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If you invest in real estate, chances are that someday you’ll end up selling one property and buying another. In this scenario, it’s likely you’ll want to use the gain from the sale of the old property to fund the purchase of the new one. You’ll also probably want to know what kind of tax deferral to deploy in order to maximize the amount of capital that you can roll over into your new acquisition and minimize the amount you owe to Uncle Sam.
Luckily, we know the answer: It’s a 1031 like-kind exchange.
A 1031 like-kind exchange can defer capital gains taxes and keep more capital compounding in your portfolio. All you need to do is follow the rules to the letter and avoid a few easy-to-miss pitfalls.
Below is our practical guide to the 1031 exchange. In it, we break down IRS regulations so that they are simple and easy to follow. Plus, we share some of the “wish-I’d-known” lessons that most investors end up learning the hard way.
What is a 1031 exchange?
A 1031 exchange (named for Internal Revenue Code §1031) allows you to defer capital gains and depreciation-recapture taxes when you sell U.S. real property held for investment or business use and acquire like-kind U.S. real property to be held for investment / business use.
Only real property (as opposed to personal property) is eligible, and personal residences don’t qualify. Therefore, you couldn’t use the 1031 exchange if you sold your own home and bought a new one, or if you sold a rental property and used the gain to buy a home for yourself. The 1031 exchange only applies if both properties are for business purposes.
Core timing rules
Mark your calendar! One of these easiest traps to fall into with a 1031 exchange is missing important deadlines. Fortunately, it’s also one of the simplest to avoid. Make sure you stay on top of these dates:
45-Day Identification Window: After you transfer the relinquished property, you have 45 days to identify replacement property (using the three-property, 200%, or 95% identification rules).
180-Day Exchange Period: You must acquire the replacement property by the earlier of 180 days after transfer or your tax-return due date (including extensions) for that year.
Report the transaction on Form 8824 with your return. The IRS instructions restate these timing rules plainly.
Disaster extensions: In federally declared disasters, the IRS can extend the 45/180-day deadlines.
Like-kind, Qualified Intermediary, and “don’t touch the cash”
So, how do you know for sure if the investment property you sold is like-kind with the property you’re purchasing? Fortunately, it’s pretty simple. Like-kind is a broad term in real estate: nearly all U.S. investment / business real property is like-kind to other U.S. investment / business real property. Basically, if the property you sell is a rental and the property you acquire is also a rental, you can pretty safely assume that they are like-kind.
What you cannot take for granted, however, is that the gain from the sale of a rental property that you intend to use in your acquisition of another rental property will automatically qualify for the 1031 exchange. It is very important that you don’t touch the cash!
Why? And what exactly does that mean? The IRS states that in order for a gain to be eligible for a 1031 exchange, it must be held with a Qualified Intermediary (QI) who then facilitates the exchange via a written agreement that meets Treasury regulations. Meanwhile, if you were to take actual or constructive receipt of sale proceeds (i.e. if the sale proceeds passed into an account held by you or your business) rather than use a QI, the gain would no longer be eligible for the 1031 exchange and would be subject to regular capital gains taxes.
Common 1031 structures
Below are a few of the key terms you’ll likely hear in regard to the 1031 exchange:
Delayed (deferred) exchange: This is the most common type of 1031 exchange: sell first, buy later. These types of exchanges follow the 45/180-day rules outlined above.
Reverse exchange: These types of exchanges retroactively apply the gain from a sale towards an earlier acquisition of like-kind property. In other words: buy first, sell later. This is a less common application of 1031 and needs to be carried out using a Qualified Exchange Accommodation Arrangement (QEAA).
DSTs (Delaware Statutory Trusts): This is a passive replacement property option for the 1031 exchange permitted under Rev. Rul. 2004-86 and is subject to specific trust constraints.
“Boot” 101
Another aspect of the 1031 exchange that you need to understand is what triggers tax. If you end up owing tax with a 1031 exchange, you will typically be taxed on the “boot”.
The term boot refers to any excess of the gain from the sale that does not go towards the acquisition of like-kind property. This means that any cash you receive, non-like-kind property you purchase, or debt relief not offset by new debt typically becomes taxable boot. Therefore, the goal is to trade equal or up in value, equity, and debt, and to avoid using any portion of the gain for other purposes.
To put it simply, if your goal is a 100% deferral, make sure you invest 100% of the gain in like-kind property.
Related-party traps
When it comes to exchange of property between related parties, transactions are tightly policed. It is important to be aware of any additional requirements that you must meet in order to qualify for the 1031 exchange in these types of scenarios.
For instance, in many cases both parties must hold their properties for at least two years after the exchange. Early dispositions by either party can often collapse the deferral.
When it comes to related-party exchanges, the rules can be a bit more murky and the pitfalls can be easier to miss. If you are planning to use the 1031 exchange in a business deal that involves a related party, it is very important to work closely with tax counsel to help you navigate the intricacies specific to your case. (See §1031(f) and related guidance.)
The importance of good record-keeping
Success in deferring taxes using the 1031 is frequently a matter of crossing all the t’s and dotting all the i’s when reporting the exchange. Good record-keeping is essential to ensure that your 1031 is properly executed.
To report the exchange, you’ll use IRS Form 8824. Records that prove identity, outline the acquisition, and show proper handling of funds via a QI are essential in order to successfully complete the form and ensure a full deferral. As always, it is a good idea to consult legal experts who can more readily spot the sort of missing or inadequate reporting that could end up costing you dearly.
Hopefully in the end you’ll have a well structured 1031 that defers Section 1250 recapture along with gain and avoids any boot that could trigger tax.
Field-tested tips for the 1031 exchange
Years of buying, managing, and selling rentals have taught us a thing or two about what can make– or break– a 1031. Here is some of our hard-earned wisdom to help you stay ahead of the curve:
Define your buy box before Day 1. Define criteria such as property age, bed / bath minimums, lot type, school catchment areas, lifestyle factors, and “no-go” items (e.g., no two-bedroom SFRs, no pools, etc.) before you do any selling or buying. A portfolio that rents easily and resells cleanly requires curation and can’t be left to chance, and you need to be ready to make deliberate moves quickly if you want your exchange to qualify for 1031. Once the 45-day clock starts, indecision is expensive.
Get boots on the ground—don’t underwrite from spreadsheets alone. Busy roads, steep driveways, rail lines, etc. are the sort of “white elephants” that force permanent rent discounts. See the asset in person or send a trusted PM / inspector before you identify.
Formal inspections + contractor walk-throughs. Tie up the target, then order a pro inspection and a contractor estimate within your 45/180 timeline so you can pivot if the scope kills your numbers.
Document everything on tenant-occupied replacements. Demand leases, deposits, keys, rent ledgers, and an interior inspection. Month-to-month tenants can vanish post-close—don’t buy a surprise make-ready during your exchange period.
Pre-clear multiple exit strategies. Even exchange properties need optionality: rental, wholetail, flip, owner-finance, or wholesale. If the market turns mid-exchange, optionality is oxygen.
Be skeptical of pro formas. A glossy 10-year appreciation curve isn’t a plan. Verify local rent comps, days-to-rent, and realistic CapEx with a local property manager before you identify.
Line up your QI, tax pro, and lender early. Lender underwriting and QI docs can eat precious days, and reverse / improvement exchanges add complexity. Make sure you start those conversations before you list the relinquished asset.
Example 1031 timeline
What does the 1031 process look like for your run-of-the-mill delayed exchange? Here is an example timeline:
Day 0: Close sale. QI receives proceeds. Identification window opens.
By Day 20–30: Complete on-site visits / inspections for shortlisted properties; lock financing terms.
By Day 45: Submit written identification to your QI under the three-property/200%/95% rule.
By Day 60–90: Complete appraisals, final rehab bids, insurance, and estoppels / tenant docs.
By Day 180 (or tax return due date if earlier): Close on all identified replacement properties; QI wires funds.
FAQs
Do short-term rentals qualify? If the property is truly held for investment / business (and not primarily for personal use), it can. Facts and intent matter. Check with your CPA.
Can I move into my 1031 property later? Eventually, yes, but only after a genuine investment-use period. Transitioning to a primary home has separate rules and can affect eligibility for the §121 home-sale exclusion. Speak with your tax advisor and review §121 nuances.
Can I exchange into a DST? Yes—Rev. Rul. 2004-86 recognizes properly structured Delaware Statutory Trusts as eligible replacement property for §1031.
What if my area gets hit by a disaster? The IRS can extend 45/180-day deadlines for affected taxpayers. Watch for IRS notices.
Quick 1031 checklist
Engage a Qualified Intermediary before closing the sale.
Pre-underwrite a buy box and markets with your local PM.
Build a shortlist and schedule inspections well before Day 45.
Identify under the 3-property/200%/95% rules by Day 45.
Match or exceed value, equity, and debt to avoid boot.
Mind related-party rules (often a two-year hold).
Close by Day 180 (or earlier tax-return due date). File Form 8824.
The bottom line
A 1031 exchange is part tax strategy, part operations play. The tax deferral is the reward for strict compliance (QI + 45/180 days), while the investment win comes from on-the-ground discipline: a tight buy box, rigorous inspections, documented tenants, and multiple exits. Be diligent in both areas, and you won’t just defer tax—you’ll level up the quality of your entire portfolio.
Evernest property managers have the kind of hard-won expertise and inside knowledge that only comes from having boots on the ground in the local rental market. If you’d like help pressure-testing a buy box in a target market or you want real rent / maintenance intel on potential replacement properties, get in touch with one of our agents today.
