The CPA's 2026 Guide to 1031 Exchanges

When a client calls about selling an appreciated property, the 1031 exchange is usually the first lever a CPA reaches for — and the one most likely to be mishandled if the planning starts too late. This guide is a practitioner's reference: how the exchange works, the tax mechanics and reporting you'll be responsible for, the deadlines and elections that decide whether deferral survives, and a checklist for steering clients through the process. It pairs with our client-facing 1031 exchange guide and assumes you'll confirm current law against primary authority.

How a 1031 exchange works (advisor's refresher)

Under Section 1031, a taxpayer can defer gain on the disposition of real property held for productive use in a trade or business or for investment by exchanging it for like-kind real property held for the same purpose. Since the 2017 Tax Cuts and Jobs Act, only real property qualifies — personal property and intangibles were removed effective 2018. Most exchanges are delayed (Starker) exchanges facilitated by a qualified intermediary (QI) under the §1.1031(k)-1 safe harbor: the client sells the relinquished property, the QI holds the proceeds, the client identifies replacement property within 45 days, and acquires it within 180 days. Reverse and improvement (build-to-suit) variations operate under the Rev. Proc. 2000-37 parking safe harbor. The client's role is mechanical; yours is to ensure the structure and reporting preserve nonrecognition.

Tax treatment and basis

A fully qualifying exchange defers the entire realized gain — including the unrecaptured §1250 gain (up to 25%) and any exposure to the 3.8% net investment income tax — that the client would otherwise recognize. The deferral is achieved through a substituted (carryover) basis: broadly, the basis of the replacement property equals the basis of the relinquished property, decreased by any boot received and increased by gain recognized and additional consideration paid. Holding period tacks. Because basis carries over, the deferred gain is preserved for future recognition (or elimination via a §1014 step-up at death). Be prepared to walk clients through the fact that a low replacement-property basis means lower future depreciation and a larger gain on an eventual taxable sale — deferral is not forgiveness.

Depreciating the replacement property

A point often missed at the desk: under Reg. §1.168(i)-6, the exchanged basis of the replacement property generally continues to be depreciated over the remaining recovery period and method of the relinquished property, while any excess basis (additional cash invested) is treated as newly placed-in-service property on a fresh schedule. The taxpayer may elect out of this default and treat the entire basis as new property placed in service at the replacement's acquisition. The choice affects near-term depreciation and warrants a quick projection for the client. Coordinate this with any cost-segregation study on the replacement.

Boot, netting, and partial exchanges

Gain is recognized to the extent of boot — money or non-like-kind property received — capped at realized gain. Cash boot is straightforward; mortgage (debt-relief) boot arises when liabilities assumed by the other party exceed liabilities the taxpayer takes on, and it can be offset by cash paid (but not vice versa). Net the consideration carefully: customary exchange expenses can generally be paid from proceeds without creating boot, while non-exchange items (loan-acquisition costs, prorations, certain credits) can. When gain is recognized via boot, recapture is generally triggered first. The client-facing mechanics are detailed in our memo on boot; for the deferral to be complete the client must trade equal-or-up in value, reinvest all equity, and replace debt.

Reporting: Form 8824 and the return

The exchange is reported on Form 8824, Like-Kind Exchanges, filed with the return for the year the relinquished property was transferred. Form 8824 captures the identification and exchange dates, computes realized and recognized gain, any boot, and the basis of the replacement property; recognized gain (and recapture) then flows to Schedule D / Form 4797 as applicable. For exchanges straddling a tax year (sale late in the year, replacement acquired the next), confirm the client extends the return so the 180-day period isn't truncated to the original due date. Maintain workpapers for the basis computation, since it follows the client for years and into the next exchange.

Deadlines, identification, and elections

The 45-day identification and 180-day completion periods run concurrently from the transfer date and are calendar-day, no-weekend-grace deadlines, extended only by §7508A disaster relief. Identification must be written, signed, and delivered to the QI or a party to the exchange, satisfying the three-property, 200%, or 95% rule (see identification rules). The 180-day period is capped at the return due date including extensions, so late-year sales require a filed extension to preserve the full window. Build a deadline calendar for every client exchange — missed dates are the most common and least forgivable failure.

Recurring traps to flag

• Constructive receipt. Any client access to proceeds outside the QI safe harbor disqualifies the exchange. Confirm the QI is engaged pre-closing and isn't a disqualified person.
• Related-party exchanges (§1031(f)). A two-year holding requirement applies; early disposition by either party can unwind deferral. Indirect related-party swaps through a QI are also scrutinized (Rev. Rul. 2002-83).
• Drop-and-swap / swap-and-drop. Partnership and LLC dispositions raise "held for investment" and timing issues when interests are distributed as TICs before or after the exchange; document intent.
• Vesting / same-taxpayer rule. The taxpayer that sells must acquire (disregarded entities aside); mismatches break the exchange.
• Primary-residence and dealer property. Section 121 and §1031 interactions, and exclusion of property held primarily for sale.

Client due-diligence checklist

A practical sequence to run with a client contemplating an exchange:

• Confirm eligibility — property held for investment/business, not a residence or dealer inventory.
• Engage a qualified intermediary before closing; vet fund security (segregated/qualified escrow, bonding).
• Model the alternative — compute the tax on an outright sale (gain + recapture + NIIT + state) so the client sees what's being deferred.
• Calendar the 45/180 deadlines and confirm an extension for late-year sales.
• Plan the replacement — value, debt, and equity to avoid boot; identify backups (a quick-closing DST is a common fallback).
• Address state issues — clawback/withholding and any nonresident filings.
• Document basis and the depreciation election for the replacement.

State and multistate considerations

Most states conform to §1031, but several wrinkles recur. California and a few others impose clawback regimes that track deferred in-state gain when a client exchanges into out-of-state replacement property and later sells; California requires annual reporting on FTB Form 3840 until the deferred gain is recognized. Many states also impose nonresident withholding on real estate sales that must be coordinated with the exchange. Confirm conformity, withholding certificates/exemptions, and any composite or nonresident filing obligations in both the relinquished- and replacement-property states.

What clients should know

Set expectations clearly. Clients should understand that a 1031 defers, not eliminates, tax (absent a step-up at death); that the deadlines are rigid and require advance planning; that they cannot touch the proceeds; and that the replacement property's lower carryover basis reduces future depreciation and increases gain on a later taxable sale. For clients tired of management, explain the DST option as a passive, qualifying replacement, and the eventual 721 path. Most importantly, clients should engage you before listing — the most valuable 1031 planning happens before the property is under contract, not after.

Frequently Asked Questions

Glossary

Substituted (Carryover) Basis

The replacement property's basis derived from the relinquished property's basis, preserving deferred gain.

Form 8824

The IRS form reporting a like-kind exchange and computing recognized gain and replacement basis.

Qualified Intermediary (QI)

The §1.1031(k)-1 safe-harbor party that holds proceeds so the taxpayer avoids constructive receipt.

Unrecaptured §1250 Gain

Depreciation-related gain taxed at up to 25%, deferred in a qualifying exchange.

§1031(f)

The related-party rules imposing a two-year holding requirement on exchanges with related persons.

FTB Form 3840

California's annual report tracking deferred in-state gain exchanged into out-of-state property.

Disclosures