Like-Kind Exchange (IRC 1031): How to Defer Capital Gains on Commercial Property Sales
A like-kind exchange under IRC 1031 allows a taxpayer to sell investment or business-use real property and defer all capital gains tax by reinvesting the full proceeds in a replacement property of equal or greater value. Since the TCJA (effective January 1, 2018), 1031 exchanges apply ONLY to real property (land, buildings, commercial property, rental property). Personal property (equipment, vehicles, art, collectibles) no longer qualifies. The exchange doesn’t eliminate the tax: it defers the gain by reducing the basis of the replacement property. But with proper planning (including a stepped-up basis at death under IRC 1014), the deferral can become permanent. The exchange must be structured through a qualified intermediary (QI) who holds the sale proceeds in escrow, because the taxpayer must never have “constructive receipt” of the funds. Two strict deadlines apply: 45 days to identify the replacement property and 180 days to complete the acquisition.
IRC 1031 exchange rules (post-TCJA):
| Element | Rule |
|---|---|
| Property that qualifies | Real property held for investment or business use |
| Property that does NOT qualify | Personal residence, inventory (dealer property), stocks, bonds, partnership interests, equipment, vehicles |
| Like-kind definition | Very broad for real estate: any real property for any other real property (office for apartment, land for retail, etc.) |
| 45-day identification period | Must identify replacement property within 45 calendar days of sale |
| 180-day exchange period | Must acquire replacement property within 180 calendar days of sale |
| Qualified intermediary required? | Yes (taxpayer can’t touch the funds) |
| Boot (cash or non-like-kind property received) | Taxable to the extent of gain |
| Debt relief | Treated as boot if not replaced with equal or greater debt on replacement property |
Identification rules (45-day deadline):
| Rule | Limit |
|---|---|
| 3-property rule | Identify up to 3 properties (any value) |
| 200% rule | Identify any number of properties if total FMV doesn’t exceed 200% of the relinquished property’s FMV |
| 95% rule | Identify any number, but must acquire 95% of the total identified value |
What happens to the deferred gain:
| Scenario | Tax Result |
|---|---|
| Exchange into equal or greater value property | 100% deferral |
| Exchange into lesser value property (receive boot) | Partial deferral (boot is taxable) |
| Sell replacement property outright (no further exchange) | All deferred gain becomes taxable |
| Die while holding replacement property | Stepped-up basis under IRC 1014, deferred gain eliminated permanently |
| Gift replacement property | Recipient takes carryover basis (deferred gain transfers to recipient) |
| Convert to personal use | Partial recognition may apply |
How does a 1031 exchange save taxes?
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.
Does selling outright instead of exchanging free my losses?
It can. A fully taxable sale of your entire interest in the rental to an unrelated buyer frees the activity’s suspended passive losses. They first offset passive income from your other activities that year, and the rest is treated as non-passive. A 1031 exchange generally doesn’t free them, because the gain isn’t fully recognized.
The Option A and Option B comparison above leaves that out. If the rental has carried-forward losses, Option A would unlock them as deductions in the sale year, which narrows the gap between the two options. With Option B the losses don’t vanish; they keep carrying forward.
A sale to a related party doesn’t free the losses until that party sells to someone unrelated. And a large release can still run into the excess business loss limit, applied after the passive rules: $313,000 ($626,000 joint) for 2025 and $256,000 ($512,000 joint) for 2026, with any excess carried forward as a net operating loss.
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Yarik Yarosh, CPA. "Like-Kind Exchange (IRC 1031): How to Defer Capital Gains on Commercial Property Sales." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-like-kind-exchange-1031-commercial-property
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.