Education

1031 Exchange Rules

A 1031 exchange lets you defer capital gains taxes when you sell an investment property and reinvest in a like-kind replacement. Here are the rules that matter — in plain English.

The 45-Day Rule

You have 45 calendar days from the sale of your relinquished property to formally identify potential replacement properties in writing.

The 180-Day Rule

You must close on your replacement property within 180 calendar days of the sale (or your tax return due date, whichever is earlier).

1. Like-kind property

Both the property you sell and the one you buy must be held for investment or productive use in a business. Most real estate is "like-kind" to other real estate — you can swap an apartment for a retail center, raw land for a warehouse, and so on.

2. Use a Qualified Intermediary

You can never take possession of the sale proceeds, or you lose the tax deferral. A Qualified Intermediary (QI) like DeferAlly holds the funds in a segregated, FDIC-insured escrow account and facilitates the exchange. Traditional QIs charge $999–$1,500+ and keep the interest — DeferAlly charges $0 and shares the interest with you.

3. Equal or greater value

To fully defer your taxes, the replacement property must be of equal or greater value, and you must reinvest all of the net proceeds. Any cash you take out (called "boot") may be taxable.

4. Same taxpayer

The name on the title of the relinquished property must match the name on the replacement property. The taxpayer who sells must be the taxpayer who buys.

5. Identification rules

  • Three-property rule: identify up to three properties of any value.
  • 200% rule: identify any number of properties as long as their combined value doesn't exceed 200% of what you sold.
  • 95% rule: identify more than that, but you must acquire 95% of the total value identified.

6. State tax rules vary widely

A 1031 exchange defers your federal tax, but each state treats the gain differently — capital-gains rates, federal conformity, closing withholding, and clawback rules all differ. See the rules for your state before you exchange.

Browse 1031 rules by state

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This page is general educational information, not tax or legal advice. Confirm specifics with your CPA or attorney.