A 1031 exchange is an exchange of real property held for productive use in a trade or business or for investment solely for real property of like kind which is to be held either for productive use in a trade or business or for investment, on which no gain or loss is recognized. It defers tax rather than cancelling it, because the basis of the property given up carries over to the property received, so the untaxed gain stays inside the new asset and surfaces on a later taxable disposition (26 U.S.C. 1031(a)(1) and (d)).
Two limits sit in the same subsection that grants the relief. The holding requirement runs on both sides of the trade rather than on the relinquished property alone, so the replacement real property is likewise one that is to be held for productive use in a trade or business or for investment, and the subsection does not apply at all to an exchange of real property held primarily for sale (26 U.S.C. 1031(a)(1) and (a)(2)).
What Section 1031 Reaches Today
Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property, so machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property generally do not qualify for nonrecognition. The change is effective January 1, 2018, and a transition rule preserves the old treatment for personal or intangible property the taxpayer disposed of on or before December 31, 2017, or received on or before that date (IRS, Like-Kind Exchanges).
Like-kind is a low bar inside real property and a hard line outside it. Properties are of like kind if they are of the same nature or character even if they differ in grade or quality, and real properties generally are of like kind whether improved or unimproved, but real property in the United States is not like-kind to real property outside the United States (IRS, Like-Kind Exchanges).
The 45-Day and 180-Day Clock
Property received in a deferred exchange is treated as property that is not like-kind if it is not identified as property to be received on or before the day which is 45 days after the date the taxpayer transfers the relinquished property, or if it is received after the earlier of the day which is 180 days after that transfer or the due date, determined with regard to extension, for the transferor’s return for the taxable year in which the transfer occurs (26 U.S.C. 1031(a)(3)).
The regulation fixes the endpoints. Both periods begin on the date the taxpayer transfers the relinquished property, the identification period ends at midnight on the 45th day thereafter, and the exchange period ends at midnight on the earlier of the 180th day or that return due date. Where several relinquished properties go out on different dates as part of the same exchange, both periods run from the earliest of those dates (26 CFR 1.1031(k)-1(b)(2)).
That second window is an earlier-of test, not a flat count, and the difference bites at year end. The regulation’s own example runs a November transfer by a calendar year corporation and ends the exchange period at that corporation’s unextended return due date rather than on the 180th day, with only the automatic six-month extension carrying it that far (26 CFR 1.1031(k)-1(b)(3)).
How Many Replacement Properties May Be Identified
The taxpayer may identify more than one replacement property, and the ceiling comes in two alternatives. Regardless of how many relinquished properties are transferred as part of the same exchange, the maximum is three properties without regard to their fair market values, called the 3-property rule, or any number of properties as long as their aggregate fair market value at the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date they were transferred, called the 200-percent rule (26 CFR 1.1031(k)-1(c)(4)(i)).
Blowing past both is not a partial failure. A taxpayer who has identified more properties than permitted is treated as if no replacement property had been identified at all, with two exceptions: replacement property actually received before the end of the identification period, and property identified in time and received before the end of the exchange period, but only where the identified replacement property received has a fair market value of at least 95 percent of the aggregate fair market value of everything identified (26 CFR 1.1031(k)-1(c)(4)(ii)).
The Qualified Intermediary Safe Harbor
The relief turns on the taxpayer not being in actual or constructive receipt of the sale proceeds, which is why the money goes to a qualified intermediary instead. Where the taxpayer transfers relinquished property through one, the qualified intermediary is not considered the agent of the taxpayer for purposes of section 1031(a), the transfer and later receipt are treated as an exchange, and constructive receipt is measured as if that intermediary were not the taxpayer’s agent (26 CFR 1.1031(k)-1(g)(4)(i)).
The safe harbor is conditional on the paperwork. It applies only if the agreement between the taxpayer and the qualified intermediary expressly limits the taxpayer’s rights to receive, pledge, borrow or otherwise obtain the benefits of the money or other property held. A qualified intermediary is a person who is not the taxpayer or a disqualified person and who enters into a written exchange agreement under which it acquires the relinquished property from the taxpayer, transfers it, acquires the replacement property and transfers that to the taxpayer (26 CFR 1.1031(k)-1(g)(4)(ii) and (g)(4)(iii)).
Protection also ends the moment the restriction does. The safe harbor ceases to apply at the time the taxpayer has an immediate ability or unrestricted right to receive, pledge, borrow or otherwise obtain the benefits of money or other property held by the qualified intermediary (26 CFR 1.1031(k)-1(g)(4)(vi)).
Boot and Carryover Basis
Boot is the practitioner’s name for anything received in the exchange that is not like-kind property. Where the taxpayer receives other property or money as well, gain is recognized, but in an amount not in excess of the sum of that money and the fair market value of the other property, and a loss on such an exchange is not recognized at all. A liability of the taxpayer assumed by another party to the exchange counts as money received (26 U.S.C. 1031(b), (c) and (d)).
Basis is where the deferral is actually stored. The basis of the property acquired is the same as that of the property exchanged, decreased by any money received and increased by the gain, or decreased by the loss, recognized on the exchange (26 U.S.C. 1031(d)).
Say a taxpayer gives up investment real property and receives like-kind real property plus cash, on the figures below.
Adjusted basis of the property given up 300,000
Fair market value of the property received 400,000
Cash received in the exchange 50,000
Amount realized 400,000 + 50,000 = 450,000
Gain realized 450,000 - 300,000 = 150,000
Gain recognized, capped at the cash received 50,000
Basis of property received
300,000 - 50,000 + 50,000 = 300,000
Gain still deferred 400,000 - 300,000 = 100,000The recognized gain and the gain still deferred add back to the gain realized, so nothing has been forgiven anywhere in the transaction.
What a 1031 Exchange Defers, and What It Does Not
It defers depreciation recapture rather than erasing it, and because the section now reaches only real property the limitation that normally operates is the section 1250 one. Section 1250 property means any real property, other than section 1245 property, which is or has been property of a character subject to the allowance for depreciation. Where gain is not recognized in whole or in part under section 1031, the gain taken into account under the recapture subsection cannot exceed the greater of the gain recognized on the disposition or the excess of the gain that would otherwise be taken into account over the fair market value of the section 1250 property acquired (26 U.S.C. 1250(c), (d)(4)(A) and (d)(4)(C)).
What that limit holds back is moved rather than forgiven. The gain not taken into account by reason of it becomes additional depreciation in the section 1250 property acquired, additional depreciation, for property held more than one year, being the depreciation adjustments only to the extent they exceed the adjustments the straight line method would have produced (26 U.S.C. 1250(d)(4)(E) and (b)(1)). How that ordinary slice is computed is set out in depreciation recapture.
Whatever gain does get recognized still has a character to work out. Real property used in a trade or business and held for more than 1 year is property used in the trade or business for these purposes, and recognized gain on its sale or exchange is section 1231 gain, so it lands in the section 1231 netting rather than straight into capital gain treatment (26 U.S.C. 1231(a)(3) and (b)(1)). That netting, and why such property is not a capital asset in the first place, is covered in capital assets.
The carryover figure, not the price paid for the replacement property, is the number the depreciation schedule has to carry forward, which is the basis discussed in fixed assets. Property held until the owner’s death meets a different rule again, and that reset is covered in step up basis.
Where a 1031 Exchange Lands in a Firm’s Return Workflow
Reporting runs on one form. Parts I, II and III of Form 8824 report each exchange of business or investment real property for real property of a like kind, Part III figures the gain that has to be reported in the current year where cash or non-like-kind property is involved and the basis of the like-kind property received, and the form is filed with the tax return for the year in which the property was transferred (IRS, Instructions for Form 8824 (2025)).
The deadline that actually needs managing is not a filing deadline. The identification period runs from the transfer of the relinquished property, so it closes months before anyone opens the return (26 U.S.C. 1031(a)(3)).
Nor is it something the preparer can fix later. Replacement property is identified only if it is designated in a written document signed by the taxpayer and sent, before the identification period ends, to the person obligated to transfer the replacement property or to another person involved in the exchange who is not the taxpayer or a disqualified person (26 CFR 1.1031(k)-1(c)(2)). A firm that first hears about a closing at return time is hearing about it after the only window it could have flagged.
Common Questions
Nonrecognition is withdrawn where a taxpayer exchanges property with a related person and, before the date 2 years after the last transfer that was part of the exchange, the related person disposes of the property received or the taxpayer disposes of the like-kind property received from the related person. Any gain or loss is then taken into account as of the date of that disposition (26 U.S.C. 1031(f)(1)).
Some dispositions inside that window are ignored, including one after the earlier of the death of the taxpayer or the death of the related person, a compulsory or involuntary conversion where the exchange happened before the threat of it, and a disposition where it is established to the satisfaction of the Secretary that neither the exchange nor the disposition had as one of its principal purposes the avoidance of Federal income tax (26 U.S.C. 1031(f)(2)). The rule has a reporting tail as well, because Form 8824 is also filed for the 2 years following the year of a related party exchange (IRS, Instructions for Form 8824 (2025)).
The exclusions are written into the section rather than left to practice. A holder of real property held primarily for sale is outside it, which puts dealer inventory out of reach, and the property has to be held for productive use in a trade or business or for investment, which leaves a personal residence outside as well (26 U.S.C. 1031(a)(1) and (a)(2)). Anyone exchanging personal or intangible property is outside it too, since the section reaches real property only (IRS, Like-Kind Exchanges).
Structure does not rescue a related-party deal either. The section does not apply to any exchange that is part of a transaction, or series of transactions, structured to avoid the related-person rules (26 U.S.C. 1031(f)(4)).
Three of them are in the statute and the regulation, so they are not a matter of opinion. The gain is preserved in the basis of the replacement property rather than removed, and a loss on an exchange that would otherwise qualify is not recognized either, so an exchange at a loss buries the loss in basis instead of deducting it (26 U.S.C. 1031(c) and (d)). The third is the identification ceiling, because over-identifying replacement property is treated as identifying nothing at all (26 CFR 1.1031(k)-1(c)(4)(ii)).
A firm that wants the exchange-year workpapers and the like-kind exchange reporting prepared by someone else can put a real block of that work through a trial task before anything client facing depends on it.
