Key takeaways
- Section 1031 now applies only to real property held for investment or business use.
- You have 45 days to identify replacement property and 180 days to close — no extensions.
- A qualified intermediary must hold proceeds; touching the money disqualifies the exchange.
- To defer fully, buy equal or greater value and reinvest all equity.
What qualifies and what does not
Since the 2017 tax law, Section 1031 applies only to real property held for productive use in a trade or business or for investment. Personal property exchanges are gone. Your primary residence does not qualify, nor does property held primarily for resale — which excludes flips held as inventory.
Like-kind is interpreted broadly for real estate. An apartment building can be exchanged for raw land, a retail strip, or an industrial building. Both properties must be located within the United States for a domestic exchange.
The deadlines are absolute
From the day your relinquished property closes, you have 45 calendar days to identify replacement property in writing and 180 calendar days to complete the acquisition — or the due date of your return including extensions, whichever comes first. Weekends and holidays do not extend anything.
Identification follows one of three rules: the three-property rule allows identifying up to three properties of any value; the 200% rule allows any number whose combined value does not exceed twice the relinquished property's value; the 95% rule allows more if you acquire at least 95% of the identified value. Most exchangers use the three-property rule.
Qualified intermediaries and boot
You may never take actual or constructive receipt of proceeds. A qualified intermediary — an independent party who cannot be your attorney, CPA, or agent within the prior two years — holds funds and acquires the replacement property on your behalf. Engage them before closing on the sale; after closing it is too late.
To defer all gain, acquire replacement property of equal or greater value and reinvest all net equity. Any cash received or debt relief not replaced is boot and is taxable. Partial exchanges are permitted; you simply pay tax on the boot.
Reverse and improvement exchanges
A reverse exchange acquires replacement property before selling the relinquished property, using an exchange accommodation titleholder to park title. It solves the timing problem in competitive markets but requires more capital upfront and costs more.
An improvement or build-to-suit exchange lets you use exchange funds for construction on the replacement property, with the improvements completed within the 180-day window. Both structures are well established but require experienced counsel.
Frequently asked questions
Can I 1031 into a property I will eventually live in?
Possibly, but it must be genuinely held for investment first. Safe harbor guidance suggests renting at fair market value for at least two years. Converting later also affects the Section 121 exclusion under Section 121(d)(10).
What happens if I miss the 45-day deadline?
The exchange fails and the full gain becomes taxable in the year of sale. There are no extensions except in federally declared disaster areas.
Do I ever pay the deferred tax?
If you exchange repeatedly until death, heirs receive a stepped-up basis under current law and the deferred gain is eliminated. This is the swap-till-you-drop strategy.
Sources & further reading
- IRC §1031 and Treasury Regulation §1.1031(k)-1
- IRS Revenue Procedure 2000-37 (reverse exchanges)
- IRS Revenue Procedure 2008-16 (safe harbor for dwelling units)
Figures and rules change. Verify current requirements with the issuing agency or a licensed professional before acting.