRS fact sheet on like-kind exchanges says property "used primarily for personal use, like a primary residence or a second home or vacation home" doesn't qualify. Here are the cases I see people try.

• Your primary residence. It may qualify for the separate home-sale exclusion under Section 121. A house that was both home and rental can sometimes use both rules. Rev. Proc. 2005-14 gives guidance on using Sections 121 and 1031 "to a single exchange of property." A straight home-for-rental swap isn't a 1031 exchange.
• A second home you never rent.
• A house you bought to fix and flip.
• A replacement property you move into right away, or hand to your kids right away.

Changes in use need care. A home you turned into a rental can work. So can a replacement rental you later turn into your home. The timing and the paper trail matter. If you later sell a home you got in a 1031 exchange, Section 121(d)(10) blocks the home-sale exclusion for five years from the date you acquired it.

What are the 45-day and 180-day deadlines?

Section 1031(a)(3) sets two clocks. Both start when you transfer the relinquished property. That's usually the day your sale closes and records.

The identification period ends at midnight on the 45th day. By then, you must name your possible replacement properties in a signed writing. You deliver it to a party to the exchange who isn't your agent. In practice, that's your QI. The rules on how many properties you can name are their own topic. I cover them in my guide to the 1031 identification rules.

The exchange period ends on the earlier of two dates:

1. The 180th day after the transfer, or
2. The due date, with extensions, of your tax return for the year you sold.

The regulation at 26 CFR §1.1031(k)-1 says each period "ends at midnight." Both periods run at the same time. You get 180 days in total, not 45 plus 180.

Both counts use calendar days. Weekends and holidays count. If day 45 lands on a Sunday, your deadline is that Sunday. Say you close on Thursday, November 19, 2026. Day 45 is Sunday, January 3, 2027. Nothing rolls to Monday.

If you sell more than one property in the same exchange, the clocks start with the first sale. The regulation ties both periods to "the earliest date on which any of the properties are transferred." People who sell two buildings a few weeks apart are often surprised by this.

You can check your own dates with my 1031 exchange deadline calculator.

The tax-return trap

The phrase "or your return due date" catches people every year. Here's how.

Say you're an individual who files on a calendar year. You close your sale on Friday, November 13, 2026. Day 180 is Wednesday, May 12, 2027. But your 2026 Form 1040 is due April 15, 2027. That's day 153.

Unless you extend your return, your exchange period ends on April 15. If you haven't closed on your replacement by then, the exchange fails. You thought you had until May.

The fix is simple and cheap. File an extension before April 15. Form 4868 gives individuals "six (6) more months to file." Once your return is extended, the 180-day date controls again. Your CPA needs to know you're in an open exchange. I'd make that call the week you close, not in March.

For a calendar-year individual, the trap applies to any sale that closes after about October 17. Corporations, partnerships and trusts have their own due dates. So the window that triggers the trap is different for each type of entity.

Can you get an extension?

Generally, no. The IRS fact sheet says these limits "cannot be extended for any circumstance or hardship except in the case of presidentially declared disasters." A buyer who walks, a slow lender, a title problem or a family emergency doesn't change the dates.

The disaster exception comes from Section 17 of Rev. Proc. 2018-58. IPX1031 reprints that section and explains it. In short:

• A 45-day or 180-day deadline that falls on or after the disaster date can move back 120 days or to the end of the general disaster postponement, whichever is later.
• The postponement can't run past one year. It also can't run past your return due date, with extensions, for the year of the sale.
• You must have transferred the relinquished property on or before the disaster date.
• You must be an "affected taxpayer" under the IRS notice, or have trouble meeting the deadline for a listed reason. Listed reasons include property in the disaster area or a lender that won't fund.

The IRS posts its notices on its tax relief in disaster situations page. If you think relief applies, tell your QI in writing. Say which notice you're relying on and what you believe the new dates are. Your exchange agreement was written around the original dates.

Why do you need a qualified intermediary?

The reason is a tax idea called "constructive receipt." If you have the sale money in hand, or could get it on demand, the IRS treats you as having sold for cash. The exchange fails, even if you never spend a dollar.

That's also true if your own agent holds the money. The IRS fact sheet says "You can not act as your own facilitator." It adds that your agent can't either. That includes your real estate agent or broker, investment banker, accountant, attorney or employee. It also includes "anyone who has worked for you in those capacities within the previous two years."

The regulations give a few safe harbors that keep you out of constructive receipt. The qualified intermediary safe harbor is the one nearly everyone uses. Here's how it works.

1. You sign a written exchange agreement with the QI before your sale closes.
2. You assign your rights in the sale contract to the QI. The buyer gets written notice.
3. The buyer's money goes straight to the QI at closing.
4. The QI later uses the money to buy your replacement property. The seller of that property gets notice too.

Title usually passes straight from you to your buyer, and from your seller to you. The QI doesn't need to hold the deed. The regulation says a QI "is not considered the agent of the taxpayer" for this purpose.

The money has to be locked up

The exchange agreement must limit your access to the funds. Under §1.1031(k)-1(g)(6), you can't receive, pledge or borrow against the money before the exchange period ends. There are narrow exceptions.

• If you identify nothing by day 45, the money can be released after day 45.
• If you identify property, it can be released once you've received all of it.
• It can also be released after day 45 if a "material and substantial contingency" occurs. That event must relate to the exchange, be in writing and be outside your control.

Anything looser than that can sink the exchange. Read the release terms before you sign.

Choosing a QI

There's no federal license for qualified intermediaries. A few states regulate them. California is one. Under California Financial Code §51003, an exchange facilitator must meet at least one of three options. It can carry a fidelity bond of at least $1,000,000, hold $1,000,000 in cash, securities or letters of credit, or keep client funds in a qualified escrow or trust account.

The IRS fact sheet warns about "intermediaries declaring bankruptcy or otherwise being unable to meet their contractual obligations." When that happens, exchangers can miss their deadlines. So I'd ask any QI these questions.

• Where will my money sit? Is it a separate account in my name, or a pooled account?
• Do I have to co-sign withdrawals?
• What bond and insurance do you carry?
• Who audits you, and how often?
• Who earns the interest on the funds?

I cover this in more depth in my guide to choosing a qualified intermediary.

How much do you have to reinvest to defer all of the tax?

The rule of thumb has two sides.

1. Buy replacement property worth at least as much as your net sale price. That's the price, less normal closing costs.
2. Reinvest all of the net cash from the sale.

Do both, and there's no boot. All of the gain is deferred. Fall short on either, and you'll owe tax on the boot. Section 1031(b) caps the taxable amount. Gain is recognized "in an amount not in excess of the sum of such money and the fair market value of such other property." In plain terms, you pay tax on the lesser of your boot or your total gain.

The IRS fact sheet says the same thing more simply. "Gain may be taxable, but only to the extent of the proceeds that are not like-kind property." I go through partial exchanges step by step in my guide to boot and partial exchanges.

What about the mortgage?

You'll hear "you have to replace the debt." That's close, but not quite right.

When your buyer pays off your loan, that payoff counts as value you received. You can offset it two ways. You can take on new debt on the replacement property. Or you can add cash of your own. The regulations let you net the debt you take on against the debt you're relieved of. Cash you add can also offset debt relief.

The netting doesn't run the other way. More debt doesn't offset cash you pull out. Say you take $200,000 of cash and buy a bigger building with a bigger loan. The $200,000 is still taxable boot.

If you plan to refinance the new property to get cash out, wait until the exchange is complete. Do it for a business reason, not as a step built into the purchase. Your tax adviser will have a view on timing.

Which closing costs can come out of exchange funds?

Normal selling costs can be paid from exchange funds without creating boot. These include broker commissions, title insurance, escrow fees, QI fees, recording fees and transfer taxes. They also lower the amount you need to reinvest.

Other items paid from the proceeds can create boot. Watch for these:

• Rent prorations credited to your buyer
• Security deposits you hand over
• Property tax prorations
• Loan costs on the new mortgage, such as points, appraisal and lender fees

Tax preparers don't all treat these the same way. Ask your CPA to review the draft settlement statement before closing. At that point you can still bring a check instead.

How do you do a 1031 exchange, step by step?

Here is the order I walk clients through. The early steps matter most, because most mistakes can't be fixed after the sale closes.

Step 1: Talk to your CPA before you list

Ask your CPA to estimate your gain, your depreciation and your debt. Ask what a taxable sale would cost. This tells you whether an exchange is worth the effort. It also tells you how much value and debt you'll need to replace.

Step 2: Pick a qualified intermediary

Choose your QI before you accept an offer. Ask the questions in the section above. Get their exchange agreement early, so your attorney can read it.

Step 3: Add exchange language to your sale contract

Your sale contract should say you intend to do a 1031 exchange. It should ask the buyer to cooperate, at no cost to them. It should also let you assign the contract to your QI.

Step 4: Sign the exchange agreement before closing

This is the step people miss. The agreement must be in place before your sale closes. Once the money hits your account, it's too late.

Step 5: Close the sale and send the money to the QI

The buyer's funds go straight from escrow to the QI. Day 0 is the closing date. Write down day 45 and day 180 right away. Then check your return due date.

Step 6: Identify replacement property by day 45

Send a signed, written identification to your QI. Describe each property clearly, with a street address or legal description. Name backups. Get written proof that the QI received it in time.

Step 7: Close on replacement property by day 180

The QI wires the money to the closing. Title goes in the name of the same taxpayer that sold. Check that the price, cash and debt meet your full-deferral target.

Step 8: File an extension if you need one

If your sale closed in the fall, extend your tax return before April 15. That keeps your full 180 days.

Step 9: Report the exchange on Form 8824

File Form 8824 with your return for the year of the sale. Keep every document from the exchange.

Worked example: a full exchange, with the numbers

This is a hypothetical with made-up round numbers. It doesn't describe any real client or property. Your CPA should run your real numbers.

Say you bought a small industrial building in Sacramento in 2012 for $1,400,000. You've taken $600,000 of depreciation, so your adjusted basis is $800,000. You owe $1,000,000 on the loan. In November 2026, you sell for $3,000,000. You pay $120,000 in commissions and closing costs.

What a taxable sale would cost

Here's a rough federal estimate if you simply sold. It assumes you're in the top brackets. For 2026, the 20% long-term rate starts at $613,700 of taxable income for married couples filing jointly, according to Kiplinger's summary of the IRS thresholds.

• Depreciation recapture. Gain from past depreciation on a building is called "unrecaptured Section 1250 gain." Section 1(h)(1)(E) taxes it at up to 25%. That's $600,000 × 25% = $150,000.
• The rest of the gain. $1,480,000 × 20% = $296,000.
• Net investment income tax. The IRS says this tax is 3.8% once income passes $250,000 for joint filers. That's $2,080,000 × 3.8% = $79,040.
• Federal total: about $525,040.

State tax comes on top in most states. In California, it can add a large amount, since the state has no special lower rate for capital gains. Your actual bill depends on your other income and deductions. Treat this as an order of magnitude, not a quote.

Three ways the exchange could go

To defer all of the gain, you need to do three things. Buy at least $2,880,000 of property. Put all $1,880,000 of cash into it. Cover the $1,000,000 of paid-off debt with new debt or added cash.

Version A: full deferral. You buy a $2,900,000 property. You use the $1,880,000 of exchange cash and a $1,020,000 loan. Value went up, all cash went in, and new debt exceeds old debt. There's no boot and no tax now.

Your basis in the new building is $2,900,000 minus the $2,080,000 deferred gain. That's $820,000. As a check, take the old basis of $800,000 and add the extra $20,000 of debt you took on.

Version B: less debt, more of your own cash. You buy the same $2,900,000 property. You use the $1,880,000 of exchange cash, $220,000 from savings and an $800,000 loan. Your debt went down by $200,000. The $220,000 you added offsets it. You still get full deferral.

Version C: you trade down. You buy a $2,600,000 property with the $1,880,000 of exchange cash and a $720,000 loan. The new property is worth $280,000 less than your amount realized. Your debt fell by $280,000, and you added nothing to offset it. You'll recognize about $280,000 of gain. The other $1,800,000 stays deferred. Your CPA will split the taxable part between the 25% recapture rate and the 20% rate.

Version C is the pattern I see most often. People reinvest every dollar of cash and feel finished. Then they learn the smaller loan created taxable boot. The debt side is where the surprise lives.

Before you sign a purchase contract, ask your CPA to run this test with your real numbers.

1031 exchange vs. a taxable sale

Here's how the two paths compare on the points most sellers care about. These are general features, not a promise about any one deal.

Neither path is right for everyone. The section near the end on when an exchange isn't worth doing walks through the trade-offs.

Timeline at a glance

Here is the same hypothetical sale, closing Friday, November 13, 2026, for a calendar-year individual.

The table shows two things. First, there's little slack around the holidays. December 28 sits in the week when brokers, sellers and lenders are hardest to reach. Second, the April 15 line is invisible if you only count days.

Does the same taxpayer have to sell and buy?

Yes. The taxpayer that sells the relinquished property must be the taxpayer that buys the replacement. If John Smith sells, John Smith buys. If Smith Holdings LLC, taxed as a partnership, sells, Smith Holdings LLC buys.

The rule is about tax identity, not the name on the deed. That opens a few doors.

• Disregarded entities. A single-member LLC is ignored for federal income tax. You can sell a property you own personally and take title to the new one in your single-member LLC. It's still the same taxpayer. A revocable living trust works the same way while you're alive.
• Married couples. Spouses are separate taxpayers. If both spouses are on title to what you sell, both should be on title to what you buy. Plan the vesting before you sign the purchase contract.
• Delaware statutory trusts. A Delaware statutory trust, or DST, is a trust that owns real estate and sells shares of it to investors. In Rev. Rul. 2004-86, the IRS said a taxpayer "may exchange real property for an interest in the Delaware statutory trust described above" under Section 1031. That's why DST interests can serve as replacement property. They're securities, though, with their own risks. I cover them in my DST guide.

Partnerships and the "drop and swap"

This is where most of the friction is. Many properties are owned by an LLC taxed as a partnership. The partners often don't agree on what's next. One wants to exchange. One wants cash. One wants a different kind of property.

A partnership interest isn't real property. So a partner can't exchange their share of the LLC. The partnership can do one exchange as a whole. It can't split into separate exchanges for each partner.

The common workaround is the "drop and swap." Some time before the sale, the partnership hands each partner a direct, undivided share of the property. That's the "drop." Each partner then owns real property and can exchange it or cash out. That's the "swap." A variation is the "swap and drop." The partnership exchanges first, then hands out shares of the new property later.

The problem is the held-for-investment test. Say partners get their shares a week before closing a sale that was already negotiated. A tax agency can argue the partners never held the property for investment. They held it for an immediate sale. The answer depends heavily on the facts and the timing.

If you're in a partnership heading toward a sale, plan a year or more ahead. Don't wait until you have an offer. This is a question for a tax attorney.

Can you exchange with a family member or your own company?

You can, with limits. Section 1031(f) covers exchanges with a "related person." If either of you disposes of the property within two years, the deferral is lost. The gain becomes taxable as of the date of that later sale.

"Related person" includes close family, such as your spouse, children, grandchildren, parents and siblings. It also includes companies and partnerships you control by more than 50%, and some trust relationships. Your CPA can check whether a specific person or entity counts.

The exceptions

The two-year rule has three exceptions in Section 1031(f)(2).

1. A disposition after the death of either party.
2. An involuntary conversion, such as a condemnation, if the exchange came before the threat of it.
3. A showing, to the IRS's satisfaction, that tax avoidance wasn't one of the principal purposes.

That last one is hard to prove. I wouldn't plan around it.

The bigger trap: buying from a relative

Section 1031(f)(4) says the rule "shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection." That line matters most when you buy from family.

In Rev. Rul. 2002-83, the IRS looked at a taxpayer who sold low-basis property to an outsider through a QI. The taxpayer then bought high-basis property from a related party. The Journal of Accountancy's summary explains the result. The IRS said you may sell to a related party, subject to the two-year rule, but may not buy from one in this setup. Using a QI didn't change the outcome.

The Ninth Circuit reached a similar result in Teruya Brothers v. Commissioner in 2009. The court held the exchanges "were structured to avoid the purposes of § 1031(f), and thus violate § 1031(f)(4)."

Here's my working rule. Selling to a relative can work if you both hold for two years. Buying from a relative usually doesn't work unless your tax attorney has a specific reason it does.

The related-party rule also adds paperwork. The Form 8824 instructions say to "file Form 8824 for the 2 years following the year of a related party exchange."

How do you report a 1031 exchange?

You report it on IRS Form 8824. You file it with your return for the year you transferred the relinquished property. The instructions say "you must file Form 8824 with your tax return for that year." If you sold in December 2026 and bought in March 2027, the form goes on your 2026 return.

Form 8824 asks for a description of both properties. It asks for the dates you transferred, identified and received property. It asks whether a related party was involved. It then works out your recognized gain, your deferred gain and your new basis. Any recognized gain flows to your other tax forms. Recapture gets its own treatment.

When an exchange fails across two tax years

There's a helpful rule if an exchange falls apart across a year-end. The 1994 Treasury rule that added §1.1031(k)-1(j)(2) covers this case. If a QI holds the money, and you had a bona fide intent to do an exchange, you may use the installment method. You're generally treated as paid when the money actually reaches you.

Say you sell on December 1, 2026. Day 45 is January 15, 2027. You fail to identify, and the QI releases the funds in January 2027. The gain generally belongs on your 2027 return, not your 2026 return. That isn't a reason to plan a failed exchange. It's useful to know if one falls apart.

Keep the paper trail

Keep these documents for as long as you own the replacement property, and then some.

• The exchange agreement
• The assignment notices
• Your identification letter and the QI's receipt
• Both settlement statements
• The QI's final accounting

If you're audited, these documents carry the exchange.

What state tax issues should you know about?

Most states with an income tax follow the federal 1031 rules. A few details still trip people up.

Clawback states

Some states can tax deferred gain later, after you exchange out of the state. Realized lists California, Massachusetts, Montana and Oregon as states with these "clawback" rules.

California's version is the one I see most. If you swap California property for property in another state, you file Form FTB 3840. The FTB 3840 instructions say it applies to "All taxpayers who conduct an IRC Section 1031 exchange, regardless of residence status." The form "must be filed for the taxable year of the exchange and for each subsequent taxable year." That continues until the California gain is recognized. When you finally sell for cash, California taxes its share.

Withholding at closing

California generally withholds 3 1/3% of the sale price when real property is sold. The 2026 Form 593 instructions say a deferred exchange is exempt at the first transfer. But the QI must withhold in two cases. The FTB's page for qualified intermediaries spells them out.

• Boot over $1,500. The QI withholds "3 1/3% (0.0333) of the boot in excess of $1,500."
• A failed exchange. The QI withholds "3 1/3% (0.0333) of the total sales price."

Other states have their own withholding rules and forms. Your escrow officer usually knows the local forms.

Transfer taxes

A 1031 exchange defers income tax. It does nothing about transfer taxes, which are charged when a deed is recorded. In some cities, such as San Francisco, transfer tax on a large sale is a real cost. Budget for it on both the sale and the purchase.

Mistakes to avoid

None of these are exotic. They're the ones I'd check first.

1. Closing the sale before hiring a QI. Once the money reaches you, it's too late. The exchange agreement must be signed before closing.
2. Identifying loosely. "A net-lease property in Texas" isn't an identification. Use a street address, legal description or clear name.
3. Forgetting the debt. Replace it with new debt or added cash. Version C above shows the cost.
4. Missing the return due date. If you sold in the fall, file the extension.
5. Changing title. Selling as a couple and buying in one spouse's name can break the same-taxpayer rule. So can selling from a partnership and buying as an individual.
6. Treating earnest money casually. The deposit on your replacement can come from the QI. If you pay it yourself, ask your CPA how to handle reimbursement. A refund from exchange funds can be treated as cash to you.
7. Assuming the replacement will close. Sellers back out. Lenders change terms. Inspections find problems. Backup properties on your list are cheap insurance.
8. Buying from a relative without advice. Rev. Rul. 2002-83 and Teruya Brothers show how that can fail.
9. Ignoring state rules. Clawback filings and withholding have their own deadlines and forms.
10. Overpaying to beat the clock. Paying 10% too much to save tax on part of your gain can be a poor trade.

Does a 1031 exchange ever end the tax?

Not by itself. Deferral means your gain carries into the basis of the new property. If you later sell that property for cash, the deferred gain from every earlier exchange comes due. So does recapture of all the depreciation you've taken.

Under current law, one event changes that, which is death. Section 1014 says the basis of inherited property is generally "the fair market value of the property at the date of the decedent's death." If you hold exchanged property until you die, your heirs generally take it at that stepped-up basis. The deferred gain isn't taxed to anyone. I explain this more in my guide to the step-up in basis.

The 2025 tax law, the One Big Beautiful Bill Act, left Section 1031 in place. JTC Group's review notes it "did not contain any language limiting or repealing Section 1031." The law also set the federal estate and gift tax exemption at $15 million per person for 2026. Haynes Boone notes that the amount "will be indexed for inflation for years after 2026."

Tax law can change. I wouldn't build a plan that only works if nothing changes. But "exchange until you die" is a real strategy many real estate families use. Talk with your estate attorney and CPA.

When is a 1031 exchange not worth doing?

I think about four situations.

Small gains. If your gain is modest, the costs and deadline pressure can outweigh the tax you'd defer. A QI fee, extra legal work and the risk of overpaying all add up.

You want out of real estate. An exchange keeps you in real property. If you're tired of managing property, a DST or another passive structure may fit. But you'd be buying a security with real risks, not getting cash. If you want liquidity, an exchange is the wrong tool.

You'd be forced into a bad deal. In a tight market, 45 days is short. Run the math honestly. Is the tax you'd defer bigger than the premium you'd pay?

You have a loss. If the property is worth less than your basis, Section 1031 defers the loss too. Selling outright lets you use it.

How I help with the exchange

My background is in applied mathematics and applied statistics, which I studied at Babson College. I spent years in real estate acquisitions, management and development. That includes work at ValueRock Realty Partners, Faris Lee Investments, Westport Capital Partners and Arbor Bay Capital Partners. I've been involved in more than $10 billion of real estate investment activity.

Today I help investors build 1031 exchange plans, often using DSTs as some or all of the replacement property. Here's how I work.

1. An introductory call. I learn your sale price, debt, timeline and goals.
2. We review opportunities together. I tell you why I'm considering each one, what I like and where I have reservations.
3. We close. My team coordinates the paperwork with the sponsor and your QI. Because DST properties are already acquired, closing can often take two to three business days. That assumes complete paperwork, funding and approvals.

I'm not your CPA, attorney or QI. I work alongside them. Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments is independent of Aurora.

Risks and limitations

A 1031 exchange has risks of its own, apart from any property you buy.

• Failure risk. Miss a deadline, identify poorly, touch the money or break the same-taxpayer or related-party rules, and the exchange can fail. The full gain then becomes taxable.
• Overpaying under pressure. The deadlines can push you to buy property you wouldn't otherwise choose.
• QI risk. A private company holds your money. If it fails or misuses the funds, you may lose the money and the exchange.
• Tax-law risk. Congress can change Section 1031, tax rates or the step-up in basis. Deferred gain is taxed under whatever rules apply later.
• Carryover basis. The new property inherits your low basis. Your future depreciation deductions are smaller than if you'd bought with after-tax cash.

If you use DST interests as replacement property, you take on investment risks too.

• Illiquidity. There's no public market. The SEC's bulletin on private placements says investors "should be prepared to hold the securities indefinitely."
• Loss of principal. You can lose some or all of your investment.
• Distributions are not guaranteed. They can be reduced or stopped.
• No control. You rely entirely on the sponsor's decisions.
• Fees and leverage. Fees reduce returns. Debt magnifies losses.
• Accredited investors only. Most DSTs are offered only to accredited investors, through a private placement memorandum.

What my data shows

Most of this guide is about federal rules. But the rules play out in a real market for replacement property. Here's what my offering records as of October 2026 show. The set covers 76 DST offerings from 38 sponsors. These figures describe offerings I track. They aren't a forecast or a promise about any future offering.

Only some offerings are open at any moment

The number I'd point to first is availability. Of 76 offerings, 16 were open and 6 had limited availability. That's 22 offerings, or 29%, that an investor could act on. Another 24 were under review, 25 were closed and 5 were ones I reviewed and passed on.

This matters for the 45-day rule. If you plan to use a DST as replacement property or as a backup, the offering has to be available when you buy. Offerings close. So I'd identify more than one, and I'd do the review before day 45.

Debt shapes the reinvestment math

The worked example showed that debt is where exchanges go wrong. 36 of 76 offerings (47%) are all-cash, with no loan. Another 16 (21%) have loan-to-value above 50%. Loan-to-value, or LTV, is the loan divided by the property's value. Among offerings that use debt, the median LTV is about 49%.

An all-cash DST doesn't replace any debt. A leveraged DST does, through your share of its loan. Many investors blend the two to hit both the value and the debt targets.

Minimums make it easier to place leftover cash

Low minimums help when you have a smaller amount of cash left after buying a direct property. Putting that leftover into a DST, instead of taking it as boot, may keep it tax-deferred.

Other patterns

• Property types: multifamily 31 (41%), industrial 18 (24%), net lease 15 (20%, including energy royalty programs), self-storage 5, retail 4 and medical office 3.
• Projected year-one distribution rates: median 4.7%, with a range of 4.0% to 9.0% across 71 offerings that published one. These are projections and are not guaranteed.
• Hold periods: a 10-year projected hold is the most common, at 31 offerings.
• Exit paths: 44 offerings (58%) offer an optional 721 exchange into a REIT, and 13 (17%) make it mandatory.
• Locations: 33 states, led by Florida (14), Texas (13), North Carolina (8) and Georgia (7).

I also track more than 1,100 full-cycle 1031 DST investments for performance. Full-cycle means the property was bought, held and sold.

Frequently asked questions

Do the 45 days and 180 days run at the same time?

Yes. Both start the day your sale closes, and the 45 days sit inside the 180. You don't get 225 days. The 180 days can also end early on your tax return due date, so extend your return if you sold in the fall.

Can I do a 1031 exchange on my primary residence?

No. A primary residence isn't held for investment or business use. It may qualify for the Section 121 home-sale exclusion instead, which is up to $250,000 of gain for a single filer and up to $500,000 for many married couples. A property that was partly home and partly rental can sometimes use both rules, so plan it with your CPA.

How long do I have to own a property before exchanging it?

The law sets no minimum. What matters is that you held it for investment or business use. Many advisers suggest at least a year, and the IRS's vacation-home safe harbor uses 24 months. Expect to explain any short hold.

Can I take some cash out and still do an exchange?

Yes. You'll pay tax on the cash you take, up to your total gain, and defer the rest. This is a partial exchange. Remember that paying down debt without adding cash also creates boot.

Can I sell one property and buy several, or the reverse?

Yes. You can sell one building and buy three, or sell three and buy one. The identification rules must be met, and total value and cash must be enough. When you sell several properties in one exchange, the deadlines run from the first sale.

Do I have to buy in the same state?

No. U.S. real property is like-kind to other U.S. real property. You can sell in California and buy in Texas. If you leave a clawback state like California, expect to file a tracking form every year you own the out-of-state property.

What happens if my purchase falls through on day 170?

If you identified backups, you can close on one before day 180. If you didn't, the exchange fails and the gain is taxable. If the money comes back to you in the next tax year, the installment rule may let you report the gain then.

Does a 1031 exchange get rid of depreciation recapture?

It defers it. The depreciation you've taken carries into the new property. If you later sell for cash, that part of the gain is taxed at up to 25%. Under current law, heirs who inherit the property generally get a stepped-up basis.

Can I use a 1031 exchange to buy a vacation home I'll use?

Only if you hold it as an investment. The IRS safe harbor in Rev. Proc. 2008-16 requires fair-rent rentals of at least 14 days in each of two years. Personal use must stay at or below 14 days or 10% of rental days, whichever is greater.

Can a DST be my replacement property?

It can. Under Rev. Rul. 2004-86, an interest in a properly structured DST can qualify as like-kind real property. DSTs are securities with real risks, including illiquidity and loss of principal. Most are open only to accredited investors.

Do I need a lawyer as well as a qualified intermediary?

Often, yes. The QI holds the money and the paperwork, but it doesn't give you tax or legal advice. A CPA and an attorney can review your contract, your vesting and your numbers before you sign.

This guide reflects federal law and IRS guidance as of October 2026. It's general information, not tax or legal advice for your situation. Please confirm your plan with your CPA, your attorney and your qualified intermediary before you list the property.

Sources

• 26 U.S.C. §1031, Exchange of real property held for productive use or investment (Cornell LII)
• 26 CFR §1.1031(k)-1, Treatment of deferred exchanges (Cornell LII)
• 26 CFR §1.1031(a)-1, Property held for productive use in trade or business or for investment (Cornell LII)
• 26 CFR §1.1031(a)-3, Definition of real property (Cornell LII)
• IRS Fact Sheet FS-2008-18, Like-Kind Exchanges Under IRC Code Section 1031
• IRS, Instructions for Form 8824 (2025)
• IRS, About Form 4868
• IRS Rev. Proc. 2008-16
• IRS Rev. Proc. 2005-14
• IRS Rev. Rul. 2004-86
• IRS, Tax relief in disaster situations
• IRS, Net Investment Income Tax
• 26 U.S.C. §121, Exclusion of gain from sale of principal residence (Cornell LII)
• 26 U.S.C. §1, Tax imposed (Cornell LII)
• 26 U.S.C. §1014, Basis of property acquired from a decedent (Cornell LII)
• Federal Register, April 20, 1994, final rule on installment reporting in deferred exchanges (GovInfo)
• Teruya Brothers, Ltd. v. Commissioner, Ninth Circuit opinion (2009)
• More Clarification on 1031 Exchanges (Rev. Rul. 2002-83), Journal of Accountancy
• Disaster Relief Deadline Postponements under Rev. Proc. 2018-58, IPX1031
• California Financial Code §51003 (Justia)
• California FTB, 2025 Instructions for Form FTB 3840
• California FTB, 2026 Instructions for Form 593
• California FTB, Qualified intermediary / accommodator withholding
• What Is a Clawback in a 1031 Exchange?, Realized
• IRS Updates Capital Gains Tax Thresholds for 2026, Kiplinger
• How Will the One Big Beautiful Bill Act Affect 1031 Exchanges?, JTC Group
• Federal Estate, Gift and GST Tax Highlights from the One Big Beautiful Bill Act, Haynes Boone
• Investor.gov, Private Placements under Regulation D