1031 Exchange FAQ: The 42 Most-Asked Questions

Deadlines & Timeline

How long do you have to do a 1031 exchange?

180 calendar days from the closing of your sale, with a hard checkpoint at day 45 — by midnight of day 45 you must deliver written identification of replacement properties to your qualified intermediary, and by midnight of day 180 you must close on the replacement. Both deadlines come from IRC §1031(a)(3) and neither can be waived. Get your exact dates with the deadline calculator.

What is the 45-day rule?

You have 45 calendar days from your sale closing to identify replacement property in writing. The identification must be signed by you, delivered to your qualified intermediary (not your agent or attorney), and describe each property unambiguously — a street address or legal description. After midnight of day 45 the list is locked: nothing can be added or swapped. Full detail on the timeline page.

What is the 180-day rule?

Your replacement property purchase must fully close within 180 calendar days of your sale closing. Title must transfer and funds must move by midnight of day 180 — a signed contract is not enough. The 180 days include the 45-day identification window; they are not added on top of it.

Do the 45 days and 180 days run at the same time?

Yes — both clocks start on the same day (your sale closing) and run simultaneously. That means after identifying on day 45 you have 135 days left to close, not another 180. Investors who think the periods stack is one of the most common planning errors we see.

When does the 1031 clock start?

On the day your relinquished property sale closes — the day title transfers, called day 0. Not the day you list, not the day you sign the contract, not the day funds clear. If you close multiple properties as one exchange, the clock starts with the first closing.

Do weekends and holidays count toward the deadlines?

Yes. Both deadlines are calendar days — weekends and federal holidays count, and a deadline that lands on a Sunday still expires that Sunday at midnight. Unlike many IRS deadlines, the 45- and 180-day rules do not roll to the next business day.

Can the 45-day or 180-day deadline be extended?

No — with one exception: a federally declared disaster affecting you or your property can extend both deadlines, typically by 120 days, under Rev. Proc. 2018-58. There is no hardship extension, no "the lender was slow" extension, and no fee you can pay for more time. Verify current disaster relief at irs.gov before relying on it.

Can my 180 days be cut short?

Yes — the true deadline is the earlier of day 180 or the due date of your tax return for the year you sold. Sell in Q4 and your April filing deadline can arrive before day 180. The fix is simple: file a Form 4868 extension, which preserves your full 180 days. The deadline calculator checks this rule automatically.

What happens if I miss a 1031 deadline?

The exchange fails and the sale becomes fully taxable — federal capital gains, depreciation recapture, state tax, and possibly the 3.8% net investment income tax all come due for the year of sale. There is no partial credit for a near miss on day 45. This is why replacement shopping should start before you sell, not after.

Getting Started

What is a 1031 exchange?

A 1031 exchange lets you sell investment real estate and reinvest the proceeds into other investment real estate while deferring the capital gains tax — named for Section 1031 of the Internal Revenue Code. The tax isn't forgiven; it's postponed, letting your full equity keep compounding in the next property. Start with the plain-English guide.

How does a 1031 exchange work?

Six steps: engage a qualified intermediary before closing, sell, let the QI hold the proceeds, identify replacements in writing within 45 days, close within 180 days, and report on Form 8824. The critical mechanic is that you never touch the sale money — it goes from your buyer's closing straight to the QI's segregated account and from there to your purchase.

What property qualifies as like-kind?

Any U.S. real property held for investment or business use is like-kind to any other — a rental condo can become farmland, an office building, or a DST interest. What doesn't qualify: your primary residence, property held primarily for resale (flips), foreign real estate paired with U.S. real estate, and — since the 2017 tax law — anything that isn't real estate. Details in the rules pillar.

Can I do a 1031 exchange on my primary residence?

No — your home isn't held for investment, so it fails §1031. Your home has its own tax break: the §121 exclusion shelters up to $250,000 of gain ($500,000 married filing jointly) if you lived there 2 of the last 5 years. Mixed-use property — a duplex you live in and rent — can split the sale between §121 and §1031.

Can I 1031 a vacation home?

Only if it genuinely operates as a rental. The IRS safe harbor (Rev. Proc. 2008-16): own it 24 months, rent it at fair market value at least 14 days per year, and keep personal use under 14 days or 10% of days rented — in each of the two years before the exchange. A house that's mostly for your family with occasional Airbnb weekends will struggle to qualify.

Can a corporation do a 1031 exchange?

Yes — any U.S. taxpayer can: C-corporations, S-corporations, LLCs, partnerships, trusts, and individuals. The requirement isn't about entity type; it's that the same taxpayer that sells must buy the replacement. The complications arise when partners in an entity want to go separate ways — that requires advance planning (a "drop and swap"), ideally a tax year before the sale.

Can an LLC, S-corp, or partnership do a 1031 exchange?

Yes, at the entity level — the LLC or corporation exchanges as a single taxpayer. What individual members and shareholders can't do is exchange their ownership interests in the entity (partnership interests are excluded from §1031). If some owners want cash and others want to exchange, restructure well before the sale — talk to your CPA about drop-and-swap timing.

How many times can you do a 1031 exchange?

There's no limit — you can exchange as many times as you want, deferring tax at every step. Many investors chain exchanges for decades and never sell for cash, a strategy known as "swap till you drop": at death, the deferred gain can be eliminated entirely by the stepped-up basis.

Is a 1031 exchange worth it?

Usually yes when your deferred tax is meaningfully larger than the transaction costs — and the bigger your gain and depreciation recapture, the more compelling it gets. Deferral means your would-be tax bill stays invested and compounding. It's least compelling for small gains, or if you need the cash and accept the tax. Run your numbers in the 1031 calculator.

Rules & Mechanics

What is the 3-property rule?

You may identify up to three replacement properties of any value, and close on any of them. It's the identification rule used in roughly 9 of 10 exchanges because it's simple and lets you carry backups. Identify two or three — if your first choice falls through after day 45, you can only buy what's on the list.

What is the 200% rule?

You may identify any number of properties as long as their combined value doesn't exceed 200% of your sale price. Useful when you're buying several smaller properties or aren't sure which deals will close. Exceed both the 3-property and 200% limits and you fall into the unforgiving 95% rule — you must actually acquire 95% of the value you identified.

What is boot in a 1031 exchange?

Boot is anything you receive in the exchange that isn't like-kind real estate — leftover cash, a reduction in debt, or the seller's non-realty property — and it's taxable up to your total gain. Boot doesn't kill the exchange; it just makes that portion taxable. Common accidental boot: closing credits, prorated rents, and paying off more mortgage than you take on. Full boot breakdown.

Do I have to reinvest everything?

For full deferral, yes — buy replacement property worth at least your net sale price and reinvest all the equity. Debt counts too: the mortgage on the new property must equal or exceed what was paid off on the old one, or you cover the difference with fresh cash. Fall short on either and the shortfall is taxed as boot.

Can I take cash out of a 1031 exchange?

Yes — it's called a partial exchange. The cash you keep is boot and is taxed, while the reinvested portion stays deferred. The cash must come out through the QI at the right moment (at closing or after the exchange completes), not midstream. Many investors instead complete the full exchange and later do a cash-out refinance on the replacement — loan proceeds aren't taxable income.

Can I change how title is held during an exchange?

The same taxpayer that sells must buy — changing the taxpayer mid-exchange is one of the fastest ways to blow it up. The main exception: entities the IRS disregards, like a single-member LLC. You can sell personally and buy through your single-member LLC (or vice versa) because the IRS sees the same taxpayer. Adding a spouse or moving to a partnership mid-exchange invites disqualification.

Can I buy replacement property from a family member?

It's heavily restricted — §1031(f) generally requires both you and the related seller to hold for two years, and buying from a relative who doesn't do their own exchange usually fails entirely. "Related" covers family and entities you control over 50%. Selling to a related party is easier than buying from one, but both directions deserve professional review before contract.

How long must I hold a property before (or after) exchanging?

The statute sets no minimum holding period — what matters is your intent to hold for investment, which the IRS reads from your facts. Most practitioners are comfortable at a year or more (two supports the vacation-home safe harbor and related-party rules). Buying with the intent to flip fails regardless of timing. More in the holding-period guide.

Qualified Intermediary

What is a qualified intermediary?

A qualified intermediary (QI) — also called an accommodator or facilitator — is the independent party that holds your sale proceeds and papers the exchange so you never touch the money. The QI can't be your agent, attorney, CPA, or anyone who worked for you in the last two years. Full explainer: what a QI does.

Why can't I hold the sale money myself?

Because touching the proceeds — even for a day, even in escrow you control — is "constructive receipt," and it makes the sale taxable immediately. The entire legal structure of a deferred exchange rests on the funds going from your buyer's closing directly to the QI's account. There is no fixing this after the wire hits your account.

How do I choose a qualified intermediary?

Vet three things: how your money is held (segregated, dual-signature accounts — never commingled), what protects it (fidelity bond and E&O insurance), and who's answering the phone (a Certified Exchange Specialist beats a call center). The QI industry is largely unregulated federally, so this diligence is on you. Here's my full checklist for vetting a QI.

When do I need to hire the QI?

Before your sale closes — ideally two to four weeks before, when the purchase agreement is being drafted. The QI needs to insert assignment language into your contract and set up the exchange account. After closing is too late: once proceeds reach you, no QI can un-ring that bell. Engaging the week of closing is possible but risks mistakes.

What does a qualified intermediary cost?

A straightforward forward exchange is typically a modest flat fee; reverse and improvement exchanges cost several times more because an exchange accommodation titleholder must take and hold title. Fee differences between reputable QIs are trivial next to the tax at stake — pick on security and expertise, then compare price. Ask me for a current quote.

Construction, Reverse & DST

Can a 1031 exchange be used for new construction?

Yes — through an improvement (build-to-suit) exchange, where an exchange accommodation titleholder holds the new property while your exchange funds pay for construction. The catch: only value in place by day 180 counts, so this works for renovations and builds that can substantially complete in six months — not ground-up projects on raw timelines. How it works: construction & improvement exchanges.

What is a reverse 1031 exchange?

Buying your replacement before selling your current property — an accommodation titleholder "parks" one of the properties (Rev. Proc. 2000-37), and you have 180 days to complete the sale. It solves the biggest fear in a hot market: losing the perfect replacement while waiting for your buyer. It costs more and requires bridge financing, since your equity is still locked in the unsold property. Full guide: reverse exchanges.

What is a DST 1031 exchange?

A Delaware Statutory Trust lets you exchange into a fractional interest in large institutional real estate — the IRS treats it as direct property ownership for §1031 (Rev. Rul. 2004-86). The DSTs I work with are zero-cash-flow structures: returns come through tax deferral, debt paydown, and value at exit rather than monthly distributions. They're a fit for investors done with active management, and a common day-44 backup identification. Details: DST exchanges.

What happens when a DST property sells?

You receive your share of the proceeds and face the same choice as any sale: 1031 the proceeds into the next property (or another DST) and keep deferring, or cash out and recognize the gain. Sponsors typically hold DST properties for a multi-year term. Because your interest is like-kind real estate, the exchange chain — and the "swap till you drop" endgame — stays fully available.

Can you 1031 into an opportunity zone fund?

No — a qualified opportunity fund is an investment in an entity, not like-kind real estate, so it can't be your 1031 replacement. Opportunity zones are an alternative: instead of exchanging, you invest just the gain into a QOF within 180 days of sale for a different deferral with its own rules. Which is better depends on your horizon and appetite — comparison here: 1031 vs opportunity zones.

Can you 1031 into a REIT?

Not directly — REIT shares are securities, not like-kind real estate. The two-step path many investors use: 1031 into a DST, then after a holding period contribute the DST interest to the REIT's operating partnership under §721 (an "UPREIT" transaction). That final step is tax-deferred but one-way — once in OP units, you can't 1031 out again.

Taxes & States

Does a 1031 exchange defer state taxes too?

In nearly every state, yes — state capital gains tax defers along with federal. The stakes vary wildly by state: eight states have no income tax at all, while California tops out over 13% and NYC residents face combined rates near 15%. See what's at stake where you are: state-by-state tax rates.

Do all states follow the federal 1031 rules?

Almost all conform, with famous quirks: California "claws back" — if you exchange CA property for out-of-state property, you file Form 3840 annually and California taxes the CA-sourced gain when you eventually sell for cash. Pennsylvania, the last holdout, has conformed since 2023. Some states (like New Jersey) apply an estimated-tax withholding at closing for out-of-state sellers — a prepayment, not an extra tax, and exemption forms exist for exchanges. Your state's specifics: all 50 state guides.

Does a 1031 exchange defer depreciation recapture?

Yes — in a full exchange, depreciation recapture (taxed at up to 25%) defers right along with the capital gain. This is a bigger deal than most investors realize: on a long-held rental, recapture can rival the capital gains bill itself. Estimate yours with the depreciation recapture calculator.

What happens to the deferred tax when I die?

Under current law, your heirs inherit the property at its stepped-up fair-market-value basis — the deferred gain is eliminated, not just deferred. This is why "swap till you drop" is a genuine estate strategy, not a joke: decades of exchanges can convert a lifetime of taxable gains into an inheritance with no built-in income tax bill. Estate tax is a separate question for your planner.

How is a 1031 exchange reported to the IRS?

On Form 8824, filed with your federal return for the year you sold — it reports both properties, the timeline dates, any boot, and your carryover basis. Your QI provides the closing documentation, and your CPA calculates the new basis (old basis carried over, plus new cash invested). California exchangers add Form 3840 if the replacement is out of state.