1031 Exchanges: Defer Capital Gains on Real Estate Sales
A 1031 exchange lets real estate investors defer capital gains tax — sometimes indefinitely — by rolling proceeds into another investment property. The rules are unforgiving but the savings can be enormous.
The core mechanic
Sell investment real estate. Within strict deadlines, buy replacement investment real estate of equal or greater value. Don't touch the cash. The gain isn't eliminated — it's deferred into the new property's basis.
What qualifies (post-TCJA: real property only)
- Investment or business-use real estate only
- Both relinquished and replacement must be 'like-kind' — virtually any real estate qualifies (raw land for apartments, office for retail, etc.)
- Personal residences do NOT qualify
- Stocks, bonds, partnership interests, equipment — no longer eligible since 2018
The two deadlines
- 45-day identification window — from closing of relinquished property, formally identify up to 3 potential replacement properties (or use the 200% rule)
- 180-day exchange window — must close on replacement within 180 days of original closing
Deadlines include weekends and holidays. Miss by one day = full taxable sale.
You need a Qualified Intermediary (QI)
You cannot take possession of the sale proceeds. A QI (also called accommodator) holds the funds and uses them to purchase the replacement. Pick a reputable one with strong fidelity bond and escrow controls — there have been multimillion-dollar QI failures.
Boot — the partial taxable portion
'Boot' is anything you receive that isn't like-kind real estate:
- Cash kept from the sale
- Mortgage relief (new debt < old debt)
- Personal property included in the deal
Boot is taxable up to the amount of gain. Plan the trade-up amounts carefully.
Swap till you drop
Heirs receive stepped-up basis at death — meaning all that deferred gain disappears for income tax purposes (estate tax is separate). A common strategy: keep exchanging into larger properties until death.
Common pitfalls
- Taking constructive receipt of proceeds (kills the exchange)
- Identifying replacement properties verbally instead of in writing to the QI
- Missing the 45 or 180-day deadline
- Buying a property you already had under contract before the sale
- Using related-party transactions without 2-year holding
Run your own numbers
Use our free, in-browser calculators — no signup, no data collection.
Open the calculators