What Is a 1031 Exchange? Complete Rules & Timeline Guide (2026)

Selling a commercial property after years of appreciation means one thing before you see a dollar of profit: a massive capital gains tax bill.

Unless you use a 1031 exchange.

A properly executed 1031 exchange lets you sell an investment property and roll every dollar of proceeds into a new property — completely deferring capital gains tax. Investors have used this strategy for decades to build wealth faster by keeping money working instead of sending it to the IRS.

In this guide you will learn exactly what a 1031 exchange is, the complete rules and requirements for 2026, the critical 45-day and 180-day deadlines, how reverse exchanges work, what a qualified intermediary does, and the most common mistakes that blow up an exchange.

What Is a 1031 Exchange?

A 1031 exchange — named after Section 1031 of the Internal Revenue Code — is a tax-deferral strategy that allows a real estate investor to sell an investment property and reinvest the proceeds into a like-kind replacement property without paying capital gains tax at the time of the sale.

The tax is not eliminated. It is deferred. When you eventually sell the replacement property without doing another exchange, the deferred gain becomes taxable.

But here is why it is so powerful: by reinvesting the full proceeds including what would have been paid in taxes, you compound returns on a larger capital base. And if you keep exchanging, the tax deferral can last indefinitely. At death, heirs receive a stepped-up basis — potentially eliminating the deferred tax entirely.

A simple example: You bought a commercial building 10 years ago for $500,000. It is now worth $1,200,000. Without a 1031 exchange, selling triggers tax on a $700,000 gain — potentially $140,000–$210,000 in federal capital gains and depreciation recapture tax.

With a 1031 exchange, you reinvest all $1,200,000 into a replacement property. Zero tax at sale. The full amount keeps working.

1031 Exchange Rules — The Complete Requirements

To qualify for tax deferral under Section 1031, your exchange must satisfy all of these requirements:

Rule 1 — Like-Kind Property

Both the relinquished property (what you sell) and the replacement property (what you buy) must be "like-kind."

In real estate, like-kind is interpreted very broadly by the IRS. Any real property held for investment or business use qualifies — regardless of type, location within the US, or quality.

Valid like-kind exchanges:

• Apartment building → commercial office building
• Retail strip mall → industrial warehouse
• Raw land → triple net retail property
• Single family rental → multifamily apartment complex
• Commercial building → Delaware Statutory Trust (DST) interest

Not eligible:

• Primary residence → investment property (primary residence does not qualify as relinquished property)
• US property → foreign property
• Real estate → stocks, bonds, or business assets

Rule 2 — Investment or Business Use

Both properties must be held for investment or productive use in a trade or business. Personal use property — including your primary residence and vacation homes used primarily personally — does not qualify.

Rule 3 — Equal or Greater Value

To defer 100% of your capital gains tax, the replacement property must be of equal or greater value than the relinquished property, and you must reinvest all of the net proceeds.

If you buy down in value or keep some cash, the amount you do not reinvest is called boot — and boot is taxable in the year of the exchange.

Boot examples:

• Sell for $1,000,000, reinvest $900,000 → $100,000 cash boot, taxable
• Sell for $1,000,000, buy $1,000,000 property but carry less debt → mortgage boot, potentially taxable
• Sell for $1,000,000, buy $1,100,000 property → no boot, fully deferred

Rule 4 — The Same Taxpayer

The entity that sells the relinquished property must be the same entity that purchases the replacement property. If you sell as an individual, you must buy as an individual. If an LLC sells, the same LLC must buy.

Rule 5 — Qualified Intermediary Required

You cannot touch the sale proceeds. A qualified intermediary (QI) — also called an exchange facilitator — must hold the funds between the sale and purchase. If the proceeds pass through your hands at any point, the exchange is disqualified. More on QIs below.

The 1031 Exchange Timeline — The Two Critical Deadlines

This is where most exchanges fail. The IRS imposes two strict deadlines that cannot be extended except in presidentially declared disaster areas.

Deadline 1 — 45-Day Identification Period

From the closing date of your relinquished property sale, you have exactly 45 calendar days to identify potential replacement properties in writing to your qualified intermediary.

45 days is not much time. In a competitive market, you need to be actively searching before you close the sale.

Identification rules — you must follow one of three:

Three Property Rule (most common)
Identify up to 3 replacement properties of any value. You can ultimately purchase any one, two, or all three.

200 Percent Rule
Identify any number of properties as long as their combined fair market value does not exceed 200% of the relinquished property's sale price.

95 Percent Rule
Identify any number of properties of any total value, but you must acquire 95% of the total identified value. This rule is rarely used because of its difficulty.

Identification must be:

• In writing
• Signed by you
• Delivered to your qualified intermediary or the seller of the replacement property
• Received before midnight of the 45th day

You cannot change or add properties after the 45-day deadline.

Deadline 2 — 180-Day Exchange Period

From the same closing date of your sale, you have 180 calendar days to close on the replacement property.

Note: the 180-day period runs concurrently with the 45-day identification period — it does not start after the 45 days end.

If your tax return for the year of the sale is due before the 180-day period ends, you must file for an extension or the exchange period is cut short to your return due date.

Timeline visualization:

Use our 1031 exchange deadline calculator to enter your sale date and get both deadlines calculated instantly — with a countdown showing days remaining.

What Is a Qualified Intermediary?

A qualified intermediary (QI) — also called an exchange accommodator or exchange facilitator — is a third party who holds your exchange funds between the sale and purchase.

The QI is not optional. It is a legal requirement under IRS safe harbor rules.

What the QI does:

1. Prepares the exchange agreement before your sale closes
2. Receives the sale proceeds directly from the title company at closing
3. Holds the funds in a segregated exchange account
4. Transfers the funds to the title company when you close on the replacement property
5. Prepares the documentation needed for your tax return

Who can NOT be your QI:

• You (obviously)
• Your attorney
• Your accountant
• Your real estate agent
• Anyone who has acted as your agent in the past 2 years
• Any related party (family members, business partners)

How to choose a QI:

• Use a company that specializes in 1031 exchanges — not a general title company or attorney doing it as a side service
• Verify they carry fidelity bond and errors and omissions insurance
• Confirm they use segregated accounts — your funds should not comingle with other clients' money
• Check their track record and years in business

QI fees typically run $800–$1,500 for a standard deferred exchange. This is a small cost relative to the tax savings at stake.

Types of 1031 Exchanges

1. Deferred Exchange (Most Common)

The standard exchange. You sell first, then identify and purchase the replacement property within the 45/180-day deadlines. This is what most people mean when they say "1031 exchange."

2. Simultaneous Exchange

You sell your property and close on the replacement property on the same day. Rarely practical in modern real estate transactions.

3. Reverse 1031 Exchange

You purchase the replacement property before selling your relinquished property. This solves the problem of finding a replacement property in a competitive market before your sale proceeds are available.

How a reverse exchange works: An Exchange Accommodation Titleholder (EAT) — a special purpose entity your QI creates — takes title to either the replacement property or the relinquished property while you complete the exchange.

The same 45-day identification and 180-day completion deadlines apply, running from when the EAT acquires the parked property.

The challenge: You need sufficient cash or financing to purchase the replacement property before your relinquished property sells — since you cannot use the sale proceeds yet.

Reverse exchange timeline:

4. Construction / Improvement Exchange

Also called a build-to-suit exchange. You use exchange proceeds to construct improvements on the replacement property before taking title. Useful when the replacement property needs significant renovation or when you are building new.

The improvements must be substantially complete and the title must transfer within the 180-day exchange period.

5. Delaware Statutory Trust (DST) Exchange

A DST is a legal entity that holds investment real estate. As a DST investor, you own a fractional beneficial interest in the trust — which the IRS treats as direct ownership of real property for 1031 purposes.

Why DSTs are popular for 1031 exchanges:

• Closes quickly — often within 3–5 days, solving the 45-day identification deadline pressure
• Passive ownership — professional management, no landlord responsibilities
• Access to institutional-quality properties (Class A multifamily, major retail centers) at lower minimum investment
• No management involvement required — ideal for investors transitioning to retirement

DST limitations:

• No control over property decisions
• Illiquid — you cannot sell your interest easily
• Cannot refinance or make major changes to the property
• Must hold through the DST's full disposition timeline

Can You Do a 1031 Exchange on a Primary Residence?

No — not directly. A 1031 exchange only applies to investment and business-use property. Your primary residence is not eligible as the relinquished property.

However, there is a hybrid strategy for properties that were once primary residences and then converted to rentals:

If you lived in a property as your primary residence for at least 2 of the last 5 years, you may qualify for the Section 121 exclusion ($250,000 or $500,000 for married couples) to exclude some gain. If the property was also used as a rental, you may be able to combine the Section 121 exclusion with a 1031 exchange for the remaining gain.

The 1031 exchange 5-year rule:
If you exchange into a property and later want to use it as a primary residence, the IRS requires that you hold it for at least 5 years before the Section 121 exclusion applies to any portion of the gain. This rule was clarified in Revenue Procedure 2008-16.

1031 Exchange by State

While Section 1031 is a federal tax provision, several states have additional requirements or conformity issues.

California: California conforms to federal 1031 exchange rules. However, California requires taxpayers who complete an exchange with out-of-state replacement property to file an annual information return (Form 3840) tracking the deferred gain until it is eventually recognized.

Florida: Florida has no state income tax, so the federal 1031 rules apply without a state-level overlay. Florida is a popular destination for 1031 exchange buyers — especially for NNN and multifamily properties.

Texas: Texas also has no state income tax. No additional state requirements beyond federal rules. Strong demand for NNN properties and multifamily makes Texas a top 1031 exchange destination.

Other states: Most states conform to federal 1031 rules. A few states — including Massachusetts and Pennsylvania — have specific state-level requirements. Always verify state rules with a qualified CPA before completing an exchange.

The 5 Most Common 1031 Exchange Mistakes

Mistake 1 — Missing the 45-Day Deadline

The most common exchange failure. Investors close their sale without having identified replacement properties in advance. With only 45 days, you need to be actively shopping before your sale closes.

Mistake 2 — Touching the Money

If the sale proceeds pass through your bank account — even for one day — the exchange is disqualified. The funds must go directly from the title company to your qualified intermediary at closing.

Mistake 3 — Choosing an Unqualified or Inadequate QI

QIs are not regulated at the federal level. Some have failed financially, taking client exchange funds with them. Use an established, insured QI with a long track record.

Mistake 4 — Buying Down in Value

Purchasing a replacement property worth less than the relinquished property — or failing to reinvest all net proceeds — triggers taxable boot. Many investors underestimate closing costs and end up with unintended cash boot.

Mistake 5 — Related Party Transactions

Purchasing a replacement property from a related party — family member, business partner, or entity you control — triggers special rules. The replacement property must generally be held for at least 2 years after the exchange or the gain becomes immediately taxable.

Frequently Asked Questions

What is a 1031 exchange in simple terms? A 1031 exchange lets you sell an investment property and reinvest the proceeds into another investment property without paying capital gains tax at the time of sale. The tax is deferred — not eliminated — until you sell the replacement property without doing another exchange.

What are the 1031 exchange rules? The main rules are: both properties must be real property held for investment or business use, the replacement property must be of equal or greater value, you must identify replacement properties within 45 days of closing, you must close on the replacement property within 180 days, and a qualified intermediary must hold the funds throughout.

What is the 45-day rule in a 1031 exchange? From the date your relinquished property closes, you have exactly 45 calendar days to identify potential replacement properties in writing to your qualified intermediary. You can identify up to three properties under the Three Property Rule. This deadline cannot be extended.

What is the 180-day rule? From the date your relinquished property closes, you have 180 calendar days to close on your replacement property. This deadline runs concurrently with the 45-day identification period — not after it.

What is a qualified intermediary in a 1031 exchange? A qualified intermediary (QI) is a third-party company that holds your exchange proceeds between the sale and purchase. The IRS requires a QI — you cannot hold the funds yourself. The QI must be unrelated to you and must not have acted as your agent within the past 2 years.

Can you do a 1031 exchange on a primary residence? No. A 1031 exchange only applies to investment and business-use property. Your primary residence does not qualify as the relinquished property. However, if a property was a rental before you moved in, a partial combination of the Section 121 exclusion and 1031 exchange may be available.

What is a reverse 1031 exchange? A reverse exchange lets you purchase the replacement property before selling your relinquished property. An Exchange Accommodation Titleholder holds title to one of the properties during the exchange period. The same 45-day and 180-day deadlines apply from the date the EAT acquires the parked property.

What is a DST in a 1031 exchange? A Delaware Statutory Trust (DST) is a legal entity that holds investment real estate. Investors own fractional interests that qualify as like-kind real property for 1031 exchange purposes. DSTs close quickly — often within days — making them popular for investors struggling to identify replacement properties within the 45-day window.

Track Your 1031 Exchange Deadlines

Never miss the 45-day identification or 180-day closing deadline. Enter your sale date and our calculator tracks both deadlines with a live countdown.

→ Use the Free 1031 Exchange Deadline Calculator

Evaluating a replacement NNN property for your exchange? Use our cap rate calculator to analyze the deal before you commit.

Last updated: May 2026. 1031 exchange rules reflect current IRS guidance under Section 1031 of the Internal Revenue Code.
This content is for informational purposes only. Consult a qualified CPA and 1031 exchange intermediary before executing any exchange.