CPA-led 1031 exchange guide
1031 Exchange Rules — FAQ
Answer-first guide to the 1031 exchange rules investors ask about most. To qualify for a 1031 exchange, both the relinquished and replacement properties must be real property located in the United States, held for investment or business use (not personal use, not dealer inventory, and not personal property), and the transaction must use a Qualified Intermediary, identify replacements within 45 days, and close within 180 days. Done correctly, a Section 1031 exchange lets you defer capital gains taxes — it is tax-deferred, not tax-free.
The core 1031 exchange rules
Five rules decide whether a transaction will qualify for a 1031 exchange and defer capital gains taxes.
- Both properties must be real property located in the United States and held for investment or business (trade or business) use
- A Qualified Intermediary must hold the sale proceeds — you cannot receive or constructively receive the funds
- Replacement property must be identified in writing within 45 days of the relinquished closing
- All replacement property must close within 180 days (or your return due date, whichever is earlier)
- The replacement must be equal or greater in value, with all net equity reinvested and any paid-off debt replaced
Tax-deferred, not tax-free
A 1031 exchange is tax-deferred: the gain rolls into the replacement property's basis and is recognized later, unless rolled again into another exchange or stepped up at death. It is not tax-free. Anyone describing Section 1031 as tax-free is using the wrong word — the IRS still tracks the deferred gain through Form 8824 and (in California) FTB 3840.
Personal property is excluded
Since the 2017 Tax Cuts and Jobs Act, only real property qualifies. Personal property — equipment, vehicles, artwork, collectibles, intangibles — is excluded from Section 1031. Primary residences and dealer inventory are also excluded. Real property held for investment or for productive use in a trade or business is the only category that qualifies for a 1031 exchange.
Process & paperwork
What actually happens between Day 0 and Day 180.
- Exchange agreement and contract assignments are signed before closing
- Net sale proceeds wire directly to a segregated exchange account
- Written, signed identification is delivered to the QI by Day 45
- Replacement closing wires funds from the exchange account by Day 180
- Form 8824 is filed with your tax return for the year of the exchange
Frequently Asked Questions
What is a 1031 exchange in one sentence?
A tax-deferred swap of investment real estate for like-kind investment real estate, governed by IRC Section 1031, that postpones federal and state capital gains, depreciation recapture, and net investment income tax.
What property qualifies as like-kind?
Nearly all U.S. real property held for investment or business use is like-kind to other U.S. real property held for the same purpose. A rental house is like-kind to raw land, an apartment building, or commercial property.
Do I need a Qualified Intermediary?
Yes for a delayed (forward) exchange and yes for a reverse exchange. You cannot receive or constructively receive the sale proceeds.
When does the 45-day clock start?
At midnight on the day the relinquished property closes (Day 0). The 180-day clock starts at the same moment and runs concurrently.
Can I extend the deadlines?
Only through federally declared disaster relief issued by the IRS. There are no informal extensions.
What is boot in a 1031 exchange?
Anything received in the exchange that isn't like-kind property — cash boot, mortgage boot (debt relief), or non-like-kind property. Boot is taxable in the year of the exchange.
Does rental property qualify?
Yes. A single-family rental, duplex, small multifamily, or apartment building held for investment qualifies. So do short-term rentals that meet the Rev. Proc. 2008-16 personal-use safe harbor.
Can I 1031 my primary residence?
No. Personal residences don't qualify under Section 1031. The Section 121 exclusion is a separate provision for primary residences.
Are related-party exchanges allowed?
Yes, with restrictions — there is a two-year holding requirement and additional anti-abuse rules. Run any related-party scenario by your QI and CPA before signing.
Do I have to replace the debt that was paid off?
To defer the full gain, yes — either with new debt on the replacement property or with new out-of-pocket cash. Unreplaced debt becomes mortgage boot.
Can I take some cash out and still do an exchange?
Yes. A partial exchange is allowed; the cash you keep is boot and is taxable, but the rest of the transaction still qualifies for deferral.
What is a reverse 1031 exchange?
A structure where the replacement property closes first and an Exchange Accommodation Titleholder parks one of the properties until the relinquished property sells. Same 45/180 deadlines apply.
What is an improvement (construction) exchange?
A structure that lets you use exchange funds to build or improve replacement property — completed within the 180-day window — by parking the replacement with an EAT during construction.
What documentation do I need to provide?
The relinquished property purchase contract, your basis records, depreciation schedule, current loan payoff, and replacement candidate details. Brandon provides a checklist after the initial consultation.
When should I contact a Qualified Intermediary?
As soon as you accept an offer on the relinquished property — ideally before. The exchange agreement must be in place before closing.