Selling a Rental Property and Buying Another: How to Do It Without Paying Tax

Why 'I reinvested it' doesn't help

IRC §1031 defers gain only on an exchange of property for property. The moment sale proceeds are paid to you, or to an account you control, you have sold for cash. Under the constructive-receipt rules in Treas. Reg. §1.1031(k)-1(f), it doesn't matter what you do with the money afterward. This is the single most expensive misunderstanding in rental real estate.

The fix is structural: the proceeds must go from your buyer's closing to a qualified intermediary, and from the intermediary to your replacement seller's closing. You never touch them.

Step 1: Engage the intermediary before your sale closes

Ideally two to four weeks before closing, when the purchase contract is being finalized. The QI adds assignment language to your sale contract, prepares the exchange agreement, and instructs the closing agent to wire proceeds to a segregated exchange account. Closing day is technically possible; the day after closing is too late, full stop. How to pick one: vetting a qualified intermediary.

Step 2: Close the sale (Day 0)

Your sale closes, proceeds go to the QI, and both clocks start: 45 calendar days to identify replacements in writing and 180 calendar days to close on them. Both run from the same day. Weekends and holidays count. There are no extensions outside federally declared disasters. Get your exact dates from the deadline calculator.

Step 3: Identify replacements in writing by Day 45

Deliver a signed, dated list to your QI (not your agent, not your attorney) describing each property unambiguously, usually by street address. Most investors use the 3-property rule: up to three candidates of any value. If you're buying several, the 200% rule may fit better. After midnight on Day 45 the list is locked. The three identification rules explained.

Step 4: Close on the replacement by Day 180

The QI wires your exchange funds directly to the replacement closing. To defer 100% of the tax you need three things: replacement value at least equal to your net sale price, new debt at least equal to the debt paid off at sale (or fresh cash to cover the difference), and every dollar of exchange cash reinvested. Fall short and the shortfall is taxable boot; the rest still defers. How boot works.

Step 5: Report it on Form 8824

File Form 8824 with your return for the year of sale. Your basis in the new property is your old basis carried over, plus any new cash invested, minus boot recognized. Depreciation restarts on that carryover basis. Walkthrough: reporting a 1031 exchange on Form 8824.

What if you find the new property first?

Then you need a reverse exchange: an accommodation titleholder parks the new property while you sell the old one within 180 days. It costs more and needs bridge financing, but it solves the 'I'll lose the deal if I wait' problem. And if you've already closed the sale with proceeds in hand, the exchange window has closed; the remaining options are in can you do a 1031 after closing?