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

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.

How does a 1031 exchange work step by step?

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 income from my other rentals use up suspended losses?

Yes. The passive loss limit applies to your net passive loss, so passive income from other activities, like rent from a warehouse you exchanged into and lease out, absorbs passive losses before anything is disallowed. That matters because a 1031 exchange generally doesn’t free suspended losses, since the gain isn’t fully recognized.

Each year’s disallowed loss carries forward as a deduction for the same activity and gets netted again the next year. Two other routes can put losses to work while you hold: the $25,000 allowance, for owners who actively participate, own at least 10%, and have modified AGI of $100,000 or less (it’s gone at $150,000), and real estate professional status combined with material participation in the rental.

If you later sell your entire interest in the activity in a fully taxable sale to an unrelated buyer, the remaining losses first offset passive income from your other activities that year, and the rest is treated as non-passive.

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