A 1031 exchange lets you sell a rental or investment property and put off paying tax on the gain by reinvesting the proceeds in other real estate held for investment. To defer all of the tax, a qualified intermediary holds the sale money, you identify the replacement property within 45 days, you close on it within 180 days, and you buy at least as much as you sold while reinvesting all of the cash.
The tax is deferred, not forgiven: your old property's low tax basis carries into the new one. Repeated, though, exchanges let you trade up to a larger portfolio without handing a share of every sale to the IRS.
What is a 1031 exchange?
Normally, selling a rental for more than its adjusted basis creates a taxable gain: long-term capital gain on the appreciation, and up to 25% on the part that comes from depreciation you claimed. A like-kind exchange under Section 1031 lets you recognize none of that gain if you trade the property for other qualifying real estate.
In practice, you sell to one buyer and buy from a different seller, and the rules treat the two closings as one exchange as long as a qualified intermediary sits between them and the deadlines are met. This is a deferred exchange, what most investors mean by "doing a 1031."
The deferred gain does not disappear. It reduces the basis of the replacement property, so its depreciation is smaller and a later taxable sale picks up the old gain too.
What property qualifies as like-kind?
For real estate, "like-kind" is broad. A rental house can be exchanged for land, a small apartment building, a commercial building or a different rental in another state. What matters is that both are real property held for productive use in a business or for investment.
| Qualifies | Does not qualify |
|---|---|
| Long-term rental houses and multifamily | Your main home (a separate exclusion covers it) |
| Short-term and vacation rentals held as investments | Property you buy to renovate and resell (a flip) |
| Land held for investment | Real estate outside the United States, against US property |
| Commercial and mixed-use buildings | Partnership interests (most multi-member LLCs), stocks, notes |
| A tenancy in common interest in real estate | Furniture and equipment, since 2018 |
Since January 1, 2018 the exchange covers real property only. Furniture in a short-term rental is not part of it, and anything you receive that is not real estate can be taxable.
The same taxpayer that sells must buy. If your LLC owns the property, the LLC (or you, if it is a single-member LLC the IRS disregards) should take title to the replacement; buying rental property in an LLC covers how lenders handle that. Changing how you hold title in the middle of an exchange is a common way to break it.
The 1031 exchange timeline: 45 and 180 days
Two deadlines start the day your sale closes, and they run at the same time, not one after the other.
- The identification period: 45 days. By midnight of the 45th day, you must identify the replacement property in a signed, written document delivered to your intermediary or another party to the exchange (not your own agent or attorney). Each property has to be described clearly, by street address or legal description.
- The exchange period: 180 days, or sooner. You must receive the replacement property by the earlier of 180 days after the sale or the due date of your tax return for the year of the sale, including extensions.
Neither deadline moves for weekends or holidays; only a federally declared disaster extends them.
How many properties can you identify?
You can name backups, within one of three limits:
| Rule | What you can identify |
|---|---|
| Three-property rule | Up to three properties of any value |
| 200% rule | Any number, if their total value is no more than twice what you sold |
| 95% rule | Any number of any value, but you must then buy at least 95% of the total |
Most investors use the first: a first choice and two backups.
The return due date trap
If you sell late in the year, the 180 days can run past April 15. Sell on November 16, 2026, and day 45 is December 31, 2026, while day 180 is May 15, 2027. Your 2026 return is due April 15, 2027, so unless you file an extension, the exchange period ends on April 15 and you lose a month. Extending the return keeps the full 180 days.
How a deferred exchange works, step by step
- Decide before you list. The exchange must be set up before the sale closes. Once the proceeds reach you, it is too late.
- Hire a qualified intermediary. It signs an exchange agreement with you and takes your side of the sale contract.
- Close the sale. The proceeds go from the closing straight to the intermediary's account, not to you.
- Identify replacements within 45 days. In writing, signed, delivered to the intermediary.
- Arrange the financing. Lenders take a month or more, so start the loan when you identify.
- Close on the replacement within the exchange period. The intermediary sends the exchange funds to the closing.
- Report it. File Form 8824 with your return for the year of the sale.
The qualified intermediary
The intermediary exists because of one rule: you cannot have actual or constructive receipt of the sale money. If it is credited to your account, set aside for you, or available for you to draw on, the transaction is treated as a sale.
The intermediary cannot be someone who acted as your agent in the two years before the sale: your employee, attorney, accountant, investment banker, broker, or real estate agent or broker. Close relatives and businesses you control are also disqualified. Routine title, escrow and bank services do not count against a firm.
Intermediaries are lightly regulated, and exchange funds have been lost when one failed. Ask how your funds are held (a separate account per client is worth insisting on), what bond and insurance the firm carries, and who can move money out.
Boot: what makes part of an exchange taxable
Boot is anything you receive in the exchange that is not like-kind real estate. You owe tax on your gain up to the amount of boot, and you cannot use an exchange to recognize a loss. Boot comes in two common forms:
- Cash boot: sale proceeds the intermediary hands back to you, or that pay for things other than the property.
- Mortgage boot: debt you were relieved of on the sale and did not replace. If you paid off a $200,000 loan and take on only a $170,000 loan, the $30,000 difference counts as boot unless you add cash to cover it.
You can offset debt relief with new debt or added cash, but you cannot offset cash you take out by borrowing more. Some costs paid from exchange funds, such as loan fees and rent prorations, can also create boot, so have your CPA review the settlement statement first.
The rule of thumb for full deferral: buy property worth at least the net sale price, reinvest all the cash the intermediary holds, and replace the debt you paid off with new debt or more cash.
A worked example: full deferral and a trade-down (all figures are examples)
You sell a rental for $500,000 and pay $30,000 in selling costs, so the amount you realize is $470,000. You bought it years ago for $350,000 and claimed $70,000 of depreciation, so your adjusted basis is $280,000 and your gain is $190,000. The $200,000 mortgage is paid off at the sale, and the intermediary holds $270,000.
Without an exchange, $70,000 of the gain (the depreciation) is taxed at up to 25%, as much as $17,500, and the other $120,000 at 15% for most investors, $18,000: about $35,500 of federal tax before the 3.8% net investment income tax and any state tax.
Full deferral. You buy a $600,000 property with the $270,000 and a new $330,000 loan. No cash comes back and the new loan more than replaces the old one, so there is no boot and no tax now. Your basis in the new property is $600,000 minus the $190,000 deferred gain: $410,000.
A trade-down. You buy a $420,000 property with $250,000 of the exchange funds and a $170,000 loan, and the intermediary returns $20,000 to you.
| Boot | Amount |
|---|---|
| Cash returned to you | $20,000 |
| Debt paid off ($200,000) minus new debt ($170,000) | $30,000 |
| Total boot, and the gain taxed now | $50,000 |
| Gain still deferred ($190,000 minus $50,000) | $140,000 |
| Basis in the new property ($420,000 minus $140,000) | $280,000 |
The trade-down is $50,000 smaller than the $470,000 you realized, and $50,000 is exactly what becomes taxable.
Can you 1031 exchange a vacation rental?
Yes, if it is held for investment and not mainly for your own use. A short-term rental that you rent out most of the year is an investment property like any other. The harder case is a second home you rent part of the time and use yourself.
For those, the IRS offers a safe harbor (Rev. Proc. 2008-16). It will not challenge a dwelling unit as investment property if:
- You owned it for at least 24 months before the exchange (or will own the replacement for 24 months after).
- In each of the two 12-month periods in that window, you rented it at a fair rental for 14 days or more.
- In each of those periods, your personal use was no more than the greater of 14 days or 10% of the days it was rented at a fair rental.
Falling outside the safe harbor does not disqualify a property by itself, but it leaves the question to your facts and your records.
Planning to move into the replacement one day? You can, but property acquired in a 1031 exchange has to be owned for five years before the home-sale exclusion can apply to it, and your use as a rental must be genuine first.
Financing the replacement property
Most exchanges need a loan on the replacement, to buy enough property and to replace the debt that was paid off. The 180-day clock does not wait for underwriting.
A DSCR loan suits an exchange because it qualifies on the replacement property's rent rather than your income, and it can close in the same LLC that sold. A clean file commonly closes in 30 to 45 days, which still leaves little slack if your first choice falls through on day 40. Get a quote on each property you plan to identify, before day 45, and read the DSCR loan process so you know where the time goes. If DSCR loans are new to you, start with what a DSCR loan is.
Tell the lender up front that the purchase is part of an exchange: the down payment comes from the intermediary's account, and the lender will want the exchange agreement to source it. Check the replacement's value with the value calculator, and if you are trading into a vacation rental, how to buy an Airbnb property covers the checks before you identify it.
Other kinds of exchange
- Reverse exchange. You buy the replacement before you sell. An accommodation titleholder holds one property under a separate IRS procedure, with the same 45-day and 180-day limits, and it costs more.
- Improvement exchange. Exchange funds pay for work on the replacement before you take title. Only work finished by the time you receive it, within the 180 days, counts.
- Related-party exchange. Trading with a relative or a company you control is allowed, but if either of you disposes of the property within two years, the deferred gain generally comes due. Buying your replacement from a related party through an intermediary usually fails unless that party is exchanging too, so raise it with your CPA before you identify one.
After the exchange, depreciation continues on the carried-over basis, and added basis from new money or debt is depreciated as new property. How rental property depreciation works covers the basics.
Frequently asked questions
What happens if I miss the 45-day deadline?
If you have not identified replacement property in writing by midnight on day 45, the exchange fails and the sale is taxed as an ordinary sale in the year it closed. With nothing identified, the intermediary can release the funds once day 45 has passed. There is no extension for weekends, holidays or a deal falling through, which is why most investors identify one or two backups.
Can I take some cash out of a 1031 exchange?
Yes, but the cash is boot and is taxed up to the amount of your gain, as capital gain and depreciation recapture. Some investors take cash at the sale and defer the rest; others defer everything and later refinance the replacement property, since loan proceeds are not income. Refinancing right before or after an exchange can draw scrutiny, so plan the timing with your CPA.
Can I 1031 exchange into a property in another state?
Yes. Any US real property held for business or investment is like-kind to any other, regardless of state. US property is not like-kind to property outside the United States. Some states track deferred gain when you exchange into property elsewhere and expect tax when you eventually sell, so check your state's rules before you buy out of state.
Can I do a 1031 exchange on my primary residence?
Not on the part you live in. A main home is covered by a different rule, the home sale exclusion, which can exclude up to $250,000 of gain ($500,000 for most married couples). If part of the property was rented or used for business, that part may qualify for an exchange while the home part uses the exclusion.
Do I ever pay the tax I deferred?
Only if you sell in a taxable sale. The deferred gain lowers the basis of each replacement property, so a final sale without an exchange taxes the accumulated gain, including the depreciation recapture. If you keep exchanging, or hold the last property until death, the tax may never be paid under current law, because heirs generally receive a stepped-up basis.
Sources
- IRS: Instructions for Form 8824, Like-Kind Exchanges (2025)
- IRS: Like-kind exchanges, real estate tax tips
- 26 U.S. Code 1031: exchange of real property held for productive use or investment
- 26 CFR 1.1031(k)-1: deferred exchanges, identification and intermediaries
- IRS: Internal Revenue Bulletin 2008-10, Rev. Proc. 2008-16 on dwelling units
- 26 U.S. Code 121: exclusion of gain from the sale of a principal residence
General education, not financial, tax or legal advice. Figures are examples: rates, rules and programs change, and every lender sets its own. Last checked November 4, 2026.