What Is a 1031 Exchange?

A 1031 exchange lets you sell an investment property and buy another without paying tax on the gain now. The tax is deferred rather than cancelled — it follows you into the new property and surfaces whenever you eventually sell without exchanging again.

It's also called a like-kind exchange, after the requirement that you swap investment property for other investment property. Almost any real estate held for investment or business use counts as like-kind to almost any other, which is broader than the name suggests.

Why landlords use it

Because you keep the whole proceeds working. Sell normally and you reinvest what's left after tax; exchange, and the full amount goes into the next property.

It defers the depreciation recapture as well as the capital gain, which for a long-held rental is often the larger of the two.

The two deadlines

Both run from the day your sale closes:

• 45 days to formally identify the replacement property in writing
• 180 days to complete the purchase — or your tax return due date for the year of the sale, if that falls first

They run at the same time — the 180 doesn't start when the 45 ends. A late-year sale usually needs a filing extension just to get the full 180. There is no relief for a deal falling through.

The rule that catches people

You cannot touch the money. The proceeds must pass from the closing directly to a qualified intermediary, who holds them and applies them to the purchase. If the funds reach your own account, even briefly, the exchange generally fails and the whole gain becomes taxable.

That means the intermediary has to be arranged before you close on the sale.

If you do take some cash out, that portion is called boot and is taxable — partial exchanges are allowed, you just pay on the part you didn't reinvest.

Where to read more

The full rules, and what to weigh before starting one, are in 1031 exchange: the rules and the clock. To see what you'd be deferring, our calculator estimates the bill.