69 terms covering core concepts, exchange types, tax law, related codes, and advanced strategies.
A transaction under Section 1031 of the Internal Revenue Code allowing an investor to defer capital gains taxes by reinvesting proceeds from the sale of investment or business-use real property into like-kind replacement property. Also called a Like-Kind Exchange, Tax-Deferred Exchange, or Starker Exchange. Taxes are deferred, not eliminated, and the gain carries forward in the basis of the replacement property.
Beginning on the closing date of the relinquished property, you have 180 calendar days to close on the replacement property. If this period extends past your tax return due date, you must file for an extension or the deadline is the earlier of the two dates. No extensions except for federally declared disasters.
An alternative identification rule. You may identify any number of replacement properties, as long as their combined fair market value does not exceed 200% of the fair market value of the relinquished property at the time of sale. Useful when targeting multiple lower-value properties.
The most commonly used identification rule under Treas. Reg. §1.1031(k)-1(c)(4). You may identify up to 3 replacement properties of any value. You must ultimately acquire at least one. Simple, flexible, and the default choice for most exchangers.
The normal period ends 45 calendar days after transfer of the relinquished property. Signed identification must be timely delivered to an eligible exchange participant; weekends and holidays normally do not extend the period. Eligible IRS disaster or emergency relief depends on the applicable notice. Property actually received within the identification period is generally treated as identified; otherwise failure of valid identification can prevent deferral.
A rarely-used identification rule. You may identify any number of properties regardless of total value, but you must actually acquire at least 95% of the total fair market value of everything you identified. Practically very difficult, if you identify $10M in properties, you must close on $9.5M worth.
Your tax cost in the property: original purchase price + capital improvements − accumulated depreciation. In a 1031 exchange, your adjusted basis carries forward (is substituted) into the replacement property. This is why deferred gains don't disappear, they're embedded in the lower basis of the new property.
The QI is 'substituted' into both the sale contract for the relinquished property and the purchase contract for the replacement property. This is accomplished through an assignment of contracts clause. The buyer and seller must be notified of the assignment. Required to properly structure the exchange under Treas. Reg. §1.1031(k)-1(g)(4).
Any non-like-kind value received in a 1031 exchange. Boot can trigger recognized gain, generally limited by realized gain, with separate recapture and installment-reporting rules. There are two types: Cash Boot (net cash received or equity not reinvested) and Mortgage Boot (net debt reduction from relinquished to replacement property). Full deferral generally requires eligible reinvestment without taxable boot; net debt relief can be offset with replacement debt or outside cash. Important asymmetry: additional cash brought in at closing CAN offset mortgage boot, but additional debt CANNOT offset cash boot received.
An improvement exchange in which an accommodation titleholder holds replacement property while construction occurs. The exchanger generally cannot improve land already owned and simply treat the work as like-kind replacement property; ownership and Rev. Proc. 2004-51 restrictions require specialist review. Only qualifying property and improvements actually received within the applicable period count; future work after taking title does not add exchange value.
Boot arising from cash not reinvested into the replacement property. Cash actually retained from the exchange may create boot. Reimbursement of properly applied earnest money and payments of qualifying exchange expenses need separate analysis; neither is automatically boot. Nonqualifying charges paid from exchange proceeds may cause recognized gain, generally subject to the realized-gain limit and recapture rules.
A common term for a source state's continued claim to tax originally deferred gain after an out-of-state exchange. California FTB 3840 and Oregon OR-24 have specific annual reporting rules. Other states' sourcing and filing rules are not necessarily identical; check current state guidance and distinguish original deferred gain from later appreciation.
If a property has been both a rental and a primary residence, a taxpayer may be able to exclude gain under §121 first (up to $250K/$500K) and then defer remaining gain under §1031. Requires careful sequencing and meeting both sets of holding/use requirements. Complex, consult a tax advisor.
A taxpayer may be treated as receiving funds that are available without substantial restrictions, even without physical possession. Actual or constructive receipt can prevent deferred-exchange treatment; partial exchanges and permitted distributions have separate rules. A QI agreement is a common safe harbor addressing access to proceeds, not a statutory requirement for every exchange.
A legal entity that holds real estate and allows multiple investors to own fractional beneficial interests. Interests in a DST satisfying the investment-trust facts of Rev. Rul. 2004-86 may qualify as ownership of the underlying real property; not every DST qualifies. Commonly used when an investor can't find suitable replacement property or wants passive, professionally managed real estate. Minimum subscriptions and investor eligibility vary by offering; verify current terms rather than assuming a standard dollar minimum. Management powers and financing restrictions depend on the trust's qualifying structure and offering documents; investment quality and liquidity are not guaranteed.
The most common exchange structure. The exchanger sells the relinquished property first, proceeds go to a QI, and the exchanger has up to 45 days to identify and 180 days to close on the replacement property. Governed by IRC §1031(a)(3) and Treas. Reg. §1.1031(k)-1.
Ordinary-income recapture under §1245 or §1250 must be distinguished from unrecaptured §1250 gain, which generally relates to straight-line real-property depreciation and has a maximum 25% federal rate. A qualifying exchange may defer eligible real-property gain, but boot, mixed-asset, and recapture rules can require current recognition. Track basis and each gain category separately.
A person ineligible for the intermediary safe harbor under Treas. Reg. §1.1031(k)-1(k), including certain recent agents and persons related under the regulation's modified related-party tests. Specified prior services have exceptions. There is no universal more-than-10% ownership test for every intermediary relationship; an exchange attorney should evaluate the actual facts.
A strategy for partnerships or LLCs where some partners want to do a 1031 exchange and others want cash. The entity distributes undivided interests (TIC) to each partner ('drop'), then the partners can individually sell, each choosing whether to exchange or cash out ('swap'). There is no universal safe minimum holding period. Investment intent, taxpayer identity, prearranged-sale and step-transaction issues are fact-specific, and a quick or delayed transfer is not automatically approved. Obtain specialist counsel before restructuring.
A special-purpose entity (typically an LLC) used in reverse and improvement exchanges to hold title to either the replacement or relinquished property on behalf of the exchanger. The EAT must be a different entity from the exchanger, hold title under a QEAA, and transfer the property within the 180-day safe harbor. The EAT relationship is governed by Rev. Proc. 2000-37.
The written contract between the exchanger and the QI that governs the exchange. Must be entered into before or at the closing of the relinquished property. Establishes the QI's role, the escrow arrangement, assignment of purchase/sale contracts, and the terms of the exchange. A properly drafted exchange agreement is what prevents constructive receipt.
Generally requires withholding of 15% of amount realized when a foreign person for U.S. tax purposes transfers a U.S. real property interest, subject to exceptions and some reduced rates. Nationality alone does not determine foreign-person status. Nonrecognition notices and withholding certificates have distinct eligibility and timing rules; a planned §1031 exchange does not automatically waive FIRPTA.
The IRS form required to report a 1031 like-kind exchange on your federal tax return. Must be filed for the tax year in which the relinquished property was transferred. Reports the properties exchanged, dates, values, basis, boot received, and the gain deferred or recognized. Required even if no gain is recognized.
Exchanging an undivided fractional interest (TIC share) in one property for a fractional interest in another. Common when multiple investors jointly own property and want different replacement properties, or when one investor wants to buy into an existing co-ownership arrangement.
California's annual reporting form required when a California property is exchanged for an out-of-state replacement property. File for the covered exchange year and annually as required until the reporting obligation ends under current FTB instructions; further exchanges and other dispositions require separate tracking. California uses this to track deferred gain and ensure it is taxed when eventually recognized, even if the taxpayer has moved out of California.
Also called a build-to-suit or construction exchange. Exchange proceeds are used to fund improvements to the replacement property before the exchanger takes title. An EAT holds the property and manages construction. Common when the replacement property is less valuable than the relinquished property and improvements are needed to equalize value.
An exchanger may use seller financing (installment sale) in conjunction with a 1031 exchange, but the mechanics are complex. The installment note from the buyer cannot be received by the exchanger directly without triggering gain. It must either be transferred to the QI or a third-party intermediary must acquire the note. Careful planning is required to avoid inadvertent boot.
The destruction, theft, seizure, requisition, or condemnation of property. Under Section 1033, gain from an involuntary conversion can be deferred if the owner elects to reinvest the proceeds into qualified replacement property within the statutory period. A useful alternative when 1031 timelines are impossible due to the nature of the event.
A leasehold interest of 30 years or more (including renewal options) is considered like-kind to a fee interest in real property under Treas. Reg. §1.1031(a)-1(c). A qualifying lessee interest with at least 30 years remaining, including applicable renewal options, can be like-kind to a fee interest; the original term alone is not enough. Used in sale-leaseback structures and ground lease transactions.
Under current law (post-2017 TCJA), 'like-kind' means any U.S. real property held for productive use in a trade or business or for investment. The standard is broad: a single-family rental can exchange for a commercial building, raw land, a shopping center, or a qualifying investment-trust DST interest, subject to the nature of the ownership interests and applicable exclusions. The properties do not need to be the same type, only both real property held for qualifying use.
Boot arising from a net reduction in debt. If you sell a property with a $400K mortgage and buy one with a $300K mortgage, you have $100K in mortgage boot, taxable unless offset by additional cash invested. Formula: Old Mortgage − New Mortgage = Mortgage Boot. You can neutralize mortgage boot by bringing additional cash to the replacement property purchase.
A 3.8% Medicare surtax on net investment income for taxpayers with modified AGI above $200,000 (single) or $250,000 (married filing jointly). NIIT is imposed on the lesser of net investment income or MAGI above the applicable threshold. Whether property income is investment income depends on the activity and taxpayer facts; real-estate professional status alone is insufficient for exemption. Gain not recognized in a qualifying exchange generally does not enter current NIIT.
A transaction in which gain or loss is not recognized for tax purposes in the current year. A qualifying 1031 exchange is a non-recognition transaction, realized gain exists but is not taxed. The gain is preserved in the substituted basis of the replacement property for future recognition.
The use of an EAT to temporarily 'park' title to either the replacement or relinquished property during a reverse or improvement exchange. Common terminology is Exchange Last (park the replacement while the relinquished property is sold) and Exchange First (park the relinquished property as the taxpayer receives the replacement). Both require the applicable QEAA safe-harbor conditions; labels alone do not establish qualification.
Prior to the TCJA, Section 1031 applied to personal property such as aircraft, equipment, vehicles, artwork, and franchises. These exchanges required stricter like-kind matching (e.g., aircraft for aircraft, truck for truck). Eliminated for personal property as of January 1, 2018.
One of the four IRS safe harbors for holding exchange funds. An escrow account with a third-party escrow holder that is not a disqualified person. The exchanger must not have rights to access the funds during the exchange period except under specific limited conditions.
The written agreement between the exchanger and EAT that governs a reverse or improvement exchange. Required under Rev. Proc. 2000-37 to qualify for the safe harbor. Must be entered into within 5 business days of the EAT acquiring the property. Specifies the property, the exchange arrangement, and the 180-day holding period.
An intermediary used in the common deferred-exchange safe harbor under Treas. Reg. §1.1031(k)-1(g)(4). A written agreement and restrictions on access to funds are required; disqualified-person rules have specific exceptions. A QI is not mandatory for every direct simultaneous exchange. Evaluate fund safeguards, insurance, financial stability, account structure, and applicable state regulation.
A designated eligible census tract for investment through a Qualified Opportunity Fund under IRC §1400Z-2. Only eligible gain and qualifying investments receive benefits; ordinary recapture is not automatically eligible. Distinguish the original program's generally December 31, 2026 recognition rule from rules for amounts invested after that date under Public Law 119-21. Ten-year appreciation treatment has conditions and limits; state conformity must be checked separately.
Both the relinquished and replacement properties must be held for productive use in a trade or business or for investment. A primary residence does not qualify. A solely personal-use vacation home does not qualify. Rev. Proc. 2008-16 supplies a safe harbor; properties outside it need a separate factual investment-use analysis, not automatic disqualification. Property held primarily for sale (dealer property) does not qualify.
Amount realized minus adjusted tax basis. Amount realized includes cash, other property, and liabilities discharged, less applicable selling expenses; do not add mortgage payoff again if the stated gross sale price already includes the financed consideration. Recognition and deferral require separate exchange and recapture analysis.
The portion of realized gain that is actually taxable in the current year. A supported qualifying real-property exchange without boot can have zero recognized gain, but ordinary recapture and mixed-asset rules may cause recognition independently. Boot generally triggers recognized gain up to realized gain; asset allocations and special rules matter.
Some related-party structures qualify, but §1031(f)'s disposition restriction, exceptions and anti-abuse provisions must be analyzed. Related-party seller cash-outs and basis shifting can prevent deferral even when the exchanger holds replacement property for two years. A QI does not by itself cure these concerns; specialist tax counsel is necessary.
The property you are selling as part of the exchange: also called the 'down-leg' or 'old property.' This is the asset you are giving up. Sale proceeds must flow directly to your Qualified Intermediary, never to you personally.
The property you are acquiring in the exchange: also called the 'up-leg' or 'new property.' In a typical deferred exchange, identify it within 45 calendar days and receive it by the earlier of day 180 or the federal return due date, including extensions. Full deferral also depends on qualified reinvestment, net debt relief, costs, recapture and other requirements.
Establishes the safe harbor for reverse exchanges using an EAT. The EAT holds title under a Qualified Exchange Accommodation Agreement (QEAA). The safe harbor period is 180 days. Rev. Proc. 2004-51 limits the safe harbor where the taxpayer owned the intended replacement property during the 180-day period before parking. A written QEAA, timely identification and applicable 180-day limits must be met; outside-safe-harbor arrangements require separate counsel review.
A dwelling-unit safe harbor: own the relinquished property at least 24 months before exchange and replacement property at least 24 months afterward. In EACH relevant 12-month period, rent at fair market value at least 14 days and limit personal use to the GREATER of 14 days or 10% of days rented. Outside the safe harbor, investment intent needs separate factual analysis.
The replacement property is acquired before the relinquished property is sold. An Exchange Accommodation Titleholder (EAT) holds title to one of the properties during the exchange. Governed by Rev. Proc. 2000-37. The safe harbor period is 180 days. More complex and expensive than a forward exchange, but allows investors to act quickly on desirable replacement properties.
Combines both a reverse exchange and an improvement exchange. The EAT acquires the replacement property, improvements are made, and then the relinquished property is sold, all within the 180-day safe harbor window.
A rule providing specified treatment when all its conditions are met. It is not a guarantee of overall exchange eligibility or immunity from IRS examination. Treas. Reg. §1.1031(k)-1(g) includes safe harbors addressing actual or constructive receipt, such as qualified escrow/trust and intermediary arrangements; other requirements still apply.
Generally provides an applicable estate-value basis for qualifying inherited property, subject to ownership, estate inclusion, valuation, and statutory exceptions. An adjustment may remove embedded deferred gain in eligible assets, but entity-level inside basis and income-in-respect-of-a-decedent rules require separate analysis.
The section of the Internal Revenue Code governing like-kind exchanges. Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), Section 1031 applied to both real and personal property. Since January 1, 2018, it applies only to real property. Congress added statutory deferred-exchange timing rules in 1984; Treasury subsequently established intermediary and other constructive-receipt safe harbors. A QI is not universally mandatory for direct simultaneous exchanges.
Special restrictions apply when an exchange involves a related party (spouse, parent, child, sibling, or entity with >50% ownership overlap). Section 1031(f) includes a two-year disposition restriction with exceptions, plus an anti-abuse rule that can apply regardless of holding period. Buying from a related seller who cashes out is not necessarily cured by a QI. Review the exact structure rather than assuming two years of ownership guarantees qualification.
An involuntary conversion exchange under IRC §1033. If property is destroyed, condemned, stolen, or seized by eminent domain, the owner can defer gain by reinvesting insurance proceeds or condemnation awards into replacement property. Unlike §1031, a QI is not generally required and proceeds may be retained pending qualified reinvestment. Replacement periods generally run from the end of the first tax year gain is realized and vary with the conversion and statutory relief. Similar-or-related-in-service-or-use rules ordinarily apply, while §1033(g) supplies a broader like-kind rule for qualifying condemned business or investment real estate. Eligibility and recognized gain need separate analysis.
Allows homeowners to exclude up to $250,000 ($500,000 MFJ) of capital gain on a primary residence sale. Can sometimes be combined with a 1031 exchange if a property was previously a rental and converted to a primary residence, subject to complex holding period and use requirements. Section 121 applies first, then 1031 for any remaining gain.
Personal property and certain other tangible property subject to accelerated depreciation recapture under IRC §1245. Recaptured at ordinary income rates (up to 37%). Post-TCJA, personal property no longer qualifies for 1031 treatment, so §1245 recapture is often triggered immediately on sale of depreciated equipment or personal property.
Real property (buildings and structures) subject to depreciation recapture rules under IRC §1250. Unrecaptured Section 1250 gain from straight-line depreciation is taxed at a maximum federal rate of 25% when eventually recognized. A qualifying real-property exchange may defer eligible unrecaptured §1250 gain; ordinary recapture and mixed-asset rules need separate review.
Governs the tax treatment of installment sales where the seller receives payments over time. Can interact with 1031 exchanges when seller financing is involved in the relinquished property sale. Careful structuring is required to avoid the seller note being treated as boot.
Under IRC §721, a taxpayer can contribute property to a partnership in exchange for a partnership interest without recognizing gain. Sometimes used as a step in complex transactions involving real property held in entities. Not a substitute for 1031, but relevant in entity restructuring scenarios.
A closing structure where both the relinquished property sale and the replacement property purchase occur on the same day, often used in delayed exchanges when closing timelines align. The QI must still be properly engaged to hold funds between the two closings, even briefly.
Both properties transfer at the same time, and the original concept of a 1031 exchange. Rare in modern real estate because it requires a buyer who also has like-kind property to trade. A direct simultaneous property swap need not use a QI, while other simultaneous closing structures may use a QI or another safe harbor to address receipt of funds.
An informal name for a delayed 1031 exchange, derived from Starker v. United States (9th Cir. 1979). T.J. Starker sold timberland and received a promise to deliver replacement property over several years, and the court ruled this qualified as a like-kind exchange. Congress codified delayed exchanges in 1984 in direct response to this case.
IRC §1014 generally adjusts the basis of qualifying inherited property to applicable estate-tax value, often fair market value at death. The adjustment may be upward or downward, with statutory exceptions. It may remove embedded gain in qualifying property but does not guarantee a step-up in every entity's underlying assets.
The reverse of drop and swap. The exchange is completed first (as an entity), and then the replacement property is contributed to a new partnership or LLC where partners hold different interests. Less common, but can be useful depending on entity structure and partner goals.
An informal name for continued qualifying exchanges during life followed by an estate plan that may obtain a §1014 basis adjustment in eligible inherited property. It is not a guaranteed elimination of every tax: ownership, estate inclusion, entity basis, statutory exceptions, transaction costs, and law changes must be considered.
Signed into law December 22, 2017. Effective January 1, 2018, the TCJA eliminated Section 1031 treatment for all personal property (vehicles, equipment, aircraft, artwork, collectibles, livestock, machinery, patents). Real property exchanges were fully preserved. This remains the most significant change to 1031 law in decades.
A form of co-ownership where multiple investors each hold an undivided fractional interest in a single property. TIC interests can qualify as like-kind replacement property. Rev. Proc. 2002-22 provides IRS guidance on structuring TIC arrangements. Unlike DSTs, TIC investors can have more control but arrangements are more complex.
An Umbrella Partnership Real Estate Investment Trust (UPREIT) structure where property is contributed in exchange for Operating Partnership (OP) units under §721. The OP units can eventually be converted to REIT shares. Sometimes used as an exit strategy after a 1031 exchange, and the exchanger does a 1031 into REIT-qualifying property, then contributes to the UPREIT for OP units.
Replacement property must be identified in a signed written document delivered before midnight on Day 45 to the QI, the replacement seller, or another eligible exchange participant other than yourself or a disqualified person. Oral identification does not count. The property must be described unambiguously, typically by street address or legal description.