Get answers to the most common questions about 1031 like-kind exchanges, deadlines, boot, qualified intermediaries, and tax implications.
A 1031 exchange is a tax-deferred real estate exchange under Section 1031 of the Internal Revenue Code. It allows property owners to sell real estate and reinvest the proceeds in like-kind property without triggering capital gains tax in the year of the sale. This strategy enables investors to defer taxes indefinitely by continuously exchanging into new properties.
The 45-day identification period is the window within which you must identify replacement property after closing on the sale of your relinquished property. You must provide written identification to the qualified intermediary, seller, or any party involved in the exchange by midnight of the 45th calendar day. No extensions are available except in cases of federally declared disasters.
The 180-day acquisition period is the deadline by which you must close on and acquire the identified replacement property. This period begins on the date of closing of the relinquished property. The deadline is the earlier of 180 calendar days or the due date of your tax return for the year of the exchange (including extensions). Missing this deadline disqualifies the exchange.
Boot is any cash, debt relief, or non-like-kind property received in a 1031 exchange. Receiving boot makes part of your gain taxable. To defer all gain, you must reinvest all net equity from the relinquished property and acquire replacement property of equal or greater value. Boot recognized is limited to the lesser of boot received or realized gain.
Yes. A qualified intermediary (QI) is required for the safe harbor under IRC Section 1031(a)(3). The QI holds your exchange proceeds and ensures you never have actual or constructive receipt of the funds, which would disqualify the exchange. The QI must be engaged before closing on the relinquished property and must meet specific disqualification rules.
Yes, but with restrictions. Under IRC Section 1031(f), if you exchange with a related party, both parties must hold their received property for at least 2 years. If either party disposes of the property within 2 years, the exchange is retroactively disqualified and gain is recognized. Related parties include spouses, lineal descendants, and entities with more than 50% common ownership.
Depreciation recapture is the ordinary income tax (not capital gains tax) that applies to depreciation deductions taken on real property. Under IRC §1245 and §1250, when you sell property, you must recognize ordinary income equal to the depreciation you deducted. A 1031 exchange defers all depreciation recapture—it carries forward to the replacement property's substituted basis.
A Delaware Statutory Trust is a pass-through investment entity that holds real property for passive investors. DST interests are treated as like-kind real property for §1031 purposes under Rev. Rul. 2004-86. DST investors receive passive income without management obligations. DSTs are securities (sold through FINRA brokers) and provide instant diversification.
Clawback states (California, Oregon, Hawaii, Massachusetts, Montana) tax deferred gains from §1031 exchanges regardless of whether the investor moves to another state. California requires Form FTB 3840 tracking. These states assert jurisdiction over the deferred gain when replacement property is eventually sold, even if you've left the state. Careful planning is essential for multi-state exchanges.
No. Property must be held for investment or business use under IRC §1031(a)(1). Primary residences do not qualify. However, if you later convert a former primary residence to a rental after the exchange, it can participate in future §1031 exchanges. The §121 exclusion and §1031 can be combined if you meet both tests.
For interactive tools and more detailed guidance, visit the full FAQ page.