What Is 1031 Exchange?
A 1031 exchange lets an investor defer tax on the gain from selling real property held for business or investment by reinvesting in other like-kind real property. In a deferred exchange the replacement must be identified within 45 days and received within 180 days of the sale, or by the tax return due date if earlier.
1031 Exchange in plain English
Normally, selling an investment property at a profit triggers tax on the gain. A 1031 exchange, named for Section 1031 of the Internal Revenue Code, lets you defer that tax if you reinvest in other real property held for business or investment.
The rules are strict. Since 2018 only real property qualifies. In a deferred exchange you must identify the replacement within 45 days of selling and receive it within 180 days, or by your tax return due date if earlier. Cash you keep is taxable.
Worked example
Cash left over in a 1031 exchange (boot)
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Net sale price of the rental given up (no mortgage)
- $600,000
- Adjusted basis
- $350,000
- Price of the replacement property
- $550,000
- Timeline
- Replacement identified within 45 days, received within 180 days
| Step | Calculation | Result |
|---|---|---|
| 1. Realized gain | $600,000 − $350,000 | $250,000 |
| 2. Cash not reinvested (boot) | $600,000 − $550,000 | $50,000 |
| 3. Gain recognized now | lesser of $250,000 and $50,000 | $50,000 |
| 4. Gain deferred | $250,000 − $50,000 | $200,000 |
Gain deferred: $200,000. Trading down by $50,000 makes that amount taxable now, while $200,000 of gain is deferred into the replacement property. Reinvesting the full proceeds would have deferred all of it.
What this calculation leaves out
- Simplified: ignores exchange expenses, mortgages on either property (debt relief can also be boot) and depreciation recapture.
- General information, not tax advice. The exchange must be structured before the sale closes, usually through a qualified intermediary - talk to a tax professional.
Why it matters
Deferring the tax keeps the full sale proceeds working in the next property, but any cash or other property received is taxable, and missing a deadline can disqualify the exchange.
Deferral keeps the tax money invested, but the deferred gain carries into the replacement property's basis and is generally taxed when that property is sold outside an exchange.
When 1031 Exchange is used
- Trading up from a smaller rental into a larger one without paying tax on the gain now.
- Consolidating several properties into one, or splitting one into several.
- Repositioning a portfolio into a different market or property type.
Common mistakes
- Receiving the sale proceeds yourself instead of using a qualified intermediary.
- Missing the 45-day identification or 180-day deadline.
- Trading down and being surprised that the cash kept is taxable.
- Trying to exchange a personal residence or property held mainly for resale.
1031 Exchange vs. DST vs. Qualified Opportunity Fund
Defers capital gains tax by reinvesting the full sale proceeds into another "like-kind" property, with strict identification and closing deadlines.
A fractional-ownership structure that still qualifies as like-kind real estate for a 1031 exchange, letting an investor exit active management while keeping the tax deferral.
Defers (and can partially exclude) capital gains tax by reinvesting just the gain — not the full proceeds — into a designated Opportunity Zone fund; no replacement real estate required.
1031 Exchange: frequently asked questions
What are the 1031 exchange deadlines?
In a deferred exchange, the replacement must be identified within 45 days of transferring the old property and received within 180 days, or by the tax return due date including extensions if that is earlier.
Can I do a 1031 exchange on my home?
No. Section 1031 applies to real property held for business or investment, not property used mainly as a personal residence.
What is boot in a 1031 exchange?
It is cash or other non-like-kind property received in the exchange. Gain is taxable to the extent of boot.
How is a 1031 exchange reported?
On IRS Form 8824, Like-Kind Exchanges, filed with the tax return for the year of the transfer.
Where it fits
- Investing, Exit: next, Capital Gains.
More Investing Terms
Recommended next step
See the gain a sale would create before deciding whether to exchange.
Home sale capital gains calculator →Apply it to a specific property: Five-Year Investment Projection.
Sources and review
- Like-kind exchanges - Real estate tax tips, Internal Revenue Service. Supports: Section 1031 applies only to real property (not personal or intangible property); gain is not recognized except to the extent of money or other property received; Form 8824 reports the exchange.
- Instructions for Form 8824, Like-Kind Exchanges, Internal Revenue Service. Supports: The 45-day identification period and the 180-day (or return due date) receipt deadline for deferred exchanges, and the role of qualified intermediaries.
Where this applies: United States federal income tax (Internal Revenue Code §1031). State tax treatment can differ. General information, not tax advice.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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