The 1031 Exchange: Timeline, Rules and Numbers
A deferral, not a forgiveness — with two deadlines that never move and a replacement test most people get wrong.
45 and 180
Days to identify, then to close. Neither deadline moves for any reason.
Mechanics, not advice
What it is
A 1031 exchange lets you sell an investment property and roll the proceeds into another without recognising the gain at the time of sale. The tax is deferred into the new property’s basis, which means it follows you rather than disappearing — and the deferral can continue through successive exchanges for as long as you keep going.
Two things it is not. It is not a way to avoid transaction costs: you still pay commission, transfer taxes and everything else in the cost of selling. And it is not a way to take cash out — any cash you receive is taxable.
The two deadlines
| Clock | Length | Runs from | What must happen |
|---|---|---|---|
| Identification period | 45 days | The day your sale closes | You must identify replacement properties in writing to your intermediary. Day 45 is a hard stop, weekends and holidays included. |
| Exchange period | 180 days | The same day | You must close on replacement property. It is 180 days total, not 180 after the 45 — and it can be cut short by your tax return due date. |
45 days is much shorter than it sounds
The identification rules
| Rule | How it works | When to use it |
|---|---|---|
| Three-property rule | Identify up to three properties of any value. | The default. Simple and sufficient for most exchanges. |
| 200% rule | Identify any number, so long as their combined value is at most 200% of what you sold. | When you want more options and are buying smaller assets. |
| 95% rule | Identify any number of any value, but you must acquire at least 95% of the total identified value. | Rarely used. Very little room for error. |
What full deferral requires
Two conditions, and the second is the one that surprises people:
The $240,000 example, sold in year five
- Sale price
- $278,225
- Selling costs (7%)
- −$19,476
- Loan payoff
- −$168,977
- Net proceeds to the intermediary
- $89,772
- Replacement value required (at or above net sale price)
- $258,749
- Replacement debt required (at or above loan paid off)
- $168,977
Buy for less, or borrow less, and the difference is taxable boot.
Replacing the equity is intuitive. Replacing the debt is not, and it is where exchanges quietly generate a tax bill: if you sell a leveraged property and buy a cheaper one with less financing, the debt you shed counts as boot even though no cash reached you. You can make it up by adding cash to the purchase instead of borrowing — but you have to plan that.
The process
- 1Engage a qualified intermediary before closing. This is not optional and it cannot be fixed afterwards — if the proceeds touch your account, or an account you control, the exchange is dead.
- 2Include exchange cooperation language in the sale contract.
- 3Close the sale. Proceeds go to the intermediary. Both clocks start.
- 4Identify in writing by day 45, under one of the three rules above.
- 5Close on replacement by day 180, or by your tax return due date if that falls sooner — an extension can preserve the full period.
- 6File the exchange with your return for the year of the sale.
What counts as like-kind
Much broader than people expect. Since 2018 the rules cover real property held for investment or business use, and almost any US investment real estate qualifies as like-kind to almost any other: a single-family rental exchanges into an apartment building, raw land, or a commercial strip. What does not qualify is a primary residence, a property held primarily for resale (dealer property, which catches most flips), and property outside the United States.
When it is worth doing
| Good fit | Poor fit |
|---|---|
| A large deferred gain and substantial accumulated depreciation | A small gain, where the cost and complexity outweigh the deferral |
| You genuinely want a different asset — larger, better located, less management | You have no target and are exchanging to avoid a tax bill |
| You can start searching before you list | You are already under contract with no candidates |
| You can replace the debt as well as the equity | You want to deleverage, which creates boot |
| You intend to keep holding real estate long term | You want the money out — an exchange cannot do that |
Do not let the tail wag the deal
Frequently asked questions
What are the 1031 exchange time limits?
Forty-five days from the sale closing to identify replacement properties in writing, and 180 days from the same date to complete the purchase. Both are calendar days including weekends and holidays, and the 180-day period can be shortened by your tax return due date unless you file an extension.
What is boot in a 1031 exchange?
Any value you receive that is not like-kind property — cash taken out, or a reduction in debt between the property sold and the property bought. Boot is taxable even when the rest of the exchange qualifies, which is why replacing the debt matters as much as replacing the equity.
Can I do a 1031 exchange without a qualified intermediary?
No. If the sale proceeds pass through your hands or an account you control, the exchange fails and the gain is recognised. The intermediary must be engaged before the sale closes, and this cannot be corrected afterwards.
Does a 1031 exchange eliminate taxes?
It defers them rather than eliminating them. The deferred gain reduces the basis of the replacement property, so the liability carries forward and would be recognised on a later taxable sale. It also does not reduce any of the transaction costs of selling.
Can I 1031 exchange into a different type of property?
Generally yes. Real property held for investment or business use is like-kind to other such real property, so a single-family rental can be exchanged for an apartment building, land or commercial space. Primary residences, property held mainly for resale, and property outside the United States do not qualify.