Beginner's guide to 1031 exchanges

A 1031 exchange lets you sell an investment property and roll the entire proceeds into another one without paying tax on the gain. Not less tax. No tax, this year, if you do it right. The catch is that “if you do it right” means following a set of rules that are unforgiving about timing, money handling, and paperwork. This page is the plain-English overview; the rest of this pillar takes each rule apart in detail.

What it actually does

When you sell an investment property at a profit, you normally owe capital gains tax plus depreciation recapture. A 1031 exchange, named for the code section, lets you defer all of that by reinvesting the proceeds into a “like-kind” replacement property. The gain does not disappear; it rides along into the basis of the new property, which stays low, and waits. Keep exchanging, and you keep deferring, potentially forever, a strategy the pillar’s exit pages develop.

Like-kind is broader than people expect. For real estate, almost any investment or business real property is like-kind to almost any other: you can exchange a rental house for a strip mall, raw land for an apartment building, a warehouse for farmland. What does not qualify is property held for personal use or for resale. Your home does not qualify (that is the separate Section 121 exclusion), and neither does property you hold as a dealer to flip, which is the dealer-property problem covered with the fix-and-flip LLC.

A 1031 exchange defers all the tax on an investment property sale by rolling the proceeds into like-kind replacement real estate, and almost any investment real estate is like-kind to any other.

The two clocks, and the trap in them

The rules everyone knows are the two deadlines, and the trap is that they run at the same time, not one after the other.

From the day you close the sale of your old property, you have 45 days to identify your replacement property in writing, and 180 days to close on it. Here is what trips people: the 180 days is the total, and the 45 is inside it, not added to it. You do not get 45 days and then a fresh 180. You get 180 days total, and the more of it you burn identifying, the less remains to close. Both deadlines are effectively absolute, no general hardship extensions, and there is a further catch: the 180-day window is cut short if your tax return due date arrives first, so a late-year exchange may need an extension filed to preserve the full period.

The 45-day and 180-day clocks start together on your sale date and run concurrently, so you have 180 days total, not 45 plus 180.

The rule that blows up more exchanges than any deadline: don’t touch the money

The single most important operational rule is that you cannot receive the sale proceeds, even for a moment. If the money from your sale hits your bank account, the exchange is dead and the whole gain is taxable, no matter how perfectly you handle everything else.

The proceeds must go to a qualified intermediary, a third party who holds the money between the sale and the purchase and delivers it into the replacement property. The intermediary is not optional; the code requires the structure, and the QI must be arranged before you close the sale, not after. It also cannot be your own agent, your attorney, accountant, or broker who has worked for you recently, a restriction the qualified intermediaries page details. Constructive receipt, having the right to control the money, is as fatal as actually pocketing it.

You can never take possession of the sale proceeds; they must flow through a qualified intermediary arranged before closing, or the exchange fails entirely.

The reinvestment rules that decide whether it is fully tax-free

To defer all the gain, you generally have to reinvest all the proceeds and replace all the debt. Buy a replacement property of equal or greater value, use all the equity, and carry at least as much debt as you paid off, and the deferral is complete. Fall short on any of those, pull out some cash, buy something cheaper, reduce your debt, and the shortfall is “boot,” taxable to the extent of your gain. You can still do a partial exchange, deferring most of the gain and paying tax on the boot, which the boot and partial exchanges pages cover.

The bottom line

• A 1031 exchange defers all capital gains and depreciation recapture on an investment property sale.
• Almost any investment real estate is like-kind to any other; homes and dealer property do not qualify.
• You have 180 days total to close and 45 days to identify, running concurrently from the sale date.
• You can never touch the proceeds; a qualified intermediary must hold them, arranged before closing.
• To defer all the gain, reinvest all the proceeds and replace all the debt, or the shortfall is taxable boot.

For the deadlines in detail, read timeline rules. For the intermediary requirement, see qualified intermediaries. For the full picture, start at the 1031 exchanges and exit planning hub.

Last verified August 2026.