A 1031 exchange lets you defer 100% of capital gains and depreciation recapture by rolling the proceeds from an investment property into another. The rules are unforgiving — miss a date or touch the money and the whole thing collapses into a taxable sale.
The players
- Exchangor — you, the seller.
- Qualified Intermediary (QI) — a neutral third party that holds the sale proceeds. Required. You cannot receive the funds even for a minute.
- Buyer of the relinquished — the person buying your sale property.
- Seller of the replacement — the person you're buying from.
The deadlines
Both start on the day your relinquished property closes.
| Day | Requirement |
|---|---|
| 0 | Relinquished property closes. Proceeds go to QI. |
| 45 | Identify replacement properties in writing. |
| 180 | Close on at least one identified replacement. |
Weekends and holidays do not extend deadlines.
Identification rules (pick one)
- Three-property rule. Identify up to 3 properties, any value.
- 200% rule. Identify unlimited properties, total value ≤ 200% of relinquished sale.
- 95% rule. Identify unlimited, must acquire ≥ 95% of identified value.
The tax math you must respect
To fully defer tax:
- Replacement price ≥ relinquished sale price.
- All equity reinvested.
- Debt on replacement ≥ debt on relinquished (or make up with cash).
Any "boot" (cash you keep, or debt reduction) is taxable.
Common exchange types
- Delayed exchange — the standard. Sell first, buy within 180 days.
- Reverse exchange — buy the replacement first, sell within 180 days. Requires "parking" via an Exchange Accommodation Titleholder.
- Improvement exchange — use exchange funds to build on the replacement (must be completed within 180 days).
Mistakes that torch exchanges
- Touching the money. Sale proceeds must go directly to the QI. Even overnight in your account = fail.
- Missing day 45. No extensions. Ever.
- Naming replacements verbally. Must be in writing to the QI.
- Buying with a different taxpayer. The buyer of the replacement must be the same taxpayer (or single-member LLC of same taxpayer) as the seller of the relinquished.
- QI bankruptcy. Vet your QI — insurance, segregated accounts, track record.
When to skip the 1031
- Small gain — the QI fee ($800–1,500) eats into savings.
- You want out of real estate. 1031 doesn't defer forever if you liquidate.
- Step-up-in-basis strategy — hold until death, heirs receive full step-up, tax evaporates entirely.