CPA-led 1031 exchange guide
1031 Exchange for Rental Property
Rental property — single-family, duplex, small multifamily, or apartment building — is the most common starting point for a 1031 exchange. The mechanics are identical to any other real estate exchange, but rental-specific planning makes the difference between a clean deferral and an unpleasant surprise.
Common rental exchange patterns
- Trade up from a single rental to a small multifamily
- Sell a high-maintenance property and buy a turnkey
- Consolidate several rentals into one larger asset
- Diversify geographically out of one market
Rental-specific issues to watch
Depreciation recapture builds up fast on rentals — that's a 25% federal tax you'd owe on a straight sale, fully deferred in an exchange. Mortgage payoff at closing must be matched by replacement debt or new cash to avoid boot.
Out-of-state replacements
Many investors use a 1031 to leave high-tax or management-heavy states. The exchange itself is straightforward; just be aware of the originating state's clawback rules (California's FTB 3840 is the most aggressive).
Frequently Asked Questions
Can I exchange a rental for a vacation home?
Only if the new property is also held for investment under the Rev. Proc. 2008-16 safe harbor (rented at fair market and limited personal use). A pure second home does not qualify.
What if my rental has been vacant for a while?
Investment intent is what matters. A temporarily vacant rental that's actively listed for rent still qualifies. A property held off the market for personal reasons may not.