People frequently ask for a clear, practical explanation of the basics surrounding a 1031 Exchange.

What is a 1031 / like-kind exchange? – It’s a tax rule that allows people who own real estate for business or investment purposes to defer, or delay, paying taxes when they sell the property, as long as they use the proceeds to buy another qualifying like-kind property as long as they adhere to the applicable regulations.

What is “like-kind”? – “Like-kind” refers to the requirement in a tax-deferred exchange that the property acquired, known as the Replacement Property, must be of the same general nature as the property sold, the Relinquished Property. For real estate exchanges, this standard is broadly defined, as real property is considered like-kind to other real property, regardless of differences in use, quality, or location. By trading from real estate to other real estate, the Exchanger is simply continuing their investment in real estate.

Does a 1031 Exchange Eliminate Taxes – No, a 1031 Exchange is tax deferral, not elimination. If at one point the Exchanger chooses to sell the Replacement Property and does not continue with another 1031 Exchange, the deferred taxes from the original sale will become due at that time. In the event of the death of an Exchanger, under current laws, the persons that inherit the property receive a stepped-up basis allowing taxes to be eliminated.

The basic rules and timeline for a 1031 Exchange are:

• Properties must be exchanged, not simply sold and purchased

• There must be no constructive or actual receipt of proceeds received by the Taxpayer, or Exchanger, or an agent of the Exchanger, from the transfer of the Relinquished Property pursuant to the Relinquished Property contract.

• Properties must be “Like-Kind”, but this requirement was more relevant when personal property and intangibles were allowed tax deferral prior to 2018.

• Properties must be held for business or investment purposes.

• The exchanged property must be equal or up in value, in order to defer all associated taxes.

• The exchange must follow time limit and identification requirements:

  • An Exchanger must acquire or identify the target Replacement Property within 45 days after the transfer of the Relinquished Property.

    • Properties received (purchased) within the 45-day designation period are deemed to be identified.

    • The Replacement Property must be designated in a written document, unambiguously described, signed by the Exchanger, and received by the Qualified Intermediary (or another party to the exchange) on or before the 45th day.

  • If the Exchanger identifies Replacement Property within the designated period, the exchange period end date is 180 days from the transfer of the first Relinquished Property. This provides the Exchanger with time to complete the exchange. However, it might be necessary for the taxpayer to file a tax-filing extension to utilize the full 180 days.

Most real property consists of a piece of land with or without a structure on it. It doesn’t matter what type of structure; they are nearly all like-kind to one another. Even vacant land can be held for rental or simply held for appreciation. Real estate does not have to be rental in nature to qualify. There are also many other types of real estate interests that might not readily come to mind but are considered like-kind to any other real property interest. Below is a list of what qualifies as like-kind:

• Single or multi-family rental properties

• Office buildings

• Apartment buildings

• Shopping centers

• Warehouses

• Industrial property

• Farm and ranch land

• Vacant land held for appreciation in value

• Cooperative apartments (Co-ops)

• Delaware Statutory Trusts (DSTs)

• Hotels and motels

• Cell tower and billboard easements

• Conservation easements

• Lessee’s interest in a 30-year lease (NOT a lessor’s interest)

• Warehouses

• Interests in a Contract for Deed

• Land trusts

• Growing crops

• Mineral, oil, and gas rights

• Water and timber rights

• Wind farms

• Solar array

What if I miss the 45-day identification? – There is no option to extend the 45-identification timeline, if the Exchanger fails to identify a qualifying Replacement Property the Exchange will fail, the Exchanger will receive the proceeds from the sale of their Relinquished Property back on Day 46 and standard associated taxes will be owed at that time.

What if the Qualified Intermediary (QI) messes up? – Selecting a reputable Qualified Intermediary is critical to the success of a 1031 Exchange. Because QIs are not subject to comprehensive federal regulation or licensing requirements, the Exchanger ultimately bears the tax risk if exchange requirements are not properly followed. If a QI fails to comply with IRS rules or mishandles exchange funds, the exchange could be disqualified, potentially resulting in unexpected tax liability . This is why working with an experienced, well-established QI is an essential part of mitigating risk in a 1031 Exchange.

What triggers an audit by the IRS? – Audits can be triggered at random regardless of the Exchanger has participated in a 1031 Exchange or not. Failing to follow the rules and regulations of a 1031 Exchange can result in an audit from the IRS and paying taxes. An Exchanger must file an IRS Form 8824 to report the transaction and a claim for deferral. Anything that is reported that doesn’t conform to the rules could disallow the exchange. There are many nuances to the rules, so working with an experienced team of professionals that includes not only a QI, but also a tax attorney or CPA is highly recommended to reduce the risk of an audit.

Can I split proceeds into multiple properties? – Yes, you can exchange one property and acquire multiple replacements to meet value and debt requirements, but timing considerations must be taken into account since the 45 and 180-day clock is going to begin upon the sale of the Relinquished Property. It may be difficult to identify multiple Replacement Properties within 45 days. To alleviate potential timing issues, most investors begin looking for Replacement Properties before the sale date of the Relinquished Property.

Can I use a 1031 property for a personal residence or moving situations? – A fundamental rule of a 1031 Exchange is that primary residences do not qualify. However, there are scenarios where a 1031 Exchange property can later be combined with Section 121 of the Internal Revenue Code. If an Exchanger converts their Replacement Property into a primary residence years after the exchange was completed, they may be able to use Section 121 to exclude up to $250,000 of gain (or $500,000 for married couples filing jointly) upon sale, provided certain requirements are met. This strategy is subject to additional rules, including the five-year holding requirement.

How much cash or debt reduction (“boot”) can I take? – Exchangers may receive cash proceeds during a 1031 Exchange, this situation often occurs when the value of the Replacement Property is less than the value of the Relinquished Property. Any cash received, commonly referred to as “boot”, does not disqualify the exchange, but it will trigger tax consequences on the “Boot”

When an Exchanger trades down in value or takes cash out of the exchange, the boot received is generally taxable, though the final tax impact may vary. In some cases, passive activity losses or other tax attributes may offset a portion or all of the taxable gain associated with the boot.

Similarly, when an Exchanger fails to take out new debt at least as much as old debt paid off upon closing of the relinquished property, that too can result in “mortgage boot” and be taxable.

Because receiving boot can result in exposure to capital gains tax, depreciation recapture, state taxes, and net investment income tax, it is critical for Exchangers to work closely with their tax and legal advisors when planning and executing a 1031 Exchange to fully understand the implications and optimize outcomes.

Do I need to file Form 8824? – Yes, after the 1031 Exchange have been completed, there is a final step to report the exchange to the IRS so that the deferral is recognized. Filing form 8824 is not simply “another” tax form. It is a critical step to appropriately document that a like-kind exchange has occurred. Once those financial statements are complete, accountants can utilize this information to prepare related tax returns. For owners who have completed a 1031 like-kind exchange, Form 8824 will need to be prepared and filed with the Internal Revenue Service (IRS) for the tax year in which the 1031 Exchange was completed.

What state-level taxes are deferred in a 1031 Exchange? – A properly structured like-kind exchange under IRC §1031 may allow an Exchanger to defer federal capital gains tax, depreciation recapture, state tax, and net investment income tax. However, whether state-level taxes can be deferred depends on the state in which the real estate is located, along with other factors.

Some states, such as Florida and Texas, do not impose a state income tax. As a result, 1031 Exchange transactions in these states generally do not require separate state-level reporting beyond the federal filing on IRS Form 8824. Many other states conform to the federal statute and likewise allow deferral of state income taxes on the gain that would have been recognized without a 1031 Exchange.

Certain states, including California, apply specialized rules to 1031 Exchanges. These rules including many “claw-back” provisions, require careful consideration, as they may impose state tax when the Replacement Property is later sold or moved out of state

Will the government change or cap 1031 Exchanges? – The major 2025 federal tax bill, H.R.1., also known as the One Big Beautiful Bill Act, signed into law on July 4, 2025 did not repeal or cap Section 1031 Exchanges. Investors can still defer capital gains tax by reinvesting in “like-kind” real property, with the usual timing rules (45- and 180-day deadlines) and only real estate qualifying. There’s no current statutory limit or cap on the amount of gain you can defer in a year under Section 1031, and to date no indication the current administration will be looking to alter the current state of 1031 Exchanges.