1031 exchange rules

The seven core requirements

Rule 1. Qualifying property

Both the property you sell and the property you buy must be real property held for investment or for productive use in a trade or business. This is about how the property is used, not what type it is.

Excluded: your primary residence, a second home used mainly by you, property held primarily for resale such as a flip or a developer's inventory, stocks, bonds, partnership interests, and, since the 2017 Tax Cuts and Jobs Act, all personal property including equipment and vehicles.

Rule 2. Like-kind

The properties must be like-kind. For real estate this is interpreted extremely broadly. An apartment building is like-kind to farmland, which is like-kind to a warehouse, which is like-kind to a fractional interest in a medical office portfolio. Quality, grade, and property type do not matter.

The meaningful limit is geographic. Real property located in the United States is not like-kind to real property located outside it, so you cannot exchange a Los Angeles rental for a villa in Portugal.

Rule 3. Same taxpayer

Whoever sells must be whoever buys. If John Smith sells, John Smith buys. If the Smith Family Trust sells, the Smith Family Trust buys. A single-member LLC disregarded for federal tax purposes is treated as its owner, so moving between the individual and a disregarded LLC is generally fine. Changing to a different entity in the middle is not.

Rule 4. The 45-day identification period

Within 45 calendar days of the closing on your relinquished property, you must deliver a signed written identification of replacement property to your qualified intermediary. Calendar days, including weekends and holidays. No extensions except IRS disaster relief.

Rule 5. The 180-day exchange period

The purchase must be completed within 180 calendar days of that same closing. Both clocks start on the same day and run concurrently, so on day 45 you have 135 days remaining. The period is cut short if your tax return for the year of the sale is due sooner. Filing an extension restores the full 180 days.

Rule 6. Equal or greater value, and debt replacement

To defer the full tax, the replacement must cost at least your net sale price, all proceeds must be reinvested, and any mortgage paid off at the sale must be replaced with new debt or additional cash. Shortfalls are taxable boot.

Rule 7. No actual or constructive receipt

You may not receive, control, or have the right to receive the sale proceeds at any point. A qualified intermediary must be engaged before the sale closes and must receive the funds directly from escrow. This is the only rule with no cure. Once you have the money, the exchange is legally impossible.

How to choose a qualified intermediary, and who is disqualified from being one →

Identification rules in detail

By day 45, your written identification must satisfy at least one of three rules. You choose which.

Form requirements. The identification must be in writing, signed by you, and delivered to your qualified intermediary or another party to the exchange who is not a disqualified person. It must describe each property unambiguously — a street address or legal description for real property, or the exact trust name plus the dollar amount or percentage interest for a DST.

Revocation. You may revoke and replace identifications as often as you like during the 45 days, in writing. At midnight on day 45 the list is final.

Already-acquired property. Any replacement property you actually close on before day 45 is automatically treated as identified and does not use up a slot.

The value and debt rules

Two separate tests, and both must be met for full deferral.

Worth being clear on the debt test, because it produces tax bills that catch people off guard. Sell for $900,000 with a $200,000 mortgage paid off at closing and you receive $700,000. Buy a $700,000 property free and clear and you have satisfied the equity test but failed the debt test, because $200,000 of debt vanished. Debt relief counts as a benefit received, so that $200,000 is taxable even though no cash came to you.

You may always add cash instead of debt. Bringing $200,000 of outside money to the closing solves it just as well as a new loan.

Is there a holding period?

This is the most commonly asked question with the least satisfying answer. The statute sets no minimum. It requires only that the property be "held for" investment or productive use in a trade or business, which is a question of intent supported by facts.

What that means in practice:

• A very short holding period invites the IRS to argue you held the property primarily for resale, which disqualifies it. There is case law on both sides.
• Many practitioners suggest holding at least one year and, ideally, across two tax filing years, so the property appears as an investment on two returns. This is a convention, not a rule.
• Intent is evidenced by facts: was it rented, was it advertised for lease, how was it reported on Schedule E, what did you tell your lender, what did you tell the IRS.
• Two situations do carry firm periods. Related party exchanges require two years on both sides. The vacation home safe harbor requires two years of qualifying rental use.

Vesting and entity rules

On drop and swaps. When partners want different outcomes, the partnership distributes tenant-in-common interests to the individual partners before the sale so each can choose separately. It works, but the timing matters enormously. Doing it during escrow is a well-known audit trigger. Start a year or more ahead with a tax attorney involved.

Related party rules

Related parties include immediate family, entities you control, and certain trusts, defined by reference to Sections 267(b) and 707(b).

• Exchanging with a related party: both parties must hold their new property for at least two years. If either disposes of it early, the exchange is retroactively disqualified and the gain becomes taxable in the year of the original exchange, with interest. Narrow exceptions exist for death, involuntary conversion, and transactions with no tax avoidance purpose.
• Buying replacement property from a related party: heavily scrutinized. The IRS objects when a related seller cashes out while the exchanger defers, because the family unit has shifted basis without paying tax. These frequently fail.
• Selling to a related party through an intermediary: the two-year rule still applies. Using a QI does not launder the relationship.

None of this makes related party exchanges impossible. It makes them a situation for a tax attorney rather than a checklist.

Special property situations

Reporting requirements

• IRS Form 8824, filed with your federal return for the year the relinquished property was sold. It reports both properties, the dates, the realized and recognized gain, any boot, and the basis carried forward.
• Form 4797 or Schedule D, if any portion of the gain is recognized because of boot.
• State forms. Most states follow the federal treatment. California requires FTB Form 3840 when exchanging California property into out-of-state property, filed for the exchange year and every year afterward until the gain is recognized. Oregon and Montana have comparable tracking regimes.
• California Form 593, delivered to escrow before closing to avoid the 3⅓ percent state withholding on the sale price.

Full detail on the California requirements →

Five rules that do not actually exist

• "You can only do one in your lifetime." There is no limit. Investors exchange repeatedly for decades.
• "You must buy the same type of property." No. Like-kind is broad for real estate. A duplex can become farmland.
• "You must reinvest every dollar or the exchange fails." No. Falling short creates taxable boot, but the rest of the exchange still stands. Partial exchanges are legal.
• "You have to own it for two years first." No general holding period exists. The two-year rules apply only to related party exchanges and the vacation home safe harbor.
• "1031 exchanges are a loophole that is about to be closed." The provision has been in the code since 1921 and survived both the 2017 and 2025 tax acts unchanged for real property. It could change. It has not.

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