1031 Exchange FAQ

A 1031 exchange (also called a like-kind exchange) is a tax strategy under IRC Section 1031 that lets real estate investors defer capital gains taxes when selling an investment property, as long as the proceeds are reinvested into a new like-kind property following specific IRS rules. The tax is deferred, not eliminated, and can be rolled forward indefinitely through successive exchanges.

For real estate, 'like-kind' is broadly defined. Any U.S. real property held for investment or business use is like-kind to any other U.S. real property held for investment or business use, regardless of property type, quality, or location. A single-family rental can generally exchange into a commercial warehouse, farmland, or a qualifying DST interest, subject to the nature of the ownership interests and all other requirements. Foreign property is not like-kind to U.S. property.

No. A qualifying exchange defers gain through the replacement property's tax basis. Qualifying inherited property may receive a basis adjustment under IRC §1014, often removing embedded gain, but this is not guaranteed for every asset, trust, entity, or ownership structure. Basis can also be adjusted downward; ask an estate and tax professional about your facts.

Investment or business-use real property can qualify, including rental buildings, commercial property and land. Certain trust, cooperative, easement, mineral, water and long-term lease interests may qualify, but each interest must satisfy the real-property definition and like-kind rules; a DST label alone is insufficient. U.S. and foreign real property are not like-kind. Personal-use property and property held primarily for sale do not qualify, and personal property is excluded under current §1031 rules. See the current Form 8824 instructions.

A solely personal-use primary residence does not qualify for §1031. Mixed-use property or property that meets §121's prior ownership/use tests while held for investment at exchange may permit both provisions under Rev. Proc. 2005-14. The §121 limits are up to $250,000 or $500,000 for qualifying joint filers, subject to eligibility. A replacement property must genuinely be held for investment before any later personal use. Property acquired in a §1031 exchange is subject to §121(d)(10)'s five-year restriction, as well as the ownership/use tests, nonqualified-use allocation and depreciation exclusion. Consult a CPA.

In a typical deferred exchange, identify replacement property in signed writing within 45 calendar days after transferring the relinquished property. Receive replacement property by the earlier of 180 days after transfer or the due date, including extensions, of the federal return for the transfer year. Weekends and holidays normally do not extend these periods. IRS disaster-specific relief may apply to eligible taxpayers; check the applicable notice. See IRS Form 8824 instructions and Treas. Reg. §1.1031(k)-1.

You can identify replacement properties using one of three rules: (1) The 3-Property Rule: identify up to 3 properties regardless of value. (2) The 200% Rule: identify any number of properties as long as their total FMV doesn't exceed 200% of your relinquished property's value. (3) The 95% Rule: identify unlimited properties if you actually acquire at least 95% of the total identified value. Most investors use the 3-Property Rule for simplicity.

Without valid identification or acquisition during the identification period, the deferred exchange generally cannot qualify, unless applicable IRS relief changes the deadline. Funds are not automatically returned on Day 46: release depends on the exchange agreement and Treas. Reg. §1.1031(k)-1(g)(6). Contact your QI and tax advisor to determine eligibility, fund-release timing, and tax reporting.

Generally file Form 8824 with the federal return for the year you transferred the relinquished property. An exchange spanning two calendar years does not by itself require reporting the same exchange twice. Related-party exchanges, later dispositions, recognized gain, and installment-sale treatment may create additional reporting. Follow the current Form 8824 instructions and your advisor's guidance.

An extension of the federal return due date may prevent that earlier date from shortening your normal 180-day exchange period; it does not normally add days beyond day 180. For example, a late-year transfer may have a normal day-180 date after the unextended return due date. Separate IRS disaster relief can postpone exchange deadlines only for eligible taxpayers under the applicable notice; professional confirmation is essential.

Boot includes cash, non-like-kind property, or net debt relief received. Recognized gain is generally the lesser of realized gain and boot, with separate recapture rules. Reinvest qualifying net proceeds and offset net debt relief with replacement debt or additional outside cash. Extra borrowing does not offset cash actually received; have your CPA classify exchange expenses and assets.

Yes, a partial exchange is allowed. You can take cash out (boot), but that cash will be taxable. The remaining reinvested portion still qualifies for deferral. For example: sell a $1M property with $400K gain, take $100K cash out and reinvest $900K, only the $100K is taxable that year; the other $300K in gain is deferred.

Distinguish ordinary-income recapture under §1245 or §1250 from unrecaptured §1250 gain, which generally covers prior straight-line real-property depreciation and has a maximum 25% federal rate. A qualifying real-property exchange may defer eligible gain, but mixed-asset and recapture rules can cause current recognition; personal property is not automatically exchange-eligible. Deferred amounts and tax basis must be tracked. See IRS Publication 544 and Form 8824 instructions.

Net debt relief can create taxable boot, but replacement debt is not the only way to offset it: additional cash contributed can also offset debt relief under the applicable netting rules. Additional borrowing does not offset cash actually received. Evaluate debt, cash, qualifying exchange expenses, and realized gain together with your tax advisor.

A reverse exchange lets you buy the replacement property first and sell the relinquished property later, the opposite of a standard 'forward' exchange. An Exchange Accommodation Titleholder (EAT) holds title to either the new or old property while the exchange is structured. Under IRS Rev. Proc. 2000-37, you have 45 days to identify the property to sell and 180 days to complete the sale. Reverse exchanges are more complex and expensive than forward exchanges.

An improvement exchange allows you to use exchange funds to build or renovate the replacement property before taking title. Like a reverse exchange, an EAT holds title during construction. The exchange must be completed within 180 days. This is useful when you want to exchange into a property that currently has less value than your relinquished property; improvements bring the value up to satisfy the 'equal or up in value' requirement.

A Delaware statutory trust can hold real estate for beneficial owners. Under the specific investment-trust facts in Rev. Rul. 2004-86, investors are treated as owning interests in the underlying real property that may qualify for §1031. Not every DST qualifies. Offerings can provide passive ownership but have sponsor, leverage, liquidity and securities risks; review the actual trust, tax opinion and offering documents with qualified professionals.

A qualifying DST interest can represent beneficial ownership of real property under the specific facts of Rev. Rul. 2004-86. TIC owners directly own undivided property interests; the arrangement must not be treated as a partnership for exchange purposes. Rev. Proc. 2002-22 lists conditions for IRS ruling requests, including no more than 35 co-owners—it is not a universal statutory cap for all TIC ownership. Qualification, control, liquidity, and securities restrictions depend on the offering and arrangement.

A QI facilitates a deferred exchange through a written exchange agreement and restrictions on the taxpayer's access to exchange funds under Treas. Reg. §1.1031(k)-1(g)(4). Arrange the structure before transferring the relinquished property. A QI is the common safe harbor for a sale-and-replacement exchange, not a requirement for every direct simultaneous exchange. Review financial safeguards, account structure, insurance, and any state regulation before selecting a QI.

Minimally. There is no federal licensing requirement for QIs, and most states don't regulate them either. This creates real risk, and the LandAmerica Financial Group bankruptcy in 2008 resulted in hundreds of millions of dollars in investor losses when exchange funds were commingled and lost. Best practices: use a QI that is bonded and insured, holds funds in segregated (not pooled) accounts, has a long track record, and ideally carries Fidelity Bond and E&O insurance.

Often not, if the person acted as your agent in specified roles during the two years before transfer. Treas. Reg. §1.1031(k)-1(k) also addresses related persons and exceptions for certain exchange, title, escrow, and other services. Not every previous financial relationship automatically disqualifies a person. Have an exchange attorney evaluate the actual prior services and relationships before appointing an intermediary.

A foreign person for U.S. tax purposes may complete a qualifying exchange of U.S. real property, but FIRPTA withholding requires separate analysis. Tax residency, not nationality alone, controls. The general withholding rate is 15% of amount realized, with statutory exceptions, reduced rates for certain buyer-residence transactions, and possible nonrecognition or withholding-certificate procedures. A planned exchange does not automatically eliminate withholding; review IRS Forms 8288 and 8288-B and applicable notices with qualified counsel before closing.

Related-party exchanges require review under §1031(f), including the two-year disposition restriction, statutory exceptions and anti-abuse rule. A QI does not necessarily cure a transaction in which a related seller cashes out; simply holding your replacement for two years does not guarantee eligibility. Direct swaps, purchases from related parties, dispositions, tax-avoidance concerns and related-person definitions have different consequences. Review the actual structure with counsel and the Form 8824 instructions before closing.

Rev. Proc. 2008-16 provides a dwelling-unit safe harbor: own the relinquished property at least 24 months before exchange and the replacement at least 24 months after. In each relevant 12-month period, rent at fair market value for at least 14 days and limit personal use to the greater of 14 days or 10% of days rented. Personal-use definitions and documentation matter. A property outside the safe harbor needs a separate investment-intent analysis; it is not automatically disqualified.

The relinquished property's secured mortgage is normally paid at sale; that payoff is part of the exchange's liability analysis, not automatically cash boot. Exchange proceeds can fund qualifying replacement property and eligible exchange expenses under the agreement. Payments of unrelated personal debt, loan charges, prepaids or other nonqualifying costs can create tax consequences. Classify each charge with your CPA and closing agent rather than treating every closing cost as eligible.

If nonrecognition requirements are not met, sale gain generally becomes recognizable, but valid completed portions, available exclusions, losses and installment-sale rules can affect the result and timing. Ordinary recapture can have separate current-year rules. Do not assume every failed exchange produces the same tax bill or recognition year, especially when a QI holds proceeds across year-end. Obtain a transaction-specific calculation and reporting plan.

State income-tax conformity, source-state taxation, withholding, and closing taxes are separate issues. California FTB 3840 and Oregon OR-24 have specific annual reporting requirements for covered out-of-state exchanges; other states' sourcing rules should not be assumed identical. Pennsylvania personal income-tax conformity applies to tax years beginning after December 31, 2022. A federal exchange does not automatically eliminate transfer or excise taxes, including Washington REET. Review the source-linked 50-state guide and current state instructions.

The term commonly describes a source state's continued right to tax its originally deferred gain after an out-of-state exchange. California and Oregon have specific tracking and annual reporting rules for covered transactions. It is the original source-state gain, not necessarily all later appreciation, that remains subject to sourcing analysis. Do not assume every state has identical rules or annual forms; consult the state guidance and your CPA.

California real-estate withholding generally uses 3⅓% of the sales price or an eligible alternative gain-based calculation, subject to exemptions. Use the current Form 593—not obsolete 593-C/593-W forms—to document applicable exchange relief. Boot, a partially deferred transaction, or a failed exchange may trigger withholding. Covered California-to-out-of-state exchanges also require FTB 3840 reporting. Follow current FTB instructions with your closing agent and CPA.

State withholding is generally an advance payment toward tax, not necessarily the final liability. Exchange-related exemptions or reductions depend on the state's forms, nonrecognition rules, certificates, and deadlines; planned §1031 status alone may not suffice. Withholding can reduce reinvestment funds, but it is not automatically taxable boot in every case. Coordinate any additional cash, withholding relief, and refund reporting with your QI, closing agent, and tax advisor before closing.

Several states impose withholding, estimated-payment, or transaction-reporting obligations, with different thresholds and exemptions. Important corrections: Hawaii HARPTA generally uses 7.25% of amount realized; 2026 New York IT-2663 uses 10.90% of recognized gain; Maryland's 2026 MW506NRS uses 8.75% for individuals/estates/trusts and 8.25% for entities on its form-defined payment. North Carolina NC-1099NRS is an information report, not general 4% withholding. Massachusetts has reporting and potential withholding for covered sales of $1 million or more from November 1, 2025. Consult current official forms and the source-linked States guide for the complete context; federal FIRPTA remains a separate issue.

Do not assume a blanket in-state requirement. Georgia DOR describes a like-kind exchange exemption where income is not subject to federal or state income tax; documentation and any taxable boot still require review. Mississippi §27-7-308 addresses covered sales not considered an exchange or trade. Whether a partial or failed exchange creates withholding depends on the transaction and current instructions. Confirm treatment with the state and closing agent before closing.

Where a certificate is required, Maryland MW506AE and West Virginia WV/NRAE requests generally need at least 21 days before closing. Without approved relief, the closing may need withholding under current rules. Maryland's 2026 individual rate is 8.75%, not 7.5%, and its calculation uses the form-defined payment, not automatically the gain. West Virginia permits its statutory payment calculation or applicable approved gain-based relief. Withholding is an advance tax payment, not automatic constructive receipt; discuss funding, treatment, and any refund with your advisor.

Vermont real-estate withholding, Property Transfer Tax, and Land Gains Tax are separate regimes. The Land Gains Tax addresses covered land purchased and subdivided by the seller fewer than six years before sale or exchange; it is not a blanket tax on all Vermont real estate. Federal §1031 deferral does not automatically settle this separate tax. Check current exemptions, certificates, and land-gains withholding with Vermont DOR and a qualified advisor; the States guide links the official guidance.