Real Estate · 6 min read · 2026-03-22
The 9-step 1031 checklist.
A 1031 exchange is the largest real estate tax break in the IRC. Mistakes that disqualify it cost the entire deferral.
Mistakes don't reduce the deferral. They eliminate it.
1031 exchanges defer the capital gains tax on real estate sales when proceeds are reinvested in like-kind property. The rules are mechanical and unforgiving — a single deadline missed, a single technicality violated, and the entire exchange fails. The tax becomes due in the year of sale.
The nine indicators
The nine steps every 1031 must follow.
Each is a specific procedural requirement under §1031 and the regulations. Missing any one disqualifies the exchange entirely.
Qualified intermediary engaged before sale
Pattern: QI on closing
The taxpayer cannot touch the sale proceeds. A QI must hold funds between sale and replacement purchase. Engaged before closing of the relinquished property.
45-day identification window
Threshold: written ID by day 45
Replacement property must be formally identified in writing within 45 days of the relinquished property closing. The list is binding.
180-day completion window
Threshold: closing by day 180
Replacement property purchase must close within 180 days of relinquished property closing OR by tax return due date if earlier.
Like-kind property requirements
Pattern: real property for real property
Post-2017, only real property qualifies. Personal property exchanges are no longer eligible. Specific types: investment to investment, business to business.
Equal or greater value of replacement
Threshold: replacement ≥ sold price
Replacement value below sold value triggers boot recognition. The taxable boot is the cash difference.
Equal or greater debt on replacement
Threshold: replacement debt ≥ sold debt
Debt reduction is mortgage boot, taxable. Replacement debt must equal or exceed prior debt to avoid recognition.
Three-property rule or 200% rule
Pattern: identification limits
Identify up to 3 properties (any value) or any number of properties up to 200% of relinquished value. Specific compliance required.
Holding intent — investment, not flip
Pattern: investment use documented
Both relinquished and replacement properties must be held for investment or business use. Flipped properties don't qualify; documented intent matters.
State conformity and clawback rules
Pattern: state tax exposure
States like California and others have clawback rules that recapture deferred gains when the property is later sold outside the state. Plan for state-level exposure.
What 1031 actually does
Section 1031 of the Internal Revenue Code permits the deferral of capital gains tax when real property held for investment or business use is exchanged for like-kind real property. The deferral is indefinite — gains can be deferred for decades, and stepped-up basis at death can eliminate the tax entirely. For long-tenure real estate investors, 1031 plus eventual death-basis-step-up is one of the most powerful tax structures available.
Post-2017 TCJA, only real estate qualifies for 1031. Personal property exchanges (heavy equipment, vehicles, artwork) no longer qualify. The rules below apply specifically to real estate exchanges in current law.
The QI is non-negotiable
The single most common cause of 1031 failure is constructive receipt — the taxpayer touching the sale proceeds, even briefly. The qualified intermediary structure prevents this by holding the sale proceeds from closing of the relinquished property to closing of the replacement property. The taxpayer is never in possession of the funds.
QIs are typically specialized companies (1031 Corp, IPX1031, Asset Preservation, Inc.) that handle exchanges as their primary business. Cost is typically $500–$1,500 per exchange. The cost is trivial relative to the deferred tax, and the QI's expertise prevents many of the procedural errors that cause failures.
The 45-day identification window
Within 45 days of the relinquished property closing, the taxpayer must identify replacement property in writing to the QI. The identification is binding — only properties on the list can be the replacement. The 45-day clock cannot be extended for any reason except the limited disaster-relief provisions.
The discipline is to begin the identification process before the relinquished sale closes. Most failed exchanges fail because the taxpayer did not have replacement property under contract or even seriously evaluated by day 30 of the 45-day window.
Boot — the partial-failure mode
Boot is the portion of the exchange that does not qualify for deferral. Cash boot occurs when replacement value is less than relinquished value (the difference is taxable). Mortgage boot occurs when replacement debt is less than relinquished debt (the difference is taxable). Either form of boot creates current-year capital gain.
The discipline is to structure replacement at equal or greater value and equal or greater debt. Boot can be minimized but rarely eliminated; small amounts of boot are common and often acceptable as the cost of pragmatic execution.
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Common questions
Questions.
Can I exchange a rental for a personal residence?
Not directly. The replacement must be held for investment for at least two years before converting to personal use, per Rev. Proc. 2008-16.
Are vacation homes eligible?
Sometimes. Vacation properties with documented rental history meeting safe harbor requirements may qualify. Pure personal use does not.
What's a reverse 1031?
Acquiring replacement property before selling relinquished property. Possible but more expensive (additional accommodation entity required) and structurally complex.
Can I exchange domestic for international?
No. Foreign and domestic real estate are not like-kind under current law. Both properties must be U.S.-located.
What about Delaware Statutory Trusts?
DSTs are eligible 1031 replacement vehicles, popular with retiring real estate investors. They allow passive ownership of large institutional properties without management responsibility.
Will 1031 be repealed?
Periodically proposed (Biden administration 2021); not enacted. Current law is stable but politically vulnerable in long-term reform discussions.
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