IRC 1031 Like-Kind Exchange: Deferring Tax on Business Real Property Sales

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated September 23, 2026 ·8 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

A like-kind exchange under IRC 1031 allows a business owner or investor to sell real property and defer all capital gains tax by reinvesting the proceeds into replacement real property of equal or greater value. The TCJA (2018) limited IRC 1031 to real property only; equipment, vehicles, and other personal property no longer qualify. The exchange must be structured through a qualified intermediary (QI) who holds the sale proceeds until the replacement property is purchased. The two critical deadlines are absolute: 45 days to identify potential replacement properties and 180 days to close on the replacement. Missing either deadline by even one day disqualifies the entire exchange, and all deferred gain becomes taxable immediately.

✓Key takeaway

IRC 1031 like-kind exchange rules:

What qualifies (post-TCJA):

Business real property (office, warehouse, retail space)
Investment real property (rental houses, apartments, commercial buildings)
Land held for investment or business use
Improved or unimproved real property (raw land for a building, or vice versa)

What does NOT qualify:

Primary residence (personal use)
Equipment, vehicles, machinery (TCJA eliminated personal property exchanges)
Inventory or property held primarily for sale (developers, flippers)
Partnership interests
Stocks, bonds, or other securities
Property outside the United States (exchanged for U.S. property)

“Like-kind” for real property is broad:

Relinquished Property	Replacement Property	Qualifies?
Office building	Apartment building	Yes
Warehouse	Raw land	Yes
Rental house	Commercial strip mall	Yes
Farm	Office building	Yes
Raw land	Single-family rental	Yes
U.S. rental	U.S. rental	Yes
U.S. rental	Foreign rental	No

Critical deadlines (no extensions, no exceptions):

Deadline	Days	What Must Happen
Identification period	45 days from sale	Identify up to 3 replacement properties (or more under the 200% rule)
Exchange period	180 days from sale (or tax return due date, whichever is earlier)	Close on the replacement property

Identification rules:

Three-property rule: identify up to 3 properties of any value
200% rule: identify any number of properties, but total value can’t exceed 200% of the relinquished property
95% rule: identify any number of properties if you acquire 95%+ of their total value (rarely used)

Boot (taxable portion): “Boot” is anything received in the exchange that isn’t like-kind property:

Cash received (most common)
Net debt relief (if the replacement property has less debt)
Personal property received
Boot is taxable to the extent of gain

Qualified intermediary (QI) requirement:

The seller can’t touch the proceeds (constructive receipt kills the exchange)
The QI holds funds between the sale and purchase
The QI can’t be the seller’s agent, attorney, accountant, or broker (related-party restriction)
QI fees: typically $750-$1,500 per exchange

How does a 1031 exchange work step by step?

Hypothetical example

Round numbers. A small business owner sells a commercial property used in their HVAC business and exchanges into a larger property.

Property being sold (relinquished):

Original cost: $300,000 (purchased 10 years ago)
Accumulated depreciation: $77,000 (39-year commercial, straight-line)
Adjusted basis: $223,000
Sale price: $450,000
Selling costs (broker, closing): $27,000
Net sale price: $423,000

Gain if sold without exchange:

Component	Amount	Tax Rate	Tax
Depreciation recapture (IRC 1250)	$77,000	25%	$19,250
Capital gain ($423,000 - $300,000)	$123,000	15% LTCG	$18,450
Net investment income tax	$200,000	3.8%	$7,600
State tax (est. 5%)	$200,000	5%	$10,000
Total tax without exchange			$55,300

With a 1031 exchange (same facts, buying replacement property): Step 1: Engage a qualified intermediary BEFORE the sale closes Step 2: Sell the property. QI receives $423,000 (net proceeds) Step 3: Within 45 days, identify replacement properties:

Property A: larger commercial building, $500,000
Property B: warehouse, $480,000
Property C: mixed-use building, $520,000

Step 4: Within 180 days, close on Property A ($500,000) Step 5: QI transfers $423,000 toward the purchase. Owner adds $77,000 from personal funds.

Tax result:

Item	Amount
Gain deferred	$200,000
Tax deferred	$55,300
Boot received	$0 (owner reinvested all proceeds and added cash)
Current tax	$0

The $55,300 in tax is deferred, not eliminated. The replacement property takes a reduced basis:

Replacement property cost: $500,000
Minus deferred gain: ($200,000)
Plus owner’s additional cash: $77,000
New basis: $377,000

When the replacement property is eventually sold (without another exchange), the $200,000 deferred gain becomes taxable.

Partial exchange (boot received): Same facts, but the replacement property costs $400,000 instead of $500,000. QI has $423,000. Only $400,000 is needed for the replacement. Boot (cash returned to seller): $23,000.

Boot taxable: $23,000 (taxed as capital gain and/or depreciation recapture) Remaining gain deferred: $177,000

The “swap till you drop” strategy: Perform sequential 1031 exchanges throughout your investment lifetime, deferring gain each time. At death, the property receives a stepped-up basis under IRC 1014, eliminating the deferred gain permanently.

Example over a career:

Age 35: buy commercial property for $300,000
Age 45: 1031 exchange into $500,000 property (defer $100,000 gain)
Age 55: 1031 exchange into $800,000 property (defer $200,000 gain)
Age 65: 1031 exchange into $1,200,000 property (defer $350,000 gain)
Age 80: die holding the property
Heirs receive stepped-up basis of $1,200,000 (FMV at death)
Total deferred gain ($650,000+) is permanently eliminated
Estimated tax permanently avoided: $150,000-$200,000+

Common mistakes:

Touching the proceeds (constructive receipt, exchange fails)
Missing the 45-day identification deadline (even by one day, exchange fails entirely)
Using a related party as QI (attorney, accountant, broker)
Not planning the exchange before listing the property (QI must be engaged before closing)
Exchanging into a property the owner intends to live in (personal use disqualifies)
Exchanging with a related party and either party disposes within 2 years (IRC 1031(f))
Not accounting for net debt relief as boot (replacing $200,000 in debt with $150,000 creates $50,000 boot)

Reverse exchange: Buy the replacement property BEFORE selling the relinquished property. Allowed but more complex:

An Exchange Accommodation Titleholder (EAT) takes title to the new property
The old property must be sold within 180 days
Higher fees ($5,000-$15,000) due to EAT structure
Used when the replacement property won’t wait (competitive market, auction)

Illustrative numbers only, not a real client and not advice for your facts.

What are the strict deadlines for completing a 1031 exchange?

A 1031 exchange imposes two non-negotiable deadlines. You have 45 calendar days from the date you sell the relinquished property to identify potential replacement properties in writing to the qualified intermediary. You must close on the replacement property within 180 calendar days of the sale (or by the due date of your tax return, including extensions, whichever comes first). These deadlines cannot be extended, even for weekends or holidays. If you miss either deadline, the entire exchange fails and the full gain becomes taxable in the year of the original sale.

Can I offset capital gains with capital losses from other investments?

Yes. Capital losses first offset capital gains of the same type (short-term losses against short-term gains, long-term against long-term), then any remaining net loss offsets gains of the other type. If net capital losses exceed capital gains, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Unused losses carry forward indefinitely to future tax years, maintaining their character (short-term or long-term). The wash sale rule (IRC 1091) prevents you from claiming a loss if you repurchase substantially identical securities within 30 days before or after the sale. Tax-loss harvesting before year-end is a common strategy to realize losses that offset gains elsewhere in the portfolio.

Does a partial exchange with boot free passive losses?

Generally no. Suspended passive losses are freed when you dispose of your entire interest in the activity and all of the gain is recognized. In the partial exchange above, the $23,000 of boot is taxed but $177,000 of gain stays deferred, so the gain isn’t fully recognized and the losses generally keep carrying forward.

This matters if the property you’re giving up was rented to tenants, since rental activity is passive by default however involved you are. A loss you couldn’t use in an earlier year carries forward as a deduction for the same activity.

To free those losses, you’d need a fully taxable sale of your entire interest to an unrelated buyer. They’d first offset passive income from your other activities that year, and the rest would be treated as non-passive. So if the old building carries a large pile of suspended losses, compare a partial exchange, a full exchange, and a straight sale before you choose.

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Cite this page

Yarik Yarosh, CPA. "IRC 1031 Like-Kind Exchange: Deferring Tax on Business Real Property Sales." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-irc-1031-like-kind-exchange-real-property

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.