1031 Exchange Guide 2025
Defer capital gains and depreciation recapture by exchanging into like-kind investment property
This guide covers the rules, deadlines, and mechanics of a properly structured 1031 exchange. Every rule and dollar figure is drawn from IRC §1031, the Treasury regulations, and Publication 544, and re-verified each tax year.
What is a 1031 exchange and how does it work?
A 1031 exchange allows you to defer capital gains and depreciation recapture taxes when selling investment property by reinvesting proceeds into like-kind property. You have 45 days to identify replacement properties and up to 180 days to close — capped at your tax return's due date including extensions, so late-year exchanges usually require filing an extension (Form 4868 for individuals; Form 7004 for partnerships and S corporations, whose returns are due March 15). A qualified intermediary usually holds the funds.
- •45-day identification deadline (extended only by IRS disaster relief under §7508A)
- •180-day closing deadline (or return due date + extensions, if earlier)
- •Proceeds usually held by a qualified intermediary (or qualified escrow or trust)
- •Reinvest all proceeds to defer 100% of taxes
1031 exchanges are powerful and unforgiving. The IRS designed them to defer tax on like-kind real estate swaps — but every deadline is calendar days, every QI must be truly arm's-length, and one misstep collapses the entire exchange. Most failed 1031s fail on day 45, not at closing.
Real-world scenario
Investor sells $900K rental, identifies three replacements on day 44
Day 0: Mar 1 closing. Net equity to QI: $400K. Day 44: identifies three properties totaling $1.35M (under 200% rule). Day 180: closes on two for $1.2M total, uses all $400K equity + $800K new debt. Deferred gain: $310K. Federal LTCG + recapture saved (now): ~$78K. State CA franchise board still tracks the deferral via Form 3840.
The part most people miss
California's 'clawback' (FTB Form 3840) follows your deferred gain forever, even if you move out of state. Defer in CA, retire to Nevada, sell in Texas — California still claims its share when you finally cash out. The only legal escape is dying and stepping up the basis. Plan exit residency before, not after, the exchange.
1031 Exchange Key Facts
What is a 1031 Exchange?
A 1031 exchange (named after IRC Section 1031) allows you to sell investment property and defer ALL capital gains and depreciation recapture taxes by reinvesting the proceeds into "like-kind" replacement property. You're essentially swapping one investment for another without triggering a tax event.
Tax Deferral Benefits
- Defer capital gains tax (0%, 15%, or 20% rate)
- Defer depreciation recapture (taxed up to 25%)
- Defer Net Investment Income Tax (3.8% rate)
- Repeat indefinitely - chain exchanges until death for step-up
What Properties Qualify?
"Like-kind" is broader than you might think. It refers to the nature of the investment, not the type of property. Real estate held for investment or business can be exchanged for other real estate held for investment or business.
Qualifies for Exchange
- • Rental residential property
- • Commercial property
- • Vacant land (held for investment)
- • Industrial property
- • NNN lease properties
- • Delaware Statutory Trusts (DSTs)
- • Tenant-in-Common (TIC) interests
Does NOT Qualify
- • Primary residence
- • Second homes (unless rental history)
- • Property held for sale (flips)
- • Stocks, bonds, or notes
- • Partnership interests
- • Foreign real estate for U.S. real estate (or vice versa)
- • Personal property (post-2017)
Critical Deadlines (No Hardship Extensions)
These Deadlines Don't Bend for Hardship
No extensions exist for financing delays, broker problems, or personal hardship — and weekends and holidays don't move the dates. Two real exceptions: the 180-day period is capped at your return's due date INCLUDING extensions (file Form 4868 on late-year exchanges to keep the full 180, or Form 7004 for a partnership or S corporation, whose return is due March 15), and IRS disaster relief under §7508A can extend both deadlines for federally declared disasters, significant fires, and terroristic or military actions. Missing either deadline disqualifies the exchange.
You must identify potential replacement properties in writing within 45 days of selling your relinquished property (the first one, if you sell several). The identification must be signed and delivered to the replacement property's seller or to another person involved in the exchange who is not a disqualified person, usually your qualified intermediary, an escrow agent or a title company, not your own attorney, accountant or real-estate agent (Treas. Reg. §1.1031(k)-1(c)(2)).
You must close on your replacement property within 180 days of selling your relinquished property. This is also limited by your tax return due date (file an extension if needed).
Understanding "Boot"
"Boot" is any value received that doesn't qualify for tax deferral. It's taxed in the year of the exchange, but only up to your realized gain (IRC §1031(b)); taking some boot doesn't disqualify the rest of the exchange, and a loss isn't deductible (§1031(c)). To achieve 100% deferral, you must reinvest ALL proceeds and acquire property of equal or greater value.
Cash Boot
- • Taking cash out of the exchange
- • Receiving net proceeds at closing
- • Interest earned on exchange funds
Mortgage Boot
- • Reducing your debt level
- • Paying off existing mortgage
- • Taking on less debt
- • Unless offset by additional cash you put into the replacement
Sources & References
Primary references used for this content
Like-Kind Exchanges
§1031 reporting, boot, and deferred gain
View on irs.gov
Exchange of real property held for productive use
Like-kind exchange requirements and timelines
View on law.cornell.edu
Sales and Other Dispositions of Assets
Gain/loss character, recapture, and like-kind exchanges
View on irs.gov
✓3 primary sources; links re-checked on a weekly rotation by the source watcher