What is a 1031 exchange?
A 1031 exchange is a swap of one investment or business property for another under Section 1031 of the Internal Revenue Code, which lets you put off paying tax on the gain from the sale. If you reinvest all the proceeds into like-kind real estate of equal or greater value, you recognize no gain in the year you sell.
People call it several things: a like-kind exchange, a tax-deferred exchange, a 1031 tax exchange or a Starker exchange. They all mean the same deal. The gain you would have reported is carried into the new property through a lower tax basis, and it waits there until you sell in a taxable sale, exchange again or die holding it.
Since January 1, 2018, Section 1031 covers real property only. The 2017 tax law removed equipment, vehicles, art and other personal property, and the 2025 law (P.L. 119-21) left Section 1031 as it was. For a real estate owner, the rules in 2026 are the same rules that applied in 2018.
A 1031 exchange explained in plain English
Think of a 1031 exchange as moving your money from one building to another without letting the IRS take a cut on the way. If you sold a fourplex and put the cash in the bank, you would owe tax this year. If you sell the fourplex and a neutral third party uses the money to buy a 20-unit building for you, the IRS treats it as one continuing investment.
Three ideas carry most of the weight. You trade real estate for real estate. You never touch the cash in between. You buy at least as much as you sold, both in price and in equity, if you want to defer all the tax. The rest of the rules exist to police those three ideas.
Most exchanges today are delayed exchanges: you sell first, then buy within 180 days. True two-way swaps, where two owners trade deeds on the same day, are rare. The delayed version traces back to Starker v. United States, a 1979 federal appeals case, and Congress wrote the 45-day and 180-day limits into Section 1031(a)(3) in 1984.
How does a 1031 exchange work?
A 1031 exchange works by routing your sale proceeds through a qualified intermediary, who holds the money and uses it to buy the replacement property you name within the deadlines. Here is the usual order of events in a forward, or delayed, exchange.
- Hire a qualified intermediary before your sale closes and sign an exchange agreement. Your sale contract is assigned to the intermediary.
- Close the sale. The buyer’s money goes to the intermediary, not to you. Your 45-day and 180-day clocks start that day.
- By midnight of day 45, send the intermediary a signed, written list of the replacement properties you might buy.
- Buy one or more of the listed properties and close by day 180, or by your tax return due date with extensions if that comes first. The intermediary wires the exchange funds to the closing.
- Report the exchange on IRS Form 8824 with your tax return for the year you sold.
What property qualifies for a like-kind exchange?
Real property you hold for investment or for use in a trade or business qualifies, and it can be exchanged for any other real property you will hold the same way. Like-kind refers to the nature of the property, not its grade or quality, so an apartment building can be exchanged for land, a warehouse, a strip center or a single-family rental.
Some property is shut out. Your main home does not qualify, because you hold it for personal use. Property held mainly for resale, such as a flip or lots a developer subdivides, does not qualify. Real property in the United States is not like-kind to real property abroad. An interest in an LLC or partnership that owns real estate is not real property for this purpose, which is why a typical syndication interest cannot be your replacement.
If you own a rental house, a duplex or a commercial building, our guide to a 1031 exchange on a rental or investment property covers holding periods, converting a rental to personal use and mixed-use buildings. If you are wondering about your house, the guide to a 1031 exchange and your primary residence explains when the home sale exclusion under Section 121 can be combined with an exchange.
The 45-day and 180-day deadlines
You have 45 calendar days from the sale to identify replacement property in writing and 180 calendar days from the sale to close on it. Both periods start on the same day and run at the same time. Weekends and holidays count, and the dates do not roll forward.
The 180-day limit has a catch that trips up owners who sell late in the year. The exchange period ends on the earlier of day 180 or the due date of your return, including extensions. A sale on November 17, 2026 has a day-180 date of May 16, 2027, but an individual’s 2026 return is due April 15, 2027. Unless you file an extension, your exchange ends on April 15.
| Deadline | What must happen | Rule |
|---|---|---|
| Before the sale closes | Sign an exchange agreement with a qualified intermediary and assign the sale contract | Treas. Reg. 1.1031(k)-1(g)(4) |
| Day 0 | Relinquished property transfers to the buyer; proceeds go to the intermediary | Treas. Reg. 1.1031(k)-1(b)(2) |
| Day 45 (midnight) | Signed written identification of replacement property delivered to the intermediary | IRC 1031(a)(3)(A) |
| Day 180 or return due date, if earlier | Replacement property received | IRC 1031(a)(3)(B) |
| Tax filing for the year of sale | File Form 8824 | Form 8824 instructions |
Identification rules in brief
You can identify up to three properties of any value, or more than three if their total value stays at or under 200% of what you sold, or any number if you end up buying at least 95% of the total value you listed. Most owners use the three-property rule, because it is the simplest to satisfy.
The list must be in writing, signed by you, and describe each property clearly enough to find it, such as a street address or legal description. It goes to the intermediary or another party to the exchange who is not you or your agent. Our guide to 1031 exchange rules walks through each identification test with examples, along with related-party rules, holding periods and the state rules that matter most.
Boot: why some exchanges are partly taxable
Boot is anything you receive in an exchange that is not like-kind real estate, and you pay tax on your gain up to the amount of boot. The two most common forms are cash you keep and debt you are relieved of without replacing it.
To defer all the tax, the usual rule of thumb is to buy replacement property with a price at least equal to your net sale price and to reinvest every dollar of net cash. If your old building had a $700,000 mortgage, the new one needs at least $700,000 of new debt, or you need to add cash to make up the difference. You can take some cash out on purpose and pay tax on just that part. That is called a partial exchange, and it still defers the rest of the gain.
The 1031 exchange calculator estimates your cash boot, mortgage boot and the tax on each before you commit to a replacement price.
What a 1031 exchange company does
A 1031 exchange company is a qualified intermediary, also called an accommodator or facilitator: a business that holds your sale proceeds and documents the exchange so you never have actual or constructive receipt of the cash. Without one, a delayed exchange generally fails the moment the money reaches you.
Your own attorney, CPA, real estate agent or employee cannot serve as your intermediary if they acted as your agent in the two years before the sale, and neither can a close relative. Intermediaries are lightly regulated at the federal level, so how they hold your money matters. Our guide to choosing a 1031 qualified intermediary covers fees, segregated accounts, bonding and the handful of states that license or regulate them.
Types of 1031 exchanges
There are five common ways to structure a 1031 exchange, and they differ mainly in the order of closings and who holds title in between.
| Type | How it works | When owners use it |
|---|---|---|
| Delayed (forward) | Sell first; buy within 180 days through an intermediary | Most exchanges |
| Simultaneous | Sale and purchase close the same day | Rare; usually two owners trading with each other |
| Reverse | An accommodation titleholder buys the replacement first; you sell within 180 days | The right replacement appears before your building sells |
| Improvement (build-to-suit) | The titleholder holds the replacement while work is done so the improvements count | You would otherwise trade down in value |
| DST | Buy a beneficial interest in a Delaware statutory trust as replacement property | You want a passive replacement or a backup |
What is a reverse 1031 exchange?
A reverse 1031 exchange is an exchange where you buy the replacement property before you sell the property you are giving up. Because you cannot own both and still call it an exchange, an exchange accommodation titleholder takes title to one of the properties and holds it for up to 180 days under Revenue Procedure 2000-37.
Here is how a reverse 1031 exchange works in practice. The titleholder buys and holds the new building, usually with a loan from you or a lender. You identify the property you will sell within 45 days and close that sale within 180 days. The intermediary then completes the exchange and the titleholder deeds the new building to you. Reverse exchanges cost several times more than forward ones and are harder to finance. Our reverse 1031 exchange guide covers the timeline, the costs and improvement exchanges in detail.
Exchanging into a Delaware statutory trust
A Delaware statutory trust can be replacement property because the IRS ruled in Revenue Ruling 2004-86 that a properly structured DST interest is treated as a direct interest in the real estate. That lets an owner sell an apartment building and exchange into a share of a larger, professionally managed property.
Owners use DSTs to step away from management, to match debt and to name a backup on their 45-day list in case a planned purchase falls through. The trade-offs are less control, sponsor fees and no way out until the trust sells. Most DST offerings are limited to accredited investors. Our guide to a 1031 exchange into a DST covers how they are structured, what to look for and how they compare with buying another building.
What tax does a 1031 exchange defer?
A 1031 exchange defers federal capital gains tax, the tax on depreciation you have taken and the 3.8% net investment income tax, plus state income tax in most states. For a long-held building, the depreciation piece is often the largest single item.
These are the federal rates that would apply to a 2026 sale without an exchange.
| Tax | 2026 rate | What it applies to |
|---|---|---|
| Long-term capital gains | 0%, 15% or 20% | Gain above depreciation on property held over one year; 20% applies above $545,500 of taxable income (single) or $613,700 (joint) |
| Unrecaptured Section 1250 gain | Up to 25% | Gain equal to the straight-line depreciation taken on the building |
| Net investment income tax | 3.8% | Gain for taxpayers with modified AGI above $200,000 (single) or $250,000 (joint) |
| State income tax | Varies by state | Most states tax the gain as income; a few have no income tax |
Worked example: exchanging a 16-unit building
You bought a 16-unit building in 2012 for $1,100,000 and have taken $480,000 of depreciation, so your adjusted basis is $620,000. You sell it in 2026 for $2,000,000 and pay $80,000 in selling costs, so your amount realized is $1,920,000 and your gain is $1,300,000. The building still owes $700,000 on its mortgage.
Without an exchange, and assuming you are in the top bracket, the $480,000 of depreciation is taxed at up to 25%, or $120,000. The other $820,000 is taxed at 20%, or $164,000. The 3.8% net investment income tax on the full $1,300,000 adds $49,400. That is $333,400 of federal tax before any state tax.
With an exchange, the mortgage payoff leaves $1,220,000 of net equity with the intermediary. You identify three buildings within 45 days and close on a $2,600,000, 30-unit property within 180 days, using all $1,220,000 plus a new $1,380,000 loan. You bought more than your $1,920,000 net sale price, reinvested all the cash and took on more debt than you paid off, so there is no boot and the full $1,300,000 gain is deferred.
The deferral shows up in your basis. The new building’s basis is $1,300,000, its $2,600,000 cost minus the $1,300,000 deferred gain. You depreciate from that lower figure, and the deferred gain comes due if you later sell without another exchange.
Reporting the exchange and state rules
You report a like-kind exchange on IRS Form 8824, filed with your return for the year you transferred the relinquished property. If the exchange was with a related party, you file Form 8824 for the two years after as well, and selling either property within two years generally makes the deferred gain taxable.
Most states follow the federal rules, but a few add their own steps. California taxes the deferred gain on California property even after you exchange into another state, so it requires Form FTB 3840 for the year of the exchange and every year after until the gain is recognized. California also requires withholding of 3 1/3% of the sales price on many sales, which a valid exchange defers until boot is paid out. Check your state’s rules before you list.
How long the deferral can last
There is no limit on how many times you can exchange, so the deferral can last as long as you keep exchanging. Each exchange carries the old basis forward into the next property.
Under Section 1014, property you own at death generally takes a basis equal to its fair market value on that date. For an owner who exchanges for decades and holds the last building until death, that step-up can mean the deferred gain is never taxed to the heirs. Estate rules depend on your situation and can change, so plan this with an estate attorney and CPA.
Common mistakes that break an exchange
Most failed exchanges come from timing and paperwork, not from the property itself.
- Closing the sale before an intermediary is engaged and the contract is assigned.
- Taking the sale proceeds, even briefly, or having them wired to your own account.
- Missing the day-45 list or sending it to someone who is not a party to the exchange.
- Selling late in the year and forgetting that the tax return due date can cut the 180 days short.
- Buying a cheaper property or taking on less debt, then being surprised by boot.
- Taking title to the new property in a different name than the one that sold, such as a new LLC.
- Buying from or selling to a relative or your own company without checking the related-party rules.
How Skyline fits into your exchange
If your relinquished property is an apartment building, the buyer you pick sets your clock, so a buyer who can close on a date you choose helps. Skyline buys apartment buildings with five or more units nationwide. We buy directly, close on your timeline, and can work inside 1031 deadlines. We cooperate with your intermediary on the contract assignment and can set the closing date after you have a replacement in view.
Tell us your target closing date and whether you are doing a forward or reverse exchange, and we will tell you plainly whether our timeline fits. We do not give tax advice, so have your CPA and intermediary confirm the plan.
Selling? Spread the tax with seller-carry terms
If a large tax bill is what is keeping you from selling, an installment sale may help. When you carry part of the price as a note, the gain is generally reported as you receive payments instead of all in the year of sale. Some parts of the gain, such as certain depreciation recapture, can still be due up front, so run the numbers with your CPA first.
Skyline Capital Investments buys apartment buildings with five or more units and can offer seller-carry terms, or a delayed closing that fits your 1031 timeline. Send the address and unit count and we typically respond within 48 hours. How seller financing works · How an installment sale is taxed · Seller financing calculator.
Get A Seller-Carry Offer
