1031 FAQs

Think of it as a rolling asset swap. Instead of a traditional sale where you sell a property, pocket the cash, and pay a massive tax bill, a 1031 exchange lets you seamlessly trade one investment property for another.

The phrase "like-kind" is the most misunderstood part. It does not mean you have to trade a duplex for a duplex. In the eyes of the IRS, almost all real estate held for business or investment is "like-kind" to all other real estate. You can swap a piece of raw land for an office building, or a single-family rental house for an apartment complex.

This is the official legal "permission slip" written into the US tax code— IRC Section 1031. It has actually been around since 1921.

The core text states that no gain or loss shall be recognized if you exchange property held for productive use in a trade, business, or for investment solely for another property of like-kind. Essentially, the IRS agrees to hit the "pause button" on your tax bill because your money never actually leaves the real estate market. For a plain-language overview, see the IRS fact sheet on like-kind exchanges.

Almost any taxpayer can use a 1031 exchange. This includes:

• Individuals
• C-Corporations and S-Corporations
• Partnerships and LLCs
• Trusts

The Big Exception: You cannot use this if you are classified as a "dealer." If your business model is house-flipping—meaning you buy distressed properties, rehab them, and immediately list them for a quick profit—the IRS views your properties as inventory, not investments ( see IRS guidance on property held for sale). Inventory is strictly ineligible for 1031 treatment.

The tax deferral is the headline, but the strategic advantages run much deeper:

• Interest-Free Leverage: If you owe $100,000 in capital gains taxes on a sale, a 1031 exchange lets you take that entire $100,000 and use it as a down payment on a much larger, more profitable property instead. It's essentially getting an interest-free loan from the government to grow your portfolio.
• Portfolio Diversification: You can transition out of one property type or geographical market into another. For example, you can sell a high-maintenance rental home in a slowing market and trade it for an apartment building in a booming state.
• Consolidation or Management Relief: If you are tired of playing landlord to five separate single-family rentals, you can exchange all five of them into one single commercial building managed by a professional firm.
• The Ultimate Estate Plan ("Swap till you drop"): By continually exchanging properties over your lifetime, you never pay those capital gains taxes. When you pass away, your heirs get a "stepped-up basis" to the current fair market value, entirely erasing the lifetime of deferred taxes. Your heirs can sell the property the next day and owe virtually nothing.

No. There was heavy political momentum and several formal proposals to place a $500,000 cap on deferred gains for individual taxpayers. However, the major tax packages passed recently—including the One Big Beautiful Bill Act (OBBBA)—completely preserved Section 1031. You can still defer an unlimited amount of capital gains on qualifying real estate.

No. Ever since the Tax Cuts and Jobs Act (TCJA) went into effect and its subsequent IRS clarifications were finalized, only real property (real estate) qualifies (see TD 9935 final regulations and IRS real-estate tax tips). You can no longer use a 1031 exchange to swap franchise licenses, aircraft, heavy machinery, artwork, or digital assets.

The new tax framework permanently locked in 100% bonus depreciation (reversing the scheduled phase-down that was supposed to hit 0%). This is a massive win for 1031 investors. When you buy a replacement property, you can use a cost segregation study to identify personal property components (like new appliances, carpeting, or specialty fixtures) and write 100% of their cost off immediately in Year One, while keeping your core real estate gains deferred through your 1031 tracker.

This is the single most common misconception. In real estate, "like-kind" just means investment real estate exchanged for other investment real estate (see Treas. Reg. § 1.1031(a)-1). The asset class does not matter. You can sell a raw plot of desert land and buy a retail strip mall, or sell an industrial warehouse and buy a residential duplex to rent out.

No. The tax code states the property must be held for productive use in a trade, business, or for investment. Your primary residence is strictly excluded (it falls under a different tax break, Section 121 / Pub. 523).

For a vacation home or short-term rental (Airbnb) to qualify, it must pass a strict IRS safe harbor test under Revenue Procedure 2008-16: you must own it for at least 24 months, rent it out to third parties at a fair market rate for at least 14 days each year, and your personal use of the home cannot exceed 14 days (or 10% of the total days it was rented) per year.

No. The IRS draws a hard line at the border. Domestic US real estate is only "like-kind" to other domestic US real estate (see Form 8824 instructions and Publication 544). If you sell a commercial building in New York, you cannot use a 1031 exchange to acquire an investment property in Europe or Costa Rica.

A QI (sometimes called an exchange facilitator) is an independent, neutral third party legally required to structuralize your exchange. Their job is to hold your money in a secure escrow account so you never have "constructive receipt"—control or possession—of the cash (see IRS FAQs and Treas. Reg. § 1.1031(k)-1). They also draft the formal exchange agreements and legal assignments needed to make the swap valid under the tax code.

Absolutely not. The IRS defines strict "disqualified person" rules in Treas. Reg. § 1.1031(k)-1. Anyone who has acted as your employee, attorney, accountant, investment banker, or real estate broker within the last two years is legally barred from serving as your QI. If you use them, your exchange is immediately voided. Your QI must be entirely independent.

This is a nightmare scenario—and it has happened in the real world. Because QIs are not uniformly regulated at the federal level, due diligence matters. Always ask whether they use segregated, dual-signature Q-escrow accounts (meaning they cannot move your money without your written signature) and verify they carry substantial Fidelity Bonds and Errors & Omissions insurance.

The QI structures the active transaction, but your CPA handles the grand strategy and the reporting. Core CPA responsibilities include:

• Calculating your adjusted basis: Tracking your original purchase price, adding capital improvements, and subtracting depreciation to determine exactly how much tax you are deferring.
• Structuring the replacement target: Telling you the exact dollar amount and mortgage size you must buy to avoid boot.
• Filing Form 8824: Officially reporting the transaction to the IRS on your annual tax return (Form 8824, instructions).

Before you sign the contract to sell your old property. If you wait until tax season to tell your CPA you did an exchange, you may learn too late that your entity structuring was wrong—or that you failed the Same Taxpayer rule—rendering the entire timeline useless.

The IRS does not care. It is 45 calendar days, period (per Treas. Reg. § 1.1031(k)-1 and Form 8824 instructions). If your 45-day identification deadline lands on Christmas Eve, a rainy Sunday, or a bank holiday, your written identification paperwork must still be in the hands of your Qualified Intermediary (QI) before midnight. The only exceptions ever granted are rare, hyper-specific extensions for Presidentially-declared major disaster zones.

You must submit a signed, unambiguous written document to your QI specifying the exact properties you might buy. You cannot change your mind or add properties after Day 45 has passed. You must fall under one of two core rules (full framework in Treas. Reg. § 1.1031(k)-1):

1. The 3-Property Rule: You can list up to three potential properties, regardless of how much they cost.
2. The 200% Rule: You can list as many properties as you want, provided their total, combined fair market value doesn't exceed 200% of the property you just sold.

Boot is any non-like-kind property, cash, or value you receive during the exchange (see IRS FAQs on sales and exchanges and Publication 544). Because a 1031 exchange is meant to be a clean asset swap, any leftover value that doesn't get converted into the new real estate is instantly taxable.

• Cash Boot: If you sell a property for $1 Million but only buy a replacement for $950,000, the leftover $50,000 cash held by your QI is given back to you and taxed immediately.
• Mortgage Boot (Debt Relief): If your old property had a $500,000 mortgage, but your new property only requires a $400,000 mortgage, the IRS views that $100,000 drop in your personal liabilities as a financial benefit—meaning you are taxed on that $100,000 difference.

To get a 100% tax-free exchange, yes. You must buy a property of equal or greater value, reinvest all net cash proceeds, and replace 100% of the debt you owed on the old property (though you can offset a drop in mortgage size by putting in your own extra personal cash). You can do a partial exchange, but you will pay taxes on whatever portion you don't roll over (see Publication 544).

The exact legal entity that sells the original property must be the exact same entity that buys the new one (the "same taxpayer" rule in Treas. Reg. § 1.1031(k)-1). If an S-Corporation or a specific multi-member LLC holds the title to the property being sold, that exact S-Corp or LLC must take title to the new one. You cannot sell a property owned by your partnership and try to close on the new property under your personal name.

Yes. This is called a Reverse 1031 Exchange under the safe harbor in Revenue Procedure 2000-37 (as modified by Revenue Procedure 2004-51). Because you legally cannot own both properties simultaneously under standard exchange rules, your QI will create a specialized, independent entity called an Exchange Accommodation Titleholder (EAT). The EAT will step in and "park" the title to one of the properties while you aggressively market and close on the sale of your old property within the standard 180 days. It is incredibly effective in tight real estate markets but comes with much higher administrative fees.

This is the single greatest estate-planning loop available to real estate investors. The IRS allows you to execute 1031 exchanges sequentially over your entire lifetime—selling, buying, and deferring taxes continuously.

When you eventually pass away, your heirs inherit the properties at a stepped-up basis scaled to the current fair market value. This completely wipes out a lifetime of deferred capital gains and depreciation recapture taxes. Your heirs can sell the property the next day and owe virtually zero federal tax on the inherited appreciation.

Generally, no. The foundational rule of Section 1031 is that the exact legal entity selling the original asset must be the exact same entity purchasing the new asset (see Treas. Reg. § 1.1031(k)-1 and Rev. Rul. 2002-83). If "ABC Investments LLC" transfers the title at sale, "ABC Investments LLC" must sign the title at purchase.

The Loophole: Single-Member LLCs (SMLLCs) and Grantor Trusts.The IRS classifies a standard Single-Member LLC as a "disregarded entity" for federal tax purposes. Because all tax liabilities pass cleanly straight to your personal tax return, the IRS considers an exchange from your SMLLC to your personal name (or vice versa) to be the "same taxpayer." The exact same rule applies to revocable living trusts.

You cannot just list a dozen random properties and pick one later. The Treasury Regulations (§ 1.1031(k)-1) force you to conform to one of three rigid identification frameworks. If you violate the caps of a rule, your entire identification list is disqualified, and your exchange fails instantly.

Yes, but you have to clear a very specific bar. The IRS explicitly laid out the boundaries for this under Revenue Procedure 2008-16.

To satisfy the requirement that a dwelling unit is held for "investment" rather than personal enjoyment, both your old property and your new property must pass the following two-year test:

• Ownership: You must own the unit for at least 24 months immediately before (for the sold asset) or after (for the new asset) the exchange.
• Rental Requirement: Within each of those two 12-month blocks, you must rent the property out to a third party at fair market rent for 14 days or more.
• Personal Use Cap: Your personal usage of the home cannot exceed the greater of 14 days or 10% of the total days it is actively rented out to tenants.

An exchange is not an invisible event; you are required to report it transparently on your federal tax filing for the year the transaction began.

You must fill out and file IRS Form 8824, Like-Kind Exchanges (instructions). This form tracks the date the property was given up, the date the new property was identified/received, and the underlying structural basis calculations. If you happen to receive any taxable boot (such as excess cash left in the QI escrow), that specific portion gets routed to Form 4797 or Schedule D to be taxed as current-year capital gains.

You utilize a Reverse 1031 Exchange. Because you cannot legally own both properties at the same time under standard rules, the IRS issued a specific safe harbor called Revenue Procedure 2000-37.

Under this guidance, your Qualified Intermediary establishes a completely independent holding entity known as an Exchange Accommodation Titleholder (EAT). The EAT steps in and technically "parks" (holds) the title to the new property for up to 180 days while you aggressively market and close on the sale of your old property.