A 1031 exchange doesn't eliminate the tax bill on selling an investment property — it postpones it, potentially indefinitely, as long as you follow a set of deadlines and rules that leave almost no room for error.
The Basic Trade: Defer, Don't Avoid
Under Section 1031 of the tax code, if you sell investment or business-use real estate and reinvest the proceeds into a 'like-kind' replacement property, you can defer paying capital gains tax and depreciation recapture on the sale. The tax isn't forgiven — your gain rolls into the replacement property's basis, and you'll eventually settle up if you sell without doing another exchange. Many investors defer taxes this way for decades, or until death, when heirs may receive a stepped-up basis that erases the deferred gain entirely.
What Counts as 'Like-Kind'
The definition is broader than most people expect: almost any real property held for investment or business use qualifies as like-kind to almost any other, so an apartment building can be exchanged for raw land, or a rental house for a commercial strip mall. What does not qualify is your personal residence, property held primarily for resale (like a flip), or property outside the United States.
The 45-Day and 180-Day Deadlines
Once you close the sale of your original property, you have exactly 45 calendar days to formally identify potential replacement properties in writing, and 180 calendar days total from the original sale to close on the replacement. These deadlines run on the calendar, including weekends and holidays, with no extensions for hardship — missing either one by even a day disqualifies the entire exchange.
You Can't Touch the Money — the Qualified Intermediary
The sale proceeds must go directly to a qualified intermediary, a third party who holds the funds until they're used to purchase the replacement property. If the proceeds pass through your hands or your bank account at any point, even briefly, the exchange is disqualified and the entire gain becomes taxable immediately.
Boot: The Part That Still Gets Taxed
To fully defer the gain, the replacement property must be of equal or greater value, and you must reinvest all the net proceeds and replace any debt paid off on the sale with equal or greater debt on the new property. Any leftover cash or reduction in debt you pocket — called 'boot' — is immediately taxable, even within an otherwise valid exchange.
Frequently asked questions
Can I do a 1031 exchange on a property I live in part-time?
Only the portion used for investment or business purposes typically qualifies; a primary residence generally does not, though mixed-use properties require careful allocation.
How many replacement properties can I identify within the 45 days?
Common rules allow identifying up to three properties regardless of value, or more than three if their combined value doesn't exceed 200% of the property you sold.
Does a 1031 exchange eliminate depreciation recapture too?
Yes, depreciation recapture is deferred along with the capital gain as part of the same exchange, rolling into the replacement property's basis.