A 1031 exchange — named for Section 1031 of the tax code — lets you sell real property held for investment or business and defer the entire tax bill by reinvesting in "like-kind" real estate. Done in sequence over a lifetime, it's one of the most powerful wealth-building tools in American tax law: you keep compounding pre-tax dollars instead of handing a chunk to the IRS at every sale.
Key Takeaways
- 1031 is fully intact in 2026. The One Big Beautiful Bill Act left Section 1031 unchanged — there is no enacted cap on real-estate exchanges.
- Real property only. Since the 2017 tax law, only real property held for investment or business qualifies — and almost any U.S. real estate is like-kind to any other.
- The clock is everything: 45 days to identify, 180 days to close — and a qualified intermediary must hold your proceeds the entire time.
This is the foundational guide. It covers everything that applies to every exchange, then points you toward the right replacement strategy — including three specialized deep-dives we've built: Delaware Statutory Trusts for passive ownership, mineral & royalty interests, and the related Opportunity Zone alternative. Read top to bottom, or jump to the calculators.
01 · What a 1031 Exchange Is
When you sell an appreciated investment property outright, you owe tax on the gain — federal capital gains, depreciation recapture, the net investment income tax, and state tax can combine to take a quarter to a third of your profit. A 1031 exchange defers all of it. Instead of selling and buying, you exchange: a qualified intermediary holds the proceeds, and you reinvest them into replacement real estate. The deferred gain rolls into the new property's basis. Repeat it across a career, hold until death, and your heirs receive a stepped-up basis that can erase the deferred tax entirely — the strategy nicknamed "swap till you drop."
02 · What Qualifies
Four conditions define an eligible exchange:
- Real property. Since 2018, only real property qualifies — not equipment, vehicles, or other personal property.
- Held for investment or business. Your primary residence doesn't qualify (that's the Section 121 exclusion), nor does property held as dealer inventory for resale.
- Like-kind. For real estate this is broad — a rental house is like-kind to an office building, raw land, a net-lease store, a DST interest, or qualifying mineral rights. Quality and type don't matter; character (investment real property) does.
- U.S. property. Domestic real estate is not like-kind to foreign real estate.
03 · The Core Rules: Equal-or-Up & Boot
To defer all the tax, follow the equal-or-up rule: your replacement property must cost at least as much as the net sale price of what you sold, you must reinvest all of your equity, and you must replace the debt you paid off (with new debt or your own cash). Fall short on any of these and you receive boot — and boot is taxable.
- Cash boot: sale proceeds you keep instead of reinvesting.
- Mortgage boot: debt relief — when your new loan is smaller than your old one and you don't make up the difference with cash.
You don't lose the whole exchange when you take boot; you just pay tax on the boot (up to the amount of your gain) and defer the rest. The calculator in section 06 shows exactly how this works for your numbers.
Go equal-or-up in value, reinvest all your equity, and replace your debt. Miss any of the three, and the shortfall is taxable boot.
Baker 1031 Research04 · The Deadlines: 45 & 180 Days
Two hard clocks start the day you close the sale of your relinquished property, and neither can be extended — not even if the deadline lands on a weekend or holiday. You have 45 days to formally identify your replacement property and 180 days to close on it. One trap most guides skip: the exchange period actually ends on the earlier of 180 days or your tax-return due date for the sale year. Sell late in the year and you may need to file an extension to get your full 180 days.
Enter your sale (relinquished closing) date to see both deadlines — and a warning if your filing date could cut the 180 days short.
05 · Identification Rules: 3-Property, 200% & 95%
Within those 45 days you must identify replacement candidates in writing, and you must follow one of three rules. Most exchangers use the 3-property rule; the others exist for when you want to identify more options.
- 3-Property Rule: identify up to three properties of any total value. Simplest and most common.
- 200% Rule: identify any number of properties, as long as their combined value doesn't exceed 200% of what you sold.
- 95% Rule: identify any number at any value — but you must actually acquire at least 95% of the total value you identified.
06 · The Boot & Deferral Calculator
This is where the equal-or-up rule becomes real numbers. Enter your sale and your planned replacement; the tool computes your realized gain, the taxable boot (if any), the gain you'll defer, and whether you've fully deferred.
Relinquished property (what you're selling)
Replacement property (what you're buying)
Illustrative only. Simplifies boot mechanics (cash and mortgage boot, netting cash added against debt relief) and does not separate depreciation recapture, NIIT, or state tax within the boot. Not tax advice — confirm with your CPA and qualified intermediary.
07 · The Qualified Intermediary & Process
The cardinal rule of execution: you may never take possession of the sale proceeds. If the money touches your hands or bank account, the IRS deems "constructive receipt" and the exchange fails. A qualified intermediary (QI) — an independent third party engaged before your sale closes — holds the funds, then uses them to acquire your replacement. The sequence:
- Engage a QI before closing the sale; the exchange agreement is signed up front.
- Sell the relinquished property; proceeds go directly to the QI.
- Identify replacement(s) within 45 days, in writing, under one of the three rules.
- Close within 180 days (or your tax-return due date, if earlier), with the QI funding the purchase.
- Report the exchange on Form 8824 with your tax return for the sale year.
08 · Types of Exchanges
- Delayed (forward) exchange: the standard — sell first, then buy within the deadlines. The vast majority of exchanges.
- Reverse exchange: buy the replacement first (parked with an exchange accommodation titleholder), then sell — useful in competitive markets, but more complex and costly.
- Improvement (construction) exchange: use exchange funds to build on or improve the replacement within the 180 days.
- Simultaneous exchange: both legs close the same day — rare today.
09 · Choosing Your Replacement Strategy
The hardest part of many exchanges isn't the rules — it's finding the right replacement before the clock runs out. Your main routes:
Direct ownership and tenants-in-common (TIC) interests are options too. Answer four questions to see which route fits your situation:
10 · Taxes: Recapture, Basis & "Swap Till You Drop"
A 1031 defers more than the capital gain — it also defers depreciation recapture, the often-overlooked tax on the depreciation you've claimed (taxed at up to 25% federally if you simply sell). Your deferred gain carries into the replacement property as a reduced basis, which is why the tax is deferred, not erased. The endgame for many investors is to never sell for cash: keep exchanging, and at death your heirs receive a stepped-up basis to fair-market value, wiping out the deferred gain. That's the quiet power of stacking exchanges over decades.
11 · Common Mistakes & Pitfalls
- Touching the money. Taking the proceeds — even briefly — is constructive receipt and kills the exchange. Always use a QI.
- Missing the 45-day identification. The most common failure; the deadline is absolute.
- Buying down. Replacing with a cheaper property or less debt creates taxable boot.
- Same-taxpayer problems. The entity that sells must be the one that buys; partnership "drop-and-swap" issues need planning.
- Related-party rules. Exchanges with related parties generally require a two-year holding period.
- Wrong property type. Primary residences, fix-and-flips (dealer inventory), and partnership interests don't qualify.