1031 Exchange Rules: the complete 2025 guide

What a 1031 exchange actually does

A Section 1031 like-kind exchange defers federal capital gains tax + depreciation recapture when you sell investment real estate, as long as you reinvest the proceeds into another qualifying investment property within strict time windows.

Defer ≠ eliminate. The deferred tax follows you forward as the new property's lower basis. When you eventually sell that new property without doing another exchange, the cumulative deferred tax comes due. The exception: if you hold the property until death, your heirs receive a stepped-up basis and the deferred tax disappears.

The four rules that matter

1. Like-kind property requirement

For real estate, "like-kind" is interpreted very broadly. Both properties must be held for investment or business use (not personal use). Beyond that, almost any real estate works:

• Single-family rental → multi-family apartment building ✓
• Raw land → strip mall ✓
• Vacation rental → industrial warehouse ✓
• Office building → triple-net retail ✓
• Real estate → vehicles, art, business equipment ✗ (post-2017 TCJA)

Personal residences (your primary home) and second homes used personally do not qualify. For your primary home, see the Section 121 exclusion instead.

2. The 45-day identification rule

Within 45 calendar days of closing on your original property, you must identify potential replacement properties in writing to your qualified intermediary. No extensions for weekends, holidays, or natural disasters (one disaster-area exception exists with IRS approval).

You can identify in one of three ways:

• Three-property rule: Up to 3 properties of any value. Most common.
• 200% rule: Any number of properties as long as their combined fair market value is ≤ 200% of the relinquished property's value.
• 95% rule: Any number of properties of any value, but you must close on properties worth ≥ 95% of the total identified value.

3. The 180-day closing rule

You have 180 calendar days from the closing of the original property to close on the replacement property. The 180-day clock runs concurrently with the 45-day clock — so once you've used 45 days for identification, you have 135 days left to close.

If your tax return due date (April 15) falls before the 180-day window ends, you must file an extension to get the full 180 days. If you don't, your effective window is shortened.

4. The qualified intermediary requirement

You cannot touch the cash from the sale at any point. A qualified intermediary (QI) — an independent third party — must hold the proceeds and disburse them at the replacement property closing. The QI signs both closing packages.

The QI cannot be your relative, attorney, accountant, employee, real estate agent, or anyone with whom you've had a financial relationship within the past 2 years (with narrow exceptions). Cost is typically $750–$1,500. Choose a QI who is bonded, insured, and holds funds in a segregated escrow account — fraud and bankruptcy have wiped out exchanges before.

The math: how much does a 1031 actually save?

Say you bought a rental for $300K in 2015. After 10 years of depreciation ($109K) and a sale at $700K, your taxable gain is:

• Sale price: $700,000
• Adjusted basis: $300K − $109K = $191,000
• Total gain: $509,000
• Of which $109K is depreciation recapture (taxed at 25%): $27,250 tax
• Remaining $400K is long-term capital gain (taxed at 20% federal for high earners): $80,000 tax
• Plus 3.8% Net Investment Income Tax on the $400K: $15,200
• State capital gains tax (e.g., CA at 13.3%): up to $67,700
• Total tax bill without 1031: ~$190,000

A 1031 exchange defers all $190,000 — you reinvest the full $700K into the next property and keep the entire $400K of gain working for you instead of sending $190K to the government.

Boot: where exchanges go wrong

Boot is anything in the exchange that isn't like-kind real property — and boot is taxable.

• Cash boot: You receive cash at the new closing because the new property cost less than the old. The cash amount is taxed.
• Mortgage boot: The new property's mortgage is smaller than the old one. The reduction in debt is treated as cash and taxed.

To fully defer all tax, you must:

1. Reinvest 100% of the cash proceeds into the new property
2. Replace the debt level (or add cash to make up the difference)
3. Buy property of equal or greater value

Run the numbers on your exchange

Use our calculator to model your specific deferred tax savings:

• 1031 Exchange Calculator — federal capital gains, §1250 depreciation recapture, NIIT, and state capital gains tax modeled for your specific scenario.

When NOT to do a 1031

• You want to cash out for non-real-estate use. Any cash you take out is taxable. If you actually need the cash, just pay the tax and move on.
• You can't identify a target property in 45 days. Forced exchanges into bad properties (just to avoid tax) are how investors get stuck holding lemons. Pay the tax instead.
• You're selling at a loss. No tax to defer. Worse: 1031 disqualifies the loss deduction.
• You're downsizing. Buying a smaller property creates boot, which is taxable. May still net out positive but run the math.
• You're near death and your estate is large enough. Heirs get stepped-up basis at death — the deferred tax never gets paid. But this is an estate-planning conversation, not a tax-only one.

Common variations

• Reverse exchange: You buy the new property before selling the old one. Possible but requires an Exchange Accommodation Titleholder (EAT) to hold one of the properties. Cost is higher.
• Improvement exchange: Use exchange proceeds to fund construction on the replacement property. Must be completed within the 180-day window.
• Delaware Statutory Trust (DST): Pre-packaged fractional ownership in institutional-grade real estate. Qualifies as like-kind. Common for investors who want passive ownership and instant identification.