Named for Section 1031 of the Internal Revenue Code, the exchange is the main reason long-held real estate portfolios compound the way they do. The tax is deferred rather than forgiven — it follows the basis into the replacement property and keeps rolling forward for as long as the investor keeps exchanging. The rules are unforgiving on timing, and most failed exchanges fail on the calendar rather than on the concept.
The two deadlines that decide everything
45 days from the closing of the relinquished property to formally identify replacement candidates in writing. 180 days from that same closing to complete the purchase — not 180 days from the end of the identification period. Both run on calendar days including weekends and holidays, and neither can be extended for an ordinary inconvenience. The 180-day clock is also capped by your tax return due date for that year, which catches sales late in the calendar year.
Identification rules
Three common methods. The three-property rule lets you identify up to three properties of any value. The 200% rule lets you identify any number provided their combined value does not exceed 200% of what you sold. The 95% rule lets you exceed both, provided you actually acquire 95% of the value identified. Identification must be unambiguous — a street address or legal description — and delivered in writing to the qualified intermediary within the 45 days.
The qualified intermediary is not optional
You cannot touch the proceeds. If sale funds reach you or an agent under your control, the exchange fails immediately and the whole gain becomes taxable. A qualified intermediary holds the funds between closings. They must be genuinely independent — your own attorney, CPA, broker or employee who has served you in the last two years is disqualified. Engage the intermediary before the relinquished property closes; there is no way to retrofit an exchange after the fact.
Like-kind, boot, and the debt trap
Like-kind is broad within US real property — an apartment building can be exchanged for raw land, a rental house for a retail strip. What is not like-kind: a primary residence, property held mainly for resale, and foreign real estate. To defer fully you must buy equal or greater in value and replace the debt you had. Cash taken out, or a mortgage reduction not offset by new cash, is "boot" and is taxable. The debt half surprises people: selling a property with a $400,000 loan and buying one with a $250,000 loan creates $150,000 of mortgage boot even if every dollar of cash was reinvested.
Financing the replacement property
Exchange timelines are short and unmovable, which makes financing speed a genuine constraint — a lender that takes ninety days will blow the 180-day window. This is one reason exchangers lean on non-QM and DSCR products, which underwrite the property rather than the borrower’s tax returns and typically close faster. Line up the lender during the 45-day identification period, not after. Note also that the replacement debt requirement means you often need a specific loan amount rather than the largest one available. This page is general information, not tax advice — exchanges turn on facts, and the intermediary and your CPA should be involved before you list.
1031 Exchange FAQ
No. Section 1031 applies to property held for investment or productive use in a trade or business. A primary residence has its own exclusion under a different section of the code.
The exchange fails and the gain becomes taxable in the year of sale. The deadline is statutory and is not extended for ordinary difficulty in finding a property.
Yes, subject to the identification rules — three of any value, or any number within 200% of what you sold, or more if you acquire 95% of the value identified.
Delayed. Deferred gain carries into the replacement property’s basis and is recognised whenever you sell without exchanging again.
You can, but cash received is boot and is taxable. Partial exchanges are permitted; you simply pay tax on the portion not reinvested.
Yes — buying the replacement before selling the relinquished property, using an exchange accommodation titleholder. It is more complex and more expensive, and requires specialist structuring.