You sell a $1.2M rental that you bought for $400K. You face a roughly $800K gain and a recapture bill on top. Or you do not. A § 1031 like-kind exchange lets you defer the whole tax bill by rolling the proceeds into a new investment property. Done right, no tax is due at the sale; the basis just moves into the new property and you keep compounding.
What qualifies (after TCJA)
Only real estate held for investment or productive use in a trade or business. Personal property (equipment, vehicles, art, crypto) used to qualify, but the 2017 Tax Cuts and Jobs Act killed that. Today, 1031 means real-for-real.
“Like-kind” for real estate is broad. A single-family rental can be exchanged for an apartment building, a warehouse for vacant land, a strip mall for a self-storage facility. They are all real estate. The replacement just has to be held for investment or business use, not your personal residence.
The 45-day identification window
From the day you close on the sale, you have 45 calendar days to identify the replacement property or properties in writing, delivered to the qualified intermediary. Identification follows one of three rules:
- 3-property rule: identify up to three properties, any value.
- 200% rule: identify more than three, but the total value cannot exceed 200% of what you sold.
- 95% rule: identify more than three at any value, but you must acquire 95% of the identified value.
Forty-five days is short. The smart move is having a target list before you sell.
The 180-day closing window
From the sale date, you have 180 days to close on a replacement. Calendar days, not business days, and includes weekends and holidays. If your tax return is due before the 180 days are up, you have to file an extension or your window closes early.
The qualified intermediary
You cannot receive the proceeds from the sale, not even for a minute. The closing proceeds go from the buyer to a qualified intermediary (QI), the QI holds them, and the QI sends them to the seller of the replacement property when you close on the new property. Receive the money yourself, and the exchange is dead.
The QI is a third-party service. Their fee is usually $700–$1,500 per exchange. Their job: hold the money, paperwork the deal correctly, and not go out of business mid-exchange. Pick one with a long track record and segregated client accounts.
Boot
If you receive anything other than like-kind real estate (cash, a smaller mortgage on the new property than the old, debt relief), that’s “boot” and is taxable to the extent of your gain. The classic mistake: trading down. If your replacement is cheaper than what you sold, you usually have boot.
Rule of thumb: buy equal or up in both value and debt, and reinvest all the cash. Anything less and a piece of the gain comes onto this year’s return.
Recapture follows you
The depreciation you took on the property you sold doesn’t go away in a 1031. It rolls into the basis of the new property and waits there for the eventual sale (when, again, you can 1031 it forward). The chain of deferrals ends only when you finally sell without exchanging, or when you die and your heirs get a stepped-up basis that wipes out all of it.
Common mistakes
- Touching the cash. Game over.
- Missing the 45-day ID. Game over.
- Trading down without realizing the boot is taxable.
- Identifying a property you can’t actually close on, and then running out of time and other identifications.
- Exchanging into your own primary residence. Personal-use property doesn’t qualify; you would have to rent it out as investment for a meaningful period first.