1031 Like-Kind Exchange: Rules, Timelines, and How to Defer Capital Gains on Real Estate

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

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

The 1031 like-kind exchange under IRC 1031 is the most powerful tax deferral tool available to real estate investors and business owners. When selling business-use or investment real property, the seller can defer ALL capital gains tax and depreciation recapture by reinvesting the net proceeds into “like-kind” replacement real property of equal or greater value. The term “like-kind” is broad for real estate: any real property held for business or investment can be exchanged for any other real property held for business or investment (an office building for vacant land, a rental house for a strip mall, a warehouse for an apartment complex). The TCJA (2018) eliminated 1031 exchanges for personal property (equipment, vehicles, art), limiting them exclusively to real property. The exchange must follow strict timelines and use a qualified intermediary (QI) to hold the proceeds.

✓Key takeaway

1031 exchange timeline:

Milestone	Deadline	What Must Happen
Day 0	Sale of relinquished property closes	Proceeds go to qualified intermediary (NOT to the seller)
Day 45	Identification deadline	Replacement property must be identified in writing to the QI
Day 180	Exchange deadline	Replacement property must be acquired (closing)

These deadlines are ABSOLUTE. No extensions. If Day 45 falls on a weekend or holiday, the deadline does not move. A missed deadline kills the exchange entirely.

Identification rules (choose one):

Rule	Details
Three-property rule	Identify up to 3 properties of any value
200% rule	Identify unlimited properties if total FMV does not exceed 200% of relinquished property value
95% rule	Identify unlimited properties if you acquire 95%+ of identified value

What qualifies:

Relinquished	Replacement	Qualifies?
Commercial building	Apartment building	Yes
Vacant land	Office building	Yes
Single-family rental	Multi-family rental	Yes
US real property	US real property	Yes
US real property	Foreign real property	No (since TCJA)
Business equipment	Real property	No (since TCJA)
Personal residence	Rental property	No (must be business/investment use)
Rental property	Personal residence	No (immediately, but see below for conversion)

Boot (taxable portion):

Type of Boot	Tax Treatment
Cash received by seller	Taxable (gain recognized up to boot amount)
Debt relief (mortgage on old > mortgage on new)	Taxable (treated as cash boot)
Non-like-kind property received	Taxable at FMV
No boot (equal or greater value replacement)	Fully deferred

How does a 1031 exchange work step by step?

Hypothetical example

Round numbers. A business owner sells a commercial office building and wants to defer all taxes by exchanging into a larger property.

Relinquished property (the property being sold):

Item	Amount
Sale price	$500,000
Original cost	$300,000
Land	$60,000
Building	$240,000
Depreciation taken (10 years, 39-year straight-line)	$61,538
Adjusted basis	$300,000 - $61,538 = $238,462
Gain	$500,000 - $238,462 = $261,538
Existing mortgage	$150,000
Net proceeds (to QI)	$350,000

Tax if sold outright (no 1031):

Component	Amount	Tax Rate	Tax
Depreciation recapture	$61,538	25%	$15,385
Capital gain	$200,000	20%	$40,000
NIIT	$261,538	3.8%	$9,938
State tax (6%)	$261,538	6%	$15,692
Total tax			$81,015

The 1031 exchange process:

Day 0: Closing The sale closes. The $350,000 in net proceeds goes directly to the qualified intermediary. The seller never touches the money. If the seller receives any proceeds (even into escrow), the exchange is disqualified.

QI fee: typically $750-$1,500 for a standard exchange.

Day 1-45: Identification period The owner identifies replacement properties in a written, signed document delivered to the QI.

Using the three-property rule, the owner identifies:

Warehouse at 123 Industrial Blvd ($600,000)
Strip mall at 456 Commerce Ave ($550,000)
Apartment building at 789 Residential Dr ($500,000)

Day 46-180: Acquisition period The owner negotiates and closes on the warehouse for $600,000.

Replacement property	Amount
Purchase price	$600,000
1031 exchange proceeds from QI	$350,000
New mortgage	$200,000
Owner’s additional cash	$50,000

Boot analysis:

Item	Amount
Debt relieved (old mortgage)	$150,000
Debt assumed (new mortgage)	$200,000
Net debt: new > old	$50,000 more debt = NO boot (net debt increased)
Cash received	$0 (all proceeds went to replacement)
Boot	$0

Tax deferred: $81,015 (the entire gain is deferred)

Basis of replacement property:

Calculation	Amount
Purchase price of replacement	$600,000
Less: deferred gain	($261,538)
Plus: boot recognized	$0
Adjusted basis of replacement	$338,462

The $338,462 basis (instead of $600,000) means the deferred gain will be recognized when the replacement property is eventually sold (unless another 1031 exchange is done).

The “exchange until death” strategy: If the owner does successive 1031 exchanges throughout their lifetime and passes away owning the final replacement property:

The property receives a stepped-up basis to fair market value at death (IRC 1014)
ALL deferred gains from every prior exchange are eliminated permanently
The heirs can sell the property at the stepped-up basis with minimal or no gain

This makes the 1031 exchange the most powerful long-term real estate tax strategy. The gain is deferred during life and eliminated at death.

Common mistakes that kill a 1031 exchange:

Mistake	Consequence
Seller receives proceeds (even briefly)	Exchange disqualified; entire gain taxable
Missing the 45-day identification deadline	Exchange disqualified
Missing the 180-day closing deadline	Exchange disqualified
Identifying more than 3 properties (without meeting 200% or 95% rule)	Identification invalid; exchange fails
Using the property as a personal residence immediately	Disqualified (must be investment/business use)
Related-party exchange with resale within 2 years	Gain recognized (IRC 1031(f))
Using a QI who’s disqualified (your attorney, CPA, agent, or employee)	Exchange fails

Reverse 1031 exchange: If the owner wants to buy the replacement property BEFORE selling the relinquished property:

An Exchange Accommodation Titleholder (EAT) acquires the replacement property
Within 180 days, the owner sells the relinquished property
The EAT transfers the replacement property to the owner

Reverse exchanges are more expensive (EAT fees: $5,000-$15,000) but solve the timing problem when a desired property is available before the current property sells.

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

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Cite this page

Yarik Yarosh, CPA. "1031 Like-Kind Exchange: Rules, Timelines, and How to Defer Capital Gains on Real Estate." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-like-kind-exchange-1031-rules-timeline

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