What is a 1031 exchange?

Why does this rule exist?

Section 1031 has been in the tax code since 1921. The reasoning behind it is simple. If you sell one investment property and immediately put every dollar into another investment property, you have not actually taken any money off the table. Your wealth is still tied up in real estate. You have no cash to pay a tax bill with.

Congress decided that taxing that moment would freeze the market in place. Owners would hold properties they no longer wanted, simply to avoid a bill they could not pay without borrowing. So the law says: keep the money invested in real estate, follow the rules, and we will wait.

That is the whole logic. It is not a loophole, and it is not aggressive tax planning. It is a provision that has survived more than a century of tax reform because it does what it was designed to do.

How does a 1031 exchange actually work?

Here is the sequence, start to finish.

What property qualifies, and what does not?

The property you sell and the property you buy must both be real property held for investment or for productive use in a trade or business. The term the code uses is "like-kind," which sounds restrictive but is remarkably broad. Almost any investment real estate is like-kind to almost any other investment real estate.

The two deadlines that decide everything

Both clocks start on the day your sale closes, and they run at the same time. This trips people up constantly. The 180 days do not begin after the 45 days end. On day 45 you have 135 days left, not 180.

Every day counts, including weekends and federal holidays. If day 45 falls on Christmas, it is still day 45. The IRS has granted extensions only in the case of federally declared disasters. There is no hardship exception for a lender who backs out, an inspection that goes badly, or a seller who walks away.

One more detail that catches people: your 180 days are cut short if your tax return for the year of the sale is due first. If you sell in November, your April filing deadline arrives before day 180. Filing an extension restores the full 180 days, and it is often necessary.

See the full timeline, day by day, with the pressure points marked →

California owners: three extra rules apply to you →

Or see every requirement in one reference list →

The three identification rules

By day 45 you must name your candidates in writing. You may pick whichever of these three rules works best for your situation, and you only need to satisfy one of them.

Why you have to match value and debt

To defer the entire tax, two things have to be true about the property you buy:

• It must cost the same or more than what you sold for, net of selling costs.
• You must replace any mortgage debt that was paid off at the sale, either with a new loan or by adding cash of your own.

The second rule surprises people. Suppose you sell for $900,000 with a $200,000 mortgage that gets paid off at closing. You walk away with $700,000 in proceeds. If you then buy a $700,000 property free and clear, the IRS sees that $200,000 of debt disappeared. Debt relief counts as a benefit you received, so that $200,000 is taxable even though you never touched a dollar of cash.

You can solve this in one of two ways: borrow $200,000 on the new property, or bring $200,000 of your own cash to the closing. In a DST exchange, this is handled for you, because DSTs come with their own financing already in place and you simply select one whose loan-to-value ratio matches what you need to replace.

What is boot, and why does it create a surprise tax bill?

Boot is anything you receive in the exchange that is not like-kind property. It is the leftover. Boot does not ruin the exchange, but it is taxable, and it is taxed first, meaning boot is treated as coming out of your gain rather than your original investment.

• Cash boot. Money you keep instead of reinvesting.
• Mortgage boot. Debt that was paid off and not replaced, as described above.
• Accidental boot. Prorated rents, security deposits transferred to you, or non-transaction costs paid out of exchange funds. These are small but they are real, and a good intermediary and CPA will flag them ahead of closing.

Taking some boot deliberately is a legitimate choice. In the case study on this site, the client kept $22,000 for personal use and exchanged the rest. He paid tax on that $22,000 and deferred everything else. Partial exchanges are perfectly allowed.

Depreciation recapture, the tax nobody sees coming

Every year you owned the rental, you were entitled to deduct a portion of the building's cost as depreciation, typically over 27.5 years for residential property. That deduction reduced your taxable income each year, and it also reduced your basis in the property.

When you sell, the IRS collects that benefit back. The portion of your gain attributable to depreciation, called unrecaptured Section 1250 gain, is taxed at a federal rate of up to 25 percent rather than the lower long-term capital gains rate.

A 1031 exchange defers recapture along with the capital gain, and a well-structured exchange into a DST establishes a fresh depreciation schedule on your share of the new property. That new depreciation is what shelters most of the income you receive going forward.

Read the full explanation of depreciation recapture →  ·  See all 38 questions →

What if you do not want another building?

This is the question that brings most people to this site. You are ready to stop being a landlord. Buying a different building to manage does not solve your actual problem.

The answer is that you do not have to buy a building at all. A Delaware Statutory Trust lets you own a fractional interest in large, professionally managed institutional real estate. The IRS ruled in 2004 that a properly structured DST interest is like-kind real property, so it fully qualifies as replacement property in a 1031 exchange.

You receive monthly distributions, a share of any appreciation when the property is eventually sold, and a fresh depreciation schedule that shelters much of that income. You receive no tenant calls, no repair bills, no vacancy risk on a single unit, and no property tax notices. You also give up control and liquidity, which is a real tradeoff worth understanding before you commit.

Read the full explanation of Delaware Statutory Trusts, including the risks →

Does the tax ever actually come due?

There are exactly three endings.

1. You eventually sell for cash. The deferred gain from every prior exchange stacks up and comes due in that year, at whatever rates apply then.
2. You exchange again. There is no limit to how many times you can do this. Each exchange carries the old deferred gain forward into the new property.
3. You hold until death. Under current law, your heirs receive the property at its fair market value on the date of death. The deferred gain, accumulated across every exchange you ever did, is eliminated. Your heirs could sell the next day and owe essentially nothing on the appreciation that occurred during your lifetime.

That third path is why investors describe the strategy as "swap until you drop." For a seventy-year-old owner who wants income now and wants to leave something clean to their children, it is often the single most effective estate planning move available. It also depends on a step-up rule that Congress could change, which is worth discussing honestly rather than assuming.

The four types of exchange

What does a 1031 exchange cost?

The exchange itself is not expensive relative to what it defers. A qualified intermediary typically charges somewhere in the range of $1,000 to $1,500 for a standard delayed exchange, plus a modest per-property fee if you buy more than one. Reverse and improvement exchanges cost several thousand dollars more because of the additional entity and title work.

Beyond that you have your normal closing costs, your CPA's fee for preparing Form 8824, and, if you go the DST route, the sponsor's fees, which are disclosed in the offering documents and are built into the investment. Those fees are meaningful and deserve a careful read; we walk through them on the DST page.

Set against a tax bill that frequently runs from $150,000 to $400,000 on a long-held property, the arithmetic is usually not close. But it should still be arithmetic you do, not arithmetic you assume.

Is Section 1031 going away?

Not as of 2026. The One Big Beautiful Bill Act, passed in 2025, left Section 1031 fully intact for real estate. The last significant change was the 2017 Tax Cuts and Jobs Act, which removed personal property such as equipment and vehicles from the rule while leaving real estate untouched.

Proposals to cap the deferral or repeal the provision have appeared in various budget frameworks over the years and have not become law. Section 1031 has survived every major tax reform since 1921. That is not a guarantee, and anyone who tells you the rule is permanent is guessing. The reasonable posture is to plan around the law as it exists today and to move when you are ready, rather than waiting for certainty that will not arrive.