What Is a 1031 Exchange? Everything You Need to Know

A 1031 exchange is a tax-deferral strategy that lets you sell investment or business real estate and reinvest the proceeds into other “like‑kind” real property without immediately paying capital gains or depreciation recapture tax. When structured correctly, it can preserve equity, increase cash flow, and help you scale or reposition your portfolio over time.​

What a 1031 Exchange Is

A 1031 exchange (also called a like‑kind exchange) comes from Section 1031 of the Internal Revenue Code and applies only to real property held for investment or for productive use in a trade or business. Instead of recognizing gain on the sale, your basis and gain are carried into the replacement property, deferring tax until a taxable sale or other non‑qualifying disposition.​

Key points:

• Only real property qualifies now (post‑2017), not personal property like equipment or vehicles.​

• Properties must be held for investment or business use, not primarily for resale or personal use such as a pure primary residence.​

• The exchange can involve one‑to‑one, one‑to‑many, many‑to‑one, or many‑to‑many property combinations.​

What “Like‑Kind” Really Means

For real estate, “like‑kind” refers to the nature or character of the property, not its quality, grade, or exact type. As a result, most U.S. real property held for investment or business use is considered like‑kind to other U.S. investment or business real property.​

Generally like‑kind:

Short-term rental in the woods.

• Rental houses, multifamily, retail, office, industrial, and raw land, so long as they are held for investment or business.​

• A single‑tenant NNN property exchanged for farmland, or an apartment building exchanged for a medical office can both qualify.​

Generally not like‑kind or not eligible:

• Interests in a partnership or LLC, stocks, bonds, notes, or other securities.​

• Property held primarily for sale (dealer or flipper inventory) and foreign real property exchanged with U.S. real property.​

  
  

Core Timing Rules: 45 & 180 Days

The timing rules in a delayed 1031 exchange are rigid and missing them usually disqualifies the exchange. The two critical deadlines run concurrently from the date you close on the relinquished property.​

Key deadlines:

• 45‑day identification period: You must properly identify potential replacement properties in writing within 45 calendar days after the sale closes, delivered to your qualified intermediary or another permitted party.​

• 180‑day exchange period: You must acquire one or more of the identified properties by the earlier of 180 days after the sale or your tax return due date (including extensions) for that year.​

If you miss:

• Missing 45 days: Failure to identify on time generally means full recognition of gain; the transaction is treated as a taxable sale.​

• Missing 180 days: Failure to close on time similarly disqualifies the exchange and triggers recognition of gain in the year of sale.​

The Role of the Qualified Intermediary (QI)

In modern exchanges, a qualified intermediary is usually essential to avoid the taxpayer having actual or constructive receipt of proceeds. The QI steps into the chain of the transaction and holds sale proceeds in a restricted account until they are used for the replacement property.​

Typical QI functions:

• Drafts the exchange agreement, assignment documents, notices of assignment, and replacement property identification forms.​

• Receives and safeguards exchange funds in a separate account and coordinates with closing agents so settlement statements reflect the 1031 structure correctly.​

Safe harbor notes:

• Related parties such as your regular attorney or CPA usually cannot act as the QI if they have provided non‑exchange services to you in the prior two years, or you may lose regulatory safe harbor protection.​

• The QI cannot allow you unfettered access to funds; doing so risks constructive receipt and disqualification.​

Basic Types of 1031 Exchanges

While the classic structure is a delayed exchange, several variants exist to solve different planning problems.​

Common types:

• Delayed (forward) exchange: You sell first, then buy replacement property within the 45/180‑day rules; most investors use this model.​

• Simultaneous exchange: Sale and purchase close on the same day, often with a QI still involved to manage documentation and safe harbor.​

• Reverse or build‑to‑suit structures: More advanced strategies allow you to buy first or improve property inside the exchange, but they require careful planning, often parking arrangements, and strict compliance.​

For most investors, understanding the basic delayed exchange—eligibility, like‑kind rules, strict timing, and the QI’s role—is the foundation for using 1031s strategically in a long‑term real estate investment plan.