CPA-led 1031 exchange guide
1031 Exchange Rules & Requirements
Section 1031 of the Internal Revenue Code lets you defer capital gains tax when you exchange investment real estate for like-kind property — but only if you follow every rule. Miss one and the entire exchange collapses. Here are the requirements in plain English.
Like-kind real property
Both the relinquished and replacement properties must be real property held for investment or productive use in a trade or business. Personal residences and inventory don't qualify. Almost any U.S. real estate exchanges for any other U.S. real estate.
Qualified Intermediary required
You cannot touch the sale proceeds. A Qualified Intermediary must hold the funds in a segregated exchange account between the relinquished sale and the replacement purchase.
45-day identification window
Within 45 calendar days of the relinquished closing, you must deliver a written, signed identification of replacement candidates to the QI.
180-day completion window
All replacement property must close within 180 calendar days of the relinquished closing, or the due date of your tax return (including extensions), whichever is earlier.
Equal-or-up rule
To defer 100% of the gain, the replacement property must be of equal or greater value, you must reinvest all the net equity, and you must replace any debt that was paid off (or offset it with new cash).
Frequently Asked Questions
What is 'like-kind' for real estate?
All U.S. real property held for investment or business use is considered like-kind to other U.S. real property held for the same purpose. A rental house can exchange for raw land, a strip mall, or a warehouse.
Can I exchange into a property of lesser value?
Yes, but the difference (cash boot or mortgage boot) is taxable in the year of the exchange.
Can spouses or related parties be part of the exchange?
Related-party exchanges have additional restrictions, including a two-year holding requirement. Run any related-party scenario by your QI and CPA before proceeding.