A 1031 exchange lets you sell an investment property and roll the whole proceeds into another one without writing a check to the IRS that year. The gain is not forgiven — it carries forward into the basis of whatever you buy next. What you get is the use of money that would otherwise have left the deal: your full equity working inside a bigger asset instead of a fifth of the gain going to tax.
The price is a set of deadlines with no mercy in them. A qualified intermediary has to be in place before you close, you get 45 days to name your targets in writing, and 180 days to close on one. Miss a step and the exchange does not shrink, it collapses into an ordinary taxable sale.
what a 1031 actually does
It defers tax, it does not erase it. Sell rental A, buy rental B through an exchange, and the gain you did not pay on rides into B's basis. So you might buy a $360,000 replacement and still carry the low basis of the property you sold — less depreciation to deduct going forward, and a larger bill waiting whenever you finally sell for cash. It is an interest-free loan from the government that stays outstanding as long as you keep exchanging.
Depreciation recapture rides along too. Every year you owned it you deducted depreciation, and every deduction lowered your basis. On a sale that portion is taxed separately from the appreciation — unrecaptured Section 1250 gain, at up to 25% federal — and on a long hold it is often the bigger line. Add state income tax, which varies by state, and what a 1031 defers is usually larger than "capital gains" suggests.
The deferral can also become permanent. Under current law, if you die still holding the property, your heirs take it at fair market value — a stepped-up basis — and the gain deferred through every exchange behind it disappears. Swap till you drop. That is an estate outcome, not a trading plan, and tax law changes.
the rules you cannot bend
Like-kind, and investment only. Both properties must be real property held for investment or business use; since the 2017 tax law, personal property no longer qualifies. For real estate, like-kind is broader than people expect — raw land for an apartment building, a duplex in Ohio for a fourplex in Texas. What does not qualify: your primary residence, a second home you use, and anything you bought to flip, which is inventory held for resale.
A qualified intermediary, before closing. This is the rule that kills the most exchanges, and it is unfixable after the fact. You cannot touch the money. Sign the exchange agreement before the property you are selling closes; proceeds wire from the closing table to the QI, who holds them and later funds your purchase. If the funds land in your account, or you can demand them, that is actual or constructive receipt and the exchange is over. Your own CPA, attorney, or agent is generally a disqualified person and cannot serve as your QI.
The two clocks. Both start the day your sale closes. By day 45 you identify replacement property in writing, signed and delivered to the QI. Most people use the three-property rule (up to three candidates of any value), while the 200% rule allows any number whose combined value stays under twice what you sold. By day 180 you close on one of them. Calendar days, weekends included, no extension because a deal fell apart. The trap for late-year sellers: it is 180 days or your tax return due date for that year, whichever comes first — file an extension and you get the full 180 back, so a Q4 sale usually means extending the return.
Equal or greater, on value and on debt. To defer the whole gain the replacement must be worth at least what you sold for, all your net equity must go back in, and the debt you paid off must be replaced with new debt or covered with cash you bring. Buy cheaper, keep proceeds, or carry a smaller loan and the difference is taxable boot. A partial exchange is legal — just know you are paying tax on the gap.
the timeline in practice
Put numbers on it. You bought a rental for $180,000 and are selling it for $300,000. Selling costs run about $20,000, so the net sale price is $280,000. Over the hold you took $30,000 of depreciation, dropping your adjusted basis to $150,000. Total gain: $130,000 — $30,000 of recapture and $100,000 of long-term capital gain.
Sell outright and the federal bill is roughly $7,500 on the recapture at 25% plus $15,000 on the gain at 15%, about $22,500, before state tax. Your rates depend on your income and your state, so treat that as the shape of the number rather than a quote.
You owe $100,000, so after costs and payoff there is about $180,000 of equity, of which roughly $157,500 survives the federal bill on a straight sale. Run it as a 1031 and the full $180,000 goes to the QI and into the next property: put it down on a $360,000 replacement with a $180,000 loan and you clear every test at once — value above the $300,000 you sold for, every dollar of equity redeployed, the $100,000 of old debt more than replaced.
The lived version: sign with the QI while under contract, close on day 0, underwrite candidates for six weeks, deliver a signed identification of three properties by day 45, close on one by day 180. Forty-five days sounds generous until you are inside it, and every seller you negotiate with can see the clock. The rental property analyzer models rent against the full payment stack on any active listing, which is how you turn 45 days into a filter instead of a panic.
Three listings from the catalog right now, already underwritten at current rates. This is the shortlist problem a 45-day identification window actually is.
when a 1031 is the wrong move
A standard forward exchange typically runs $1,000 to $2,000 in QI fees, plus closing coordination and real attention, and that machinery costs the same on a small gain as a large one. Defer a $20,000 gain, where the federal tax might be $3,000 to $4,000, and you hand back a real slice of the benefit while buying a 45-day deadline that can push you into a property you would not otherwise want.
Two other cases. If the property is headed to your heirs anyway, the stepped-up basis under current law does the job for free. And if what you want is cash rather than a different property, a cash-out refinance often solves it without a sale: loan proceeds are not income, there is no 45-day clock, and you keep the property and its low basis. The cost is a permanently larger payment, so run the post-refi numbers first. Finally, if the only replacement you can find inside the window is a worse asset, pay the tax and buy well — the tax tail should not wag the deal.
boot, and the mistakes that blow it up
Boot is anything you receive that is not like-kind property, and it comes in two flavors. Cash boot is sale proceeds you did not reinvest. Mortgage boot is debt relief: the new loan is smaller than the one you paid off, so you walked away richer by the difference even though no cash changed hands. Both are taxable up to the amount of your gain. The classic accident is deleveraging without meaning to — sell with $200,000 of debt, buy with $150,000, get taxed on $50,000. Add cash or borrow more, and decide before the closing table.
The failures that actually happen are procedural:
- Touching the proceeds. Constructive receipt ends the exchange, with no repair after closing.
- Hiring the QI too late. The agreement has to exist before the deed transfers.
- Sloppy identification. It must be unambiguous, signed, and in the QI's hands by day 45.
- Naming three and closing on none. Nothing outside your identification can substitute afterward.
- Forgetting the return due date, which cuts the 180 days short on a late-year sale.
- Buying a flip. Property held for resale is not investment property, however you title it.
- Vesting mismatch. The taxpayer who sold has to be the taxpayer who buys.
Two variations sit beyond the standard forward exchange. A reverse exchange lets you buy first, parked with an exchange accommodation titleholder, when the right property appears before yours sells; it works and costs meaningfully more. And there is no bright-line holding period in the statute, which is exactly why intent matters — a question for your CPA, not a rule you can look up.
get the professionals in before you list
None of this is tax advice. Rules change, state treatment varies, and your outcome turns on facts specific to you: your bracket, your entity, how long you held, what you deducted, which states the money moves between. Bring in a CPA who has actually closed exchanges and choose your intermediary before you sign the listing agreement — a perfect plan built after your sale closes is worth nothing. If the vocabulary is new, the glossary covers adjusted basis, boot, and recapture.
Used well, a 1031 is one of the few legal ways to compound at your gross rate instead of your after-tax rate: each trade up moves the whole stack of equity into a larger asset while the deferred gain keeps working. It pairs with the way portfolios actually grow — the BRRRR strategy recycles capital out of a property without selling it, while an exchange moves equity between properties without paying tax on the move. Neither rescues a bad purchase; both make a good one more powerful.