The 1031 Buyer's
Field Guide.

1. What a 1031 actually is

Section 1031 of the Internal Revenue Code lets you sell an investment or business-use real estate property and roll the proceeds into a new investment or business-use real estate property without paying federal capital gains tax today. The key word is defer. Not avoid. Not erase. Defer. You're kicking the tax down the road, possibly forever (if you die owning it — morbid, but a real planning tool), possibly until the next sale.

Since 2017, only real property qualifies. RIP to the good old days of 1031-ing a plane for another plane. Today it's real estate, full stop.

Both the property you're selling (the relinquished property, or "downleg") and the property you're buying (the replacement property, or "upleg" — yes, that's where the name of this publication comes from) have to be held for productive use in a trade or business, or for investment. Your primary residence does not qualify. A flip does not qualify. A second home you rent out ten days a year probably does not qualify.

2. When to use one (and when not to)

1031 exchanges are not free, and they are not automatic. You use one when the tax you'd pay on a sale is large enough to justify the additional friction and risk of finding and closing a replacement property under the clock.

Good candidates:

• You're sitting on significant depreciation recapture and long-term capital gain.
• You want to trade up (smaller deal → bigger deal, less management → more passive).
• You're consolidating or diversifying a portfolio.
• You're moving from active to passive — e.g., apartments into a DST.

Bad candidates:

• You have losses you could harvest against the gain.
• Your gain is tiny and the deal friction isn't worth it.
• You don't actually want to own more real estate — you just don't want to pay the tax. (This usually ends with a bad replacement property purchased in a panic.)
• You're about to die with a large estate — the step-up in basis may make the deferral moot and the exchange an unnecessary cost.

Doing a 1031 to avoid tax is like getting married to avoid eating alone. The deferral is real, but so is the thing you just committed to.

3. The two clocks: 45 and 180

The single most important thing to internalize: two deadlines start ticking the moment your relinquished property closes.

• 45 days to identify potential replacement property in writing, delivered to your QI.
• 180 days to close on one or more of those identified properties (or your tax return due date with extensions, if earlier).

These are calendar days, not business days. They include weekends, holidays, your kid's graduation, and the day your inspector gets the flu. If day 45 falls on a Sunday, day 45 is still Sunday. The IRS will cheerfully confirm this.

Both clocks start the same day. The 180-day clock does not reset if you identify late. If you close your downleg on March 1, your identification deadline is April 15 and your close deadline is August 28. Mark your calendar the day of your downleg close. Twice.

What counts as "day 1"?

Day 1 is the day after the relinquished property sale closes. A closing on March 1 starts the clock on March 2. Day 45 is April 15. Day 180 is August 28. No, we won't do the math for you on your deal — that's a QI's job.

4. Like-kind (broader than you think)

The term "like-kind" sounds narrow, but for real property, it is absurdly broad. A shopping center is like-kind to an apartment building. An industrial warehouse is like-kind to a raw land parcel. A leasehold interest of 30+ years is like-kind to fee simple. A fractional DST interest is like-kind to a whole building.

What it is not like-kind to:

• U.S. real estate is not like-kind to foreign real estate.
• Real estate is not like-kind to a REIT share (even though it feels like it should be — REIT shares are securities, not real property).
• A personal residence is not in the like-kind universe at all.

5. The Qualified Intermediary (QI)

The 1031 rules do not let you touch the proceeds from your sale. If the check lands in your bank account, the exchange is over before it started. Instead, the proceeds go to a Qualified Intermediary, an unrelated third party who holds the funds, uses them to acquire the replacement property on your direction, and then conveys that property to you.

Critical rules about QIs:

• The QI must be engaged before closing on the relinquished property. If the wire hits your account first, you're done.
• Your attorney, CPA, real estate agent, or employee from the last two years cannot be your QI under the "disqualified person" rules.
• The QI holds funds in an exchange account. Ask where the funds sit, how they're insured, and whether you get interest.

How to pick a QI: institutional scale, segregated accounts, real insurance (both E&O and fidelity bond), and a bench of exchange attorneys on staff. There have been QI collapses in the last two decades — real money, real losses. A good QI costs $1,000–$2,500 for a forward exchange. That's a rounding error on a meaningful deal. Do not cheap out here.

6. Identification rules

You identify replacement property in writing, delivered to your QI, by midnight of day 45. Use the QI's form. Be specific — street address, APN, legal description. "A similar Walgreens in the Southeast" does not cut it.

You can choose one of three identification rules:

• Three-Property Rule. Identify up to three replacement properties, regardless of value. This is what most buyers use.
• 200% Rule. Identify any number of properties, as long as the combined fair market value doesn't exceed 200% of the relinquished property's sale price. Useful for DST portfolios or many small replacements.
• 95% Rule. Identify any number of properties, with no value cap — but you must actually close on 95% of the combined identified value. This is an edge-case rule and a trap.

You can revoke an identification before the 45-day deadline and replace it. After day 45, your list is frozen. Pick carefully.

7. Boot (the bad kind)

Boot is any value you receive in the exchange that isn't like-kind real property. Two main flavors:

• Cash boot. Proceeds left over after the replacement purchase. If you sold for $2M and bought for $1.9M, that's $100K of cash boot, and it's taxable to the extent of your gain.
• Mortgage boot. Debt relief that isn't replaced. If your downleg had a $1M loan and your upleg only has a $600K loan (and you don't add cash), that's $400K of mortgage boot.

The rule of thumb for a fully tax-deferred exchange: trade equal or up in price, equal or up in equity, and equal or up in debt (or replace reduced debt with out-of-pocket cash).

8. The mistakes we see every week

• Waiting to engage a QI until closing week. Start QI selection as soon as the downleg is under contract.
• Not lining up replacement candidates before the downleg closes. Your 45-day clock does not care that you "just need to catch your breath."
• Overpaying for a panic-replacement. The worst deal in the world is the deal you bought on day 44. Identify DST backups to give yourself optionality.
• Taking cash at closing because "it's fine, I'll do a partial exchange." A partial exchange is fine — you just need to know that the cash portion is fully taxable.
• Using a related party without disclosure. There are special rules when you buy from or sell to related parties. Get a real exchange attorney involved.
• Trying to DIY the identification form. Use your QI's form. Follow the instructions. Don't be clever.

9. The DST backup plan

A Delaware Statutory Trust is a pre-packaged, institutional-grade fractional real estate investment that qualifies as like-kind under a 2004 IRS ruling. You identify DST interests on your 45-day list, and if your other identified properties fall through, you can acquire DST shares instead.

DSTs are not a free pass. They have fees, they're illiquid, they have sponsor risk, and they're a passive investment — you can't refi, you can't sell the underlying, you're along for the ride. But as backup identification, they're the most important optionality tool a 1031 buyer has. Read our full DSTs Demystified guide when it's out.

10. Reverse and improvement exchanges

Two exotic-but-useful variants:

• Reverse exchange. You buy the replacement property before you sell the relinquished one. A parking entity (EAT) holds title in the meantime. More expensive, more complex, but sometimes the only way to lock in a great deal.
• Improvement (build-to-suit) exchange. You use exchange funds to improve the replacement property. Structured through an EAT. Useful for new construction, renovations, or ground-up projects.

Both require a more sophisticated QI and more legal work. Plan on adding $10K–$25K of transaction cost. Worth it if the deal warrants it; not worth it if you're chasing small gains.

11. What to do right now

If you have a 1031 exchange open right now, do these three things today:

1. Write down your two dates. Day 45 and day 180. Put them in your calendar with 7-day, 3-day, and 1-day reminders.
2. Identify a DST backup. Even if you don't intend to use it, having a pre-vetted DST option on your identification form is cheap insurance against a deal falling through on day 43.
3. Ask your QI — in writing — where the exchange funds are held and what insurance covers them. If the answer is vague, switch QIs.

And then go read NNN 101, because "find a net lease Walgreens for my upleg" is the most common replacement strategy in the country and most people don't understand what they're actually buying.

12. FAQ

Can I 1031 my primary residence?

No. Primary residences don't qualify. Section 121 is your exclusion for a primary home.

Can I 1031 into a short-term rental?

Yes, if it's held for investment and rented consistently. If you use it personally more than 14 days per year or 10% of rental days, the IRS may argue it's not held for investment.

Can I 1031 and partially take cash?

Yes. It's called a partial exchange. The cash portion (boot) is taxable; the rest is deferred. Run the math before you decide.

What happens if I miss day 45?

Your exchange fails. The sale of the relinquished property becomes a fully taxable event. Plan for this; don't pray against it.

Can two related parties exchange with each other?

Yes, but with strict holding-period rules (generally two years) and disclosure requirements. Get a real exchange attorney involved.

Does state tax follow federal 1031 treatment?

Usually yes, but several states (notably California, via the "clawback") track the deferred gain and tax it when you eventually sell in a non-conforming state. Do not assume state follows federal without checking.

Do I need a lawyer in addition to a QI?

For a straightforward forward exchange, usually no — your transaction attorney handles the closing documents and the QI handles exchange documents. For reverse, improvement, related-party, or partnership-split (drop-and-swap) exchanges, yes, hire an exchange attorney.