What Is a 1031 Exchange?

The Plain-English Definition

A 1031 exchange — named for Section 1031 of the Internal Revenue Code, and also called a like-kind exchange — lets you sell real estate held for investment or business use and roll the proceeds into other investment or business real estate without paying capital gains tax at the time of the sale.

The key word is defer, not erase. The gain you would have paid tax on carries over into the new property (your cost basis carries over too), and the tax generally comes due when you eventually sell in a regular taxable sale. Many investors keep exchanging from property to property for years, deferring the whole way.

Why it matters: instead of losing a large slice of your equity to capital gains tax (and depreciation recapture) every time you sell, you keep that money working in the next property. That's the entire appeal.

The Core Rules

• Like-kind means real estate for real estate. Both properties must be real property held for investment or for productive use in a trade or business. "Like-kind" is broad within real estate — a rental duplex can be exchanged for raw land, a retail building, or an apartment complex. Since the 2018 tax law changes, Section 1031 applies only to real estate; equipment, vehicles, and other personal property no longer qualify.
• Buy equal or greater to fully defer. To defer all of the gain, the replacement property must generally be of equal or greater value than what you sold, and you must reinvest all of the proceeds. Trade down or pocket cash, and the difference becomes taxable (see "boot" below).
• You can't touch the money. If sale proceeds pass through your hands — even briefly — the exchange fails. A qualified intermediary (QI, sometimes called an exchange facilitator) must hold the funds between the sale and the purchase. The QI is engaged before the sale closes; you can't retrofit an exchange after taking the money.

The Two Deadlines

Both clocks start on the day you close the sale of the property you're giving up, and they run at the same time:

These are calendar days, and the statute makes essentially no allowance for weekends, holidays, or deals that fall through. Miss either deadline and the exchange generally fails — the sale becomes taxable as if the exchange never happened. This is why experienced investors start shopping for the replacement property before the first closing.

What Is "Boot"?

Boot is anything of value you receive in the exchange that isn't like-kind real estate. The two common forms:

• Cash boot — sale proceeds you keep instead of reinvesting.
• Mortgage boot (debt relief) — when the debt on the new property is less than the debt paid off on the old one, the difference is treated as if you received it.

Receiving boot doesn't disqualify the exchange — it just means the boot is taxable, so you get a partial deferral instead of a full one. If the goal is deferring everything, the working rule of thumb is: buy equal or greater in value, reinvest all the cash, and take on equal or greater debt (or replace reduced debt with fresh cash).

Types of 1031 Exchanges

• Delayed (forward) exchange — the standard structure. Sell first, the QI holds the money, then buy within the 45/180-day windows. The overwhelming majority of exchanges are delayed exchanges.
• Reverse exchange — buy the replacement property before selling the old one, using an exchange accommodation arrangement to hold title in the meantime. More complex and more expensive, but useful in fast markets.
• Improvement (construction) exchange — use exchange funds to build on or improve the replacement property before taking title, so the finished value counts toward the exchange.

What Disqualifies an Exchange

• Primary residences — your home isn't held for investment, so it doesn't qualify. (Home sales have their own separate exclusion under Section 121.)
• Property held for resale — fix-and-flips and dealer inventory are held primarily for sale, not investment, and are excluded. Intent and holding period matter here; this is a common gray area to review with a CPA.
• Missing a deadline — blow the 45-day identification or 180-day closing window and the deferral is gone.
• Touching the proceeds — taking constructive receipt of the sale money, even accidentally, defeats the exchange. The QI must hold it, start to finish.

Why Investors Use 1031 Exchanges

Deferring tax means compounding on pre-tax dollars. In practice, investors reach for a 1031 exchange to:

• Trade up — roll the full equity from a smaller rental into a larger or better-performing property.
• Consolidate or diversify — exchange several scattered single-family rentals for one multifamily building, or one large asset for several smaller ones.
• Change markets — move equity from a market you're done with into one with better fundamentals, without a tax haircut on the way.
• Change property types — because "like-kind" is broad within real estate, you can shift from land to rentals, or from residential to commercial (for example, a triple net lease property with lighter management).

One practical note: the exchange gets you into the next rental — then you have to run it. Leases, rent collection, maintenance, and tenant communication start the day you close. That operational side is what Kelpic® handles, so the property you exchanged into performs the way the numbers said it would.

Get Professional Help — Really

Everything above is the general shape of the rules, not advice for your deal. Exchange structures, identification rules, related-party restrictions, state tax treatment, and depreciation recapture all have edge cases this guide doesn't cover. A qualified intermediary and a CPA who regularly handles 1031 exchanges are not optional extras — they're how exchanges succeed.

Frequently Asked Questions