What is a 1031 exchange?

Deferral, not elimination

Section 1031 of the Internal Revenue Code allows an investor to sell real property held for investment or business use and reinvest the proceeds into another like-kind property without recognizing the capital-gains tax that would otherwise be due at sale. The tax is deferred, not erased: the gain carries forward into the cost basis of the replacement property and becomes due if that property is later sold without another exchange.

Investors who continue exchanging can defer indefinitely, and heirs may receive a step-up in basis at death — but the deferred gain remains a real liability until then. A 1031 exchange is a timing and reinvestment tool, not a way to make tax disappear.

What qualifies as like-kind

Since the Tax Cuts and Jobs Act of 2017, Section 1031 applies only to real property held for productive use in a trade or business or for investment. Personal property and intangible assets no longer qualify. The good news for real-estate investors is that nearly all U.S. investment real estate is like-kind to other U.S. investment real estate: an apartment building can be exchanged for raw land, a retail center, an industrial warehouse, or a fractional interest in a larger institutional asset.

• Qualifies: rental and commercial buildings, land held for investment, and other real property held for business or investment.
• Does not qualify: a primary residence, a second home held for personal use, property held primarily for resale (dealer inventory), and personal or intangible property.
• Geography matters: U.S. real property is not like-kind to foreign real property.

As of 2026, Section 1031 remains in effect for real property. Federal tax legislation enacted in 2025 retained it without the deferral cap that had been proposed in earlier drafts. Tax law can change; confirm the current rules with your advisor.

The role of the qualified intermediary

An investor cannot simply sell, take the cash, and buy a replacement — touching the proceeds disqualifies the exchange. A qualified intermediary (QI), an independent third party, holds the sale proceeds and applies them to the purchase of the replacement property. Engaging the QI before closing on the sale is essential; once you have constructive receipt of the funds, the opportunity is generally lost.

Strict deadlines

Two clocks start the day the relinquished property closes and run concurrently:

• 45 days to formally identify replacement property in writing.
• 180 days to close on the replacement property (or the due date of your tax return for that year, including extensions, if that comes first).

These deadlines are unforgiving — there are no routine extensions outside of certain federally declared disasters. We cover the timeline and the identification rules in detail in the 1031 exchange timeline.

Watch for boot

To defer the full gain, an investor generally must reinvest all of the net proceeds and replace at least as much debt as was paid off. Any cash taken out, or any reduction in debt that is not offset with new equity, is treated as boot and is taxable to that extent. A partial exchange is allowed; it simply defers less of the gain.

Where DSTs fit in

Finding and closing a suitable replacement property inside 45 and 180 days is the hardest part of any exchange. A Delaware Statutory Trust (DST) is a pre-packaged, professionally managed replacement option that qualifies as like-kind real property, which is why many exchangers use one — either as their primary replacement or as a backup so a stalled exchange does not fail. Start with what is a DST.