A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows real estate investors to defer capital gains taxes when selling an investment property by reinvesting the proceeds into a "like-kind" replacement property. As of 2026, the fundamental rules and timelines remain unchanged, though new FinCEN reporting requirements took effect on March 1, 2026.
39 steps across 12 sections
1. Like-Kind Property
- Both the relinquished (sold) and replacement (purchased) properties must be held for investment or business use
- "Like-kind" is broadly defined for real estate: any real property qualifies (e.g., apartment building for raw land, commercial for residential rental)
- Not eligible: Primary residences, vacation homes used personally, property held primarily for sale (flipping inventory), stocks, bonds, or personal property (since 2018 Tax Cuts and Jobs Act)
2. Qualified Intermediary (QI) Requirement
- A QI (also called an accommodator or exchange facilitator) must hold the sale proceeds
- The seller cannot touch the money at any point during the exchange
- QI must be an independent third party (not your agent, attorney, or accountant)
- QI fees typically range from $750-$1,500 per exchange
- Choose a QI with fidelity bond/insurance protecting exchange funds
3. Equal or Greater Value Rule
- The replacement property must be of equal or greater value than the relinquished property
- All equity from the sale must be reinvested
- Any cash or non-like-kind property received is called "boot" and is taxable
4. 45-Day Identification Period
- Starts the day the relinquished property sale closes
- You must identify potential replacement properties in writing to the QI within 45 calendar days
- No extensions (even if day 45 falls on a weekend or holiday — the IRS grants extensions only for presidentially declared disasters)
5. Identification Rules (choose one)
- 3-Property Rule: Identify up to 3 properties of any value
- 200% Rule: Identify any number of properties whose combined value does not exceed 200% of the relinquished property's value
- 95% Rule: Identify any number of properties if you acquire 95% or more of their combined value (rarely practical)
6. 180-Day Exchange Period
- Must close on the replacement property within 180 calendar days of selling the relinquished property
- OR by the due date of your tax return (including extensions) for the year of sale — whichever comes first
- 2026 Tax Filing Note: A taxpayer who began a 1031 exchange on or after October 17, 2025, must close by April 15, 2026 (tax return due date) unless they file an extension, which extends the deadline
7. What Is Boot?
- Cash boot: Any cash received from the exchange that is not reinvested
- Mortgage boot: If the replacement property has a smaller mortgage than the relinquished property, the difference is taxable boot
- Non-like-kind property boot: Any personal property included in the transaction
8. Tax Treatment
- Boot is taxed as capital gains in the year of the exchange
- Long-term capital gains rates (0%, 15%, or 20%) plus potential 3.8% net investment income tax
- Depreciation recapture taxed at up to 25%
9. Delayed (Forward) Exchange
- Most common type
- Sell relinquished property, then buy replacement within 180 days
- Standard 45/180-day timeline applies
10. Simultaneous Exchange
- Both properties close on the same day
- Rare in practice; still requires a QI for safety
11. Reverse Exchange
- Buy the replacement property before selling the relinquished property
- Exchange Accommodation Titleholder (EAT) holds title to one property
- More complex and expensive ($5,000-$10,000+ in QI/EAT fees)
- Must sell the relinquished property within 180 days of acquiring the replacement
12. Improvement (Build-to-Suit) Exchange
- Use exchange funds to improve the replacement property before taking title
- EAT holds title while improvements are made
- Improvements must be completed within the 180-day period
- Useful when no suitable replacement property exists at the desired value
Common Mistakes
- Touching the proceeds:
- Missing deadlines:
- Using a related party as QI:
- Not reinvesting all equity:
- Acquiring a lesser-value property: