By Harry Prabandham · Updated September 27, 2026
Tax Planning
How a 1031 Exchange Works: Deadlines, Boot, and Trade-offs
A 1031 exchange defers tax on the sale of investment real estate if the proceeds buy like-kind property within strict 45- and 180-day deadlines.
How a 1031 Exchange Works: Deadlines, Boot, and Trade-offs
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What is a 1031 exchange?
- Section 1031 lets an owner sell real property held for business or investment and postpone the tax by acquiring other like-kind real property.
- The tax is deferred, not forgiven: the untaxed gain carries into the replacement property through a lower cost basis.
- Since 2018, only real property qualifies; equipment, vehicles, artwork, and other personal property no longer do.
- A primary residence, a vacation home used mainly personally, or a house bought to flip generally does not qualify.
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What is a 1031 exchange?
- Section 1031 lets an owner sell real property held for business or investment and postpone the tax by acquiring other like-kind real property.
- The tax is deferred, not forgiven: the untaxed gain carries into the replacement property through a lower cost basis.
- Since 2018, only real property qualifies; equipment, vehicles, artwork, and other personal property no longer do.
- A primary residence, a vacation home used mainly personally, or a house bought to flip generally does not qualify.
Which deadlines can't be missed?
- Replacement property must be identified in writing within 45 calendar days after the old property transfers.
- The purchase must close by the earlier of 180 calendar days or the due date, including extensions, of that year's tax return.
- Weekends and holidays count, and extensions are generally available only through IRS disaster relief.
- A sale late in the year can lose days to the April return deadline unless the seller files an extension.
How many replacement properties can be identified?
- Three-property rule: up to three properties may be identified regardless of their combined value.
- 200% rule: any number may be identified if their total value doesn't exceed twice the value of the property sold.
- 95% exception: identifying beyond both limits works only if the buyer actually acquires at least 95% of the value identified.
- Each identification needs an unambiguous description, such as a street address or legal description, signed and delivered to a permitted party.
The intermediary and the cash
- Actual or constructive receipt of the sale proceeds, even briefly, generally breaks the exchange, so a qualified intermediary holds the funds.
- Someone who acted as the seller's agent in the prior two years, such as their attorney, accountant, or broker, generally can't serve.
- Intermediaries have little federal oversight, so sellers often ask about fidelity bonds, insurance, segregated accounts, and operating history.
- Membership in an industry association is one data point, not a substitute for checking financial strength and controls.
What is boot, and when is it taxed?
- Cash kept, or debt paid off that isn't replaced with new debt or added cash, is boot and is taxable up to the realized gain.
- Some owners intentionally take partial boot to free up cash, accepting tax on that piece while deferring the rest.
- Full deferral generally requires buying equal or greater value and reinvesting all net proceeds.
- Past depreciation carries over; on a later taxable sale, that portion of gain can be taxed at up to 25% federally.
Other rules that trip people up
- Exchanges with related parties can be disqualified if either side disposes of its property within two years.
- California taxes deferred gain when out-of-state replacement property is later sold and requires annual Form FTB 3840 filings until then.
- Delaware Statutory Trust interests can qualify, but they are illiquid, carry sponsor fees, give investors no control, and are usually limited to accredited investors.
- If replacement property is held until death, heirs generally receive a stepped-up basis under current law, which removes the deferred gain.
Key takeaways
- A 1031 exchange postpones tax; it doesn't remove it unless basis is later stepped up at death.
- The intermediary agreement and the 45- and 180-day calendar need to be in place before the sale closes.
- Deferral comes with trade-offs: reinvested cash stays in real estate, with its concentration, leverage, and management demands.
- These are complex transactions; confirm the details with a CPA and real estate attorney, since Rubric does not prepare tax returns or give legal advice.
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