When you sell business or investment real estate at a gain, you normally owe tax on that gain right away. A like-kind exchange under Section 1031 of the tax code lets you defer the tax if you swap that property for other real estate held for business or investment. It is one of the most useful tools in real estate tax planning, and also one of the least forgiving, because missing a deadline can turn the whole exchange into a taxable sale.
What qualifies
Real property is like-kind to other real property if it has the same nature or character, even if it differs in grade or quality. An apartment building can be exchanged for raw land, or a warehouse for a retail center, as long as both are held for business or investment. U.S. real property is not like-kind to real property outside the United States.
What does not qualify after 2017:
- Machinery, equipment and vehicles
- Artwork and collectibles
- Patents, other intellectual property and intangible business assets
- Real estate held primarily for resale, such as inventory of a developer or house flipper
- A principal residence, which is not held for business or investment
The 2025 edition of IRS Publication 544 lists no changes to the like-kind exchange rules in the recent legislation.
The deadlines
Most exchanges are delayed: you sell first and buy later. The timing rules are strict.
| Step | Deadline |
|---|---|
| Identify replacement property in writing | Within 45 days after you transfer the property you gave up |
| Receive the replacement property | By the earlier of 180 days after the transfer or the due date of your tax return for the year, including extensions |
The 180-day period is cut short if your return is due sooner, so a sale late in the year can require an extension to keep the full 180 days. These deadlines run at the same time, not one after the other, so count the days carefully and confirm the dates with your intermediary.
Using a qualified intermediary
In a delayed exchange you cannot take possession of the sale proceeds. A qualified intermediary (QI) holds the money and arranges the purchase of the replacement property. The IRS instructions say a deferred exchange through a QI is treated as a like-kind exchange, but related parties and your own agents cannot serve as a QI. If the QI causes you to miss the timing rules, the exchange may not qualify. Choose the QI and sign the exchange agreement before closing on the property you are selling.
Boot, gain and basis
If you receive cash or non-like-kind property (boot), you recognize gain up to the boot. Paying off debt and receiving less debt on the new property can also count as boot. Losses are not recognized in a like-kind exchange.
Your gain is deferred, not erased. It is carried into the basis of the new property. In general, your basis in the new property equals your basis in the old property, adjusted for boot and gain recognized. A lower basis means less depreciation going forward. Depreciation recapture rules may require ordinary income treatment for certain amounts, and those are figured on Form 8824.
Related parties
If you exchange with a related party, both sides must hold the property for at least two years after the last transfer. If either side disposes of its property within two years, the deferred gain is generally reported in that year, unless an exception applies such as death, an involuntary conversion, or no principal purpose of tax avoidance. You report on Form 8824 for the year of the exchange and for the two years after.
Other points
- Home sale exclusion. Property acquired in a 1031 exchange and later turned into a home generally cannot use the home sale exclusion within five years of the exchange. See the home sale exclusion.
- Depreciation continues. Review how the exchange affects your depreciation and any cost segregation plan before you swap.
- State rules. States have their own reporting and withholding rules for exchanges. Check the states involved.
- Complex structures. Reverse and improvement exchanges are more complicated. Get professional help before starting one.
Common mistakes
- Receiving the sale proceeds directly, even briefly.
- Missing the 45-day written identification.
- Buying a replacement property of lower value or taking cash out without planning for the tax.
- Using a related party as the intermediary.
- Failing to file Form 8824 with the return.
How we can help
We help real estate investors and business owners decide whether an exchange fits, calculate the expected deferral and boot, coordinate with your qualified intermediary and attorney, and report the transaction on Form 8824. See our real estate tax and tax planning services, or contact us.
Frequently asked questions
Can I do a 1031 exchange on my primary home?
No. The exchange rules apply only to real estate held for business or investment. Your home may qualify for the home sale exclusion instead.
Can I exchange equipment or vehicles?
Not after 2017. Only real property qualifies.
What happens if I miss the 45-day deadline?
The exchange generally does not qualify as a delayed like-kind exchange, and the sale is taxable. The deadlines are strict, so plan early.
Do I have to use a qualified intermediary?
In a delayed exchange, practically yes, since you cannot receive the proceeds. The IRS says a related party or your agent cannot serve as the intermediary.
Is the gain ever taxed?
It is deferred and is generally taxed when you later sell in a taxable transaction, unless you keep exchanging or other rules apply.
Official sources
- IRS: Instructions for Form 8824, Like-Kind Exchanges
- IRS: Like-kind exchanges, real estate tax tips
- IRS: Publication 544, Sales and Other Dispositions of Assets
- IRS: Publication 587, Business Use of Your Home
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.