What is a 1031 exchange?
A 1031 exchange defers the tax on gain when you exchange real property held for productive use in a trade or business, or for investment, for like-kind real property you will hold for the same purpose. Section 1031 postpones the gain. It does not erase it. Your basis in the property you sell generally carries into the replacement, adjusted for cash you add, cash or other property you receive, and any gain you have to recognize.
The usual form is a deferred exchange. You sell first. A qualified intermediary holds the proceeds so you never have actual or constructive receipt, and you buy the replacement. If the funds reach you, the sale is taxable and the exchange cannot be repaired after the fact.
When the exchange qualifies, the deferred tax can include federal tax on the gain (long-term capital gain is taxed at 0%, 15%, or 20%, depending on taxable income), unrecaptured Section 1250 gain taxed at a maximum of 25%, the 3.8% net investment income tax when it applies, and state income tax where the state conforms. Those amounts stay deferred until a later taxable disposition. Under current law, property included in a decedent's estate generally takes a fair-market-value basis at death. Whether that step-up still eliminates the deferred gain is a question for the estate's CPA, under the basis rules in effect at that death.
What are the 1031 exchange rules?
Every one of these has to be true. Missing one recognizes the gain on the sale.
- Both properties are real property held for investment or for use in a trade or business. Exchanges completed after December 31, 2017, do not cover personal property.
- The replacement is like-kind to the property sold.
- On a deferred exchange, a qualified intermediary holds the proceeds. Hire the intermediary before the sale closes.
- You identify the replacement in a signed writing within 45 days.
- You close within 180 days, or by the due date of the tax return for the year of the sale, including extensions, whichever is earlier.
- The same taxpayer that sells is the taxpayer that buys. A partnership interest is not exchangeable real property. A single-member LLC that is disregarded for income tax is the same taxpayer as its owner.
- To defer the entire gain, you do not receive boot: you reinvest the net equity, and you replace debt you paid off or add cash to cover a smaller loan.
Federal rules are uniform. Most states with an income tax follow the federal deferral. Pennsylvania follows it for tax years beginning after December 31, 2022. California requires Franchise Tax Board Form 3840 to track California property exchanged for out-of-state property, and it can tax the deferred California-source gain when that replacement is later sold. Your CPA confirms the state you leave and the state you enter. The intermediary runs the federal exchange documents.
What is like-kind property in a 1031 exchange?
Like-kind, for real property, is broad. Quality and grade do not matter. An apartment building can be exchanged for a net lease retail pad, farmland for a pharmacy, or a rental house for vacant land held for investment. Improved property is like-kind to unimproved property. The lease form does not have to match.
The edges are firm. Your primary residence is not held for investment. Property you hold primarily for sale, including a fix-and-flip held as inventory, does not qualify. Stocks, bonds, mutual funds, partnership interests, and REIT shares are not like-kind real property. U.S. real property is not like-kind to foreign real property. Section 1031(h) draws that line. A leasehold with 30 years or more remaining can be like-kind to a fee interest under Treasury Regulation 1.1031(a)-1. A shorter leasehold is not. Whether renewal options count toward the 30 years is a facts question, not an automatic add.
The statute sets no minimum holding period. Intent is read from what you did: rental or business use, how you reported the property, and how soon you sold or converted it. A purchase you immediately resell, or a replacement you immediately move into, is hard to treat as held for investment.
What is the 45-day identification rule?
The identification period is 45 calendar days. It starts on the date you transfer the relinquished property and ends at midnight on day 45. You designate the replacement in a written document you sign, and you deliver that document before the deadline to the qualified intermediary or to another person involved in the exchange who is not a disqualified person. Signing it on time and sending it late does not count. Treasury Regulation 1.1031(k)-1(c) is the rule.
Weekends and federal holidays do not extend day 45. The IRS can postpone 1031 deadlines for taxpayers affected by a federally declared disaster, and only when a notice covers your location and your dates. Plan the file as if day 45 does not move.
You may acquire only property you identified, unless you already received it before the identification period ended. After day 45 the list is closed. A property that falls out of contract on day 60 cannot be swapped for an address you never named. If you sell more than one property in the same exchange on different dates, both the 45 days and the 180 days are measured from the earliest transfer.
Run your actual dates through the 1031 exchange deadline calculator for the 45-day identification date and the exchange date, then put alarms on both. Start the search before the sale closes. The clock does not wait for you to begin shopping.
What is the 180-day close rule?
The exchange period ends at midnight on the earlier of 180 calendar days after you transfer the relinquished property, or the due date, including extensions, of your income tax return for the year of that transfer. The replacement has to be received inside that window, by the same taxpayer. There is no weekend grace.
A sale late in the year can make the return due date the binding deadline. An individual calendar-year return is generally due April 15. Filing Form 4868 extends that individual due date and can preserve the full 180 days. Partnerships, S corporations, and other filers use their own due dates and extension forms. The date that matters is the due date of the return that reports the exchange, including extensions. Filing that return before the due date does not move the deadline to the filing date. On a fourth-quarter sale, file the extension so the original due date does not cut the window short, and wait to file the return until the replacement has closed.
The same deadline calculator returns this exchange date along with day 45.
What are the 3-property rule and the 200% rule?
You have to satisfy one of three identification rules in Treasury Regulation 1.1031(k)-1(c)(4). Meeting one rule is enough. There is no fourth rule.
Three-property rule
Identify up to three properties, without regard to fair market value. Use it when three candidates are enough. A working list is one primary you have underwritten, one backup at similar economics, and one property you are confident can close if the first two fail. You do not have to buy all three. You may buy one.
200% rule
Identify any number of properties, as long as their total fair market value at the end of the identification period is not more than 200% of the fair market value of what you sold, measured on the date you transferred it. This is the rule that lets one sale be identified into several 1031 exchange NNN properties, different tenants and different states, provided the identified values stay inside the cap and the equity and debt still support the deferral you want.
95% rule
Identify any number of properties of any value, but then acquire, before the end of the exchange period, identified property worth at least 95% of the aggregate fair market value of everything you identified. It is a narrow fallback. Over-identify and fail to close on 95%, and the identification fails.
Describe each property unambiguously: a street address or a legal description. "A net lease store in Texas" is not an identification. Personal property that is typically transferred with the real estate, and that is not more than 15% of the real property's fair market value, is not counted as a separate identified property. It is still not like-kind, so the value allocated to it can be boot.
The written list goes to your qualified intermediary before day 45. Build it from properties you can actually close, before the sale, not on day 40.
What is boot in a 1031 exchange?
Boot is cash or other non-like-kind property you receive. Under Section 1031(b), you recognize gain up to the boot. Boot does not, by itself, disqualify the rest of the exchange. The like-kind portion can still be deferred.
Cash boot
You keep some of the sale proceeds, or you buy a cheaper replacement. Example, not a typical deal: sell for $1,500,000 and buy for $1,350,000. The $150,000 you did not reinvest is boot, taxable up to your realized gain, even if the intermediary never sends you a check.
Mortgage boot
Relief of debt is treated as money received. Debt you take on in the replacement is treated as money you paid, and the two net. If you are relieved of more debt than you assume, the difference is boot unless you add cash to cover it. Example: you pay off a $700,000 loan and the replacement loan is $500,000. The $200,000 difference is boot unless you bring $200,000 of additional cash. New debt does not offset cash boot. If you take $100,000 of cash out and borrow an extra $100,000 on the purchase, the cash is still boot.
Other boot
Non-real property in the deal, such as equipment in a restaurant or car wash, repair credits paid to you in cash, and prorations that put cash in your pocket. Price the personal property separately so exchange funds are not used to buy it. Have the intermediary read both settlement statements before they are final.
Recognized boot is gain. Unrecaptured Section 1250 gain, taxed at a maximum of 25%, is generally recognized before the remaining capital gain, and state tax and the 3.8% net investment income tax can apply on top. Taking boot on purpose is a partial exchange. Finding it at filing time is the version to avoid. If you intend to take cash, tell the intermediary in writing before the first closing.
What happens to basis?
Basis in the replacement starts from your basis in the property you sold. It is reduced by money and net debt relief you received, and increased by cash you added and gain you recognized. Depreciation you already took stays inside the deferred gain. The exchange does not forgive it. The portion of the replacement allocated to land is not depreciable, so the land and building split should reflect fair market value. Report the exchange on IRS Form 8824. When one sale funds several replacements, allocate basis among them in the year of the exchange.
A later cash-out refinance of property you hold is borrowing, not sale proceeds. A refinance that is part of a prearranged plan to pull cash out through the exchange can be challenged. Whether any gap is required is a CPA question, not a form on this page.
Why do NNN properties fit a 1031 exchange?
An NNN property is real estate. Held for investment, it is like-kind to other investment real estate you sell: an apartment building, a strip center, a rental house, or another net lease. There is no special 1031 category for net lease. The fit is practical. A single-tenant purchase is a deed to the fee, or a long ground lease, subject to a lease. The work between contract and closing is the lease, an estoppel, title, and financing, which can finish inside 180 days when the search starts before day 45.
NNN means the tenant pays property taxes, insurance, and maintenance. An absolute net lease also shifts structural repairs, and often the roof. Read the lease. The label on the offering memorandum is not the document. Price in-place rent against the asking price with the cap rate calculator before the address goes on the identification list, and count the years left on the term from the lease itself. The triple net lease guide is the lease primer; this page is the exchange.
The 3-property rule gives you a primary and two backups. The 200% rule gives you room to identify several NNN properties and buy more than one, which is how one sale becomes two or three leased properties, if the values, the equity, and the debt all work. Debt replacement is underwriting, not a promise that a lender will match the loan you paid off. A smaller new loan is mortgage boot unless you add cash.
Tenants buyers underwrite for this purpose include Dollar General, 7-Eleven, Chick-fil-A, Wawa, McDonald's, and Starbucks. Current offerings that can go on a list are on 1031 exchange properties for sale. The purchase steps are the same ones in how to buy net lease property.
What else qualifies for a 1031 exchange, and what does not?
Both sides have to be real property held for investment or for productive use in a trade or business. Rentals, commercial buildings, NNN property, farmland, and vacant land held for investment are in. A leasehold of 30 years or more can be in. Your home, dealer inventory, securities, and anything that is not real property are out. Rights that state law treats as real property, such as some mineral interests or tower easements, are a local-law question for counsel. Do not assume they qualify because they feel like dirt.
Primary residence and Section 121
A home is not 1031 property. Section 121 can exclude $250,000 of gain, or $500,000 if you are married filing jointly, when you owned and used the home as your main home for two of the five years before the sale. That exclusion does not use an intermediary or the 45- and 180-day clocks. A home you convert into a genuine rental can later be exchanged. If the two-of-five test is still met, Revenue Procedure 2005-14 describes how the Section 121 exclusion and a 1031 deferral can apply to the same transfer. Moving into a replacement later is the reverse problem. Revenue Procedure 2008-16 is the safe harbor people document before they rely on a conversion.
Second homes
A vacation home is not automatically in or out. Under the Revenue Procedure 2008-16 safe harbor, the IRS will treat a dwelling unit as held for investment if you owned it for at least 24 months immediately before the exchange and, in each of the two 12-month periods immediately before the exchange, you rented it at fair market rent for 14 days or more and limited personal use to the greater of 14 days or 10% of the days rented at fair market rent. The same pattern applies to the replacement for 24 months after the exchange. The safe harbor is a path, not the only fact pattern that can qualify, and a token listing over a season of personal use does not meet it.
Land, construction, and property you already own
Vacant land held for investment is like-kind to improved property. Building with exchange funds is a different problem: the improvements have to exist by the end of the exchange period, which is why a construction exchange uses an accommodation titleholder. You cannot exchange into land you already own. Paying your own contractors on your own parcel is treated as receiving the cash. The narrow alternative is a long-term ground lease to an accommodation titleholder that builds during the exchange period, so what you acquire is a leasehold plus improvements you did not already own. Buying a finished, rent-commenced pad is an ordinary purchase. That is the path on new construction NNN properties.
Stocks, funds, foreign property, and inherited property
Securities do not qualify, and they have not qualified since well before the 2018 limit of 1031 to real property. A sale of stock is not repaired by calling it an exchange. Foreign real property is like-kind only to foreign real property. A property outside the United States does not defer into a U.S. net lease building.
Inherited property often does not need an exchange. Under current law, the basis of property acquired from a decedent is generally its fair market value at death, so a sale soon after death may recognize little gain. If the heir holds the property as an investment and later gain accrues, a 1031 exchange can defer that later gain. Document date-of-death value before you list.
When do reverse, partial, and drop-and-swap exchanges apply?
Reverse exchange
Use a reverse exchange when the replacement will not wait for your sale. You cannot hold both properties as the exchanger at once, so an exchange accommodation titleholder parks the replacement under the Revenue Procedure 2000-37 safe harbor. You have 45 days from the transfer to that titleholder to identify the property you will sell, and 180 days to finish. Conventional lenders often will not lend to the accommodation entity on ordinary terms, so the financing has to be built for the structure. The cost is higher than a forward exchange because of that entity. Use it when the replacement is the property you cannot replace. Sell first when you have the time.
Partial exchange
You may reinvest only part of the value. The part you do not reinvest is boot, and you recognize gain up to that amount. The rest can stay deferred. Tell the intermediary, in writing, before the first closing, how much cash you intend to take.
Drop and swap
A partnership interest cannot be exchanged. Section 1031(a)(2) says so. Real estate owned directly, including as tenants in common, can. Partners who want different exits sometimes distribute the real estate into tenancy-in-common interests before a sale, so each person owns realty. Some of them exchange. Some sell for cash. The risk is holding purpose. Interests received immediately before a sale can look like property held for sale, or like the partnership still owns the asset. The Code states no seasoning period. Raise the exit plan well before a listing. State tax agencies, including California's Franchise Tax Board, often ask how long each owner held the interest.
What the other side of the contract sees
If you are buying from a 1031 seller, that seller's day 45 and day 180 are real, and a cooperation clause is how the intermediary is assigned into the contract. If you are the seller, put the cooperation language in the purchase contract so the buyer can be required to work with your intermediary. The clause is paperwork. It is not a price concession.
How do DST, TIC, 721, and opportunity-zone investments differ?
These are different statutes or different ownership forms. They are not a quieter version of buying a whole NNN property. Use one when the job is different from "buy this building with exchange dollars."
Delaware statutory trust
Revenue Ruling 2004-86 treats a beneficial interest in a Delaware statutory trust that meets the ruling's restrictions as direct ownership of the underlying real estate for 1031 purposes. A sponsor controls the property. You generally cannot force a sale or vote on major decisions, and you cannot get your capital out until the trust disposes of the asset. A DST interest is sometimes identified as a backup, or used to place a remainder too small for a whole property, because the closing can be short. Read the private placement memorandum for the fee load and the transfer limits. It is not the default when you have the equity to buy a property in your own name.
Tenancy in common
Each co-owner holds an undivided interest in the real estate, and that interest can be exchanged. A partnership interest cannot. Revenue Procedure 2002-22 describes what the IRS wants to see before it will consider ruling that a co-ownership is not a partnership: 35 or fewer co-owners, pro-rata economics, unanimous consent on major decisions, and no partnership-style features. That is a ruling guideline, not a statute that caps every tenancy in common at 35. Co-owners keep real consent rights, and lenders underwrite them. The organic uses are a drop-and-swap exit and several exchangers buying one building together.
Section 721
Section 721 can defer gain when you contribute property to a partnership, including a REIT operating partnership, for units. There is no qualified intermediary and no 45- or 180-day clock. The units are partnership interests. They cannot go into a later 1031 exchange. Converting them into REIT shares, or the REIT selling the contributed property, generally recognizes the deferred gain. Owners who want to keep exchanging stay in 1031. A 721 contribution is a way out of that system.
Opportunity zones and Section 1035
An opportunity-zone investment is a different code section. Eligible gain from assets Section 1031 does not cover, including securities, can go into a qualified opportunity fund. You do not use a qualified intermediary. Only the gain has to be invested, not the rest of the sale proceeds, and the holding period and the recognition date are the fund rules, not day 45 and day 180. Confirm the current recognition rule with a CPA before you compare a fund to an exchange of real estate. One is a property you choose. The other is a fund interest.
Section 1035 is unrelated. It defers gain on certain exchanges of life insurance and annuity contracts, carrier to carrier. An annuity does not exchange into a rental, and a building does not exchange into an annuity.
How do 1031 exchanges fail?
The failures that end exchanges are the calendar and the list, not an obscure subsection. Starting the search after the sale leaves too little that can close in time. Identifying one property, then losing it after day 45, leaves nothing you are allowed to buy. The counters are ordinary: engage the intermediary before the sale closes, set the criteria before day 1, get a primary under contract early in the 45 days, and identify backups in writing even when you expect the first contract to hold.
That sequence is what buyer representation is for on an exchange file. The rules on this page are public. The deadline does not move because a deal dies.