1031 Exchanges: How to Defer Tax When You Sell Investment Property
How a U.S. 1031 exchange works: what qualifies, the 45- and 180-day deadlines, the intermediary, taxable boot, and why Canada has no equivalent.
Updated & fact-checked Figures are linked to their sources at the end of the article.
A 1031 exchange, named after section 1031 of the U.S. Internal Revenue Code, lets an owner sell investment or business real estate and buy other real estate without paying tax on the gain at the time of the sale. The tax is deferred, not forgiven: the gain carries over into the replacement property and is taxed when that property is eventually sold outside an exchange.
This article is for U.S. owners of apartment buildings, hotels, shopping centres and other income property who are planning to sell and reinvest. It applies only to U.S. federal tax. Canada has no equivalent, which we cover at the end. This is general information, not tax advice: the rules are strict and the details of each deal matter, so work with a tax adviser and a qualified intermediary before you sign a sale agreement.
What qualifies
Since January 1, 2018, section 1031 applies only to real property. Exchanges of equipment, vehicles, artwork, intellectual property and other personal or intangible property no longer qualify.[1]
Both the property you give up and the property you receive must be held for investment or for productive use in a trade or business. Real property used for personal purposes, such as your home, and real property held primarily for sale do not qualify.[3] That second exclusion matters for investors: a property bought to renovate and resell quickly is likely to be treated as held for sale, not for investment.
“Like-kind” is broad for real estate. The IRS says real properties are generally like-kind regardless of whether they are improved or unimproved; an apartment building would generally be like-kind to another apartment building.[1] In practice, land, a hotel, an apartment building and a shopping centre can usually be exchanged for one another. The main limit is geography: real property in the United States is not like-kind to real property outside the United States.[1]
| Property | Generally qualifies? | Why |
|---|---|---|
| Apartment building exchanged for a hotel or retail centre | Yes | Both are U.S. real property held for investment or business use |
| Rental building exchanged for raw land held for investment | Yes | Improved and unimproved real property are generally like-kind |
| Your own home | No | Personal-use property is excluded |
| A property bought to renovate and resell | Usually no | Property held primarily for sale is excluded |
| U.S. property exchanged for property in Canada | No | U.S. and foreign real property are not like-kind |
| Furniture, equipment or a hotel brand franchise | No | Only real property qualifies since 2018 |
The deadlines
Most exchanges today are deferred exchanges: you sell first and buy later. Two clocks start on the day you transfer the property you are giving up.
- 45 days to identify. The replacement property must be identified in writing within 45 days. The document must be signed by you and delivered to the person obligated to transfer the replacement property to you, or to another person involved in the exchange who is not a disqualified person, and it must describe the property clearly, for example by legal description or street address.[2]
- 180 days to close. You must receive the replacement property within 180 days, or by the due date of your tax return for that year, including extensions, whichever is earlier.[2] A sale late in the year can therefore leave you less than 180 days unless you extend your return.
You can identify more than one property, but there are limits. Regardless of how many properties you give up, you can identify either up to three properties of any value, or any number of properties whose total fair market value is no more than double the value of everything you gave up.[3]
A deferred exchange, step by step
Before closing
Engage a qualified intermediary[3]
The exchange agreement must be in place before the sale closes, so the sale proceeds never reach you.
Day 0
Sell the relinquished property[3]
The intermediary receives the proceeds and holds them for the exchange.
By day 45
Identify replacement property in writing[3]
Up to three properties, or more if their total value is no more than twice what you sold.
By day 180
Close on the replacement property[2]
Or by your tax return due date, with extensions, if that comes first.
Tax return
Report the exchange on Form 8824[3]
The exchange is reported even when no gain is recognized.
Why you need a qualified intermediary
If you actually or constructively receive the sale money before you receive the replacement property, the IRS treats the transaction as a sale and the gain is taxable, even if you later buy the replacement property.[3] “Constructive” receipt includes money that is credited to your account or set aside so that you could draw on it.
The standard solution is a qualified intermediary, which holds the proceeds under a written agreement and uses them to acquire the replacement property for you. The intermediary cannot be a disqualified person. That includes anyone who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two years before the transfer, as well as certain related persons.[3] In other words, your regular lawyer or broker usually cannot hold the money.
Reverse exchanges, where you buy the replacement property before selling, are possible through an exchange accommodation titleholder under Revenue Procedure 2000-37, which sets its own time limits.[2] They are more complex and usually need financing for both properties at once.
When part of the gain is taxed: boot
An exchange can be partly taxable. If you receive money or other property that is not like-kind in addition to the replacement property, you must recognize the gain you realized up to the amount of the money and the fair market value of the other property received.[3] Advisers call this “boot”. A loss on an exchange is not recognized.[3]
Debt counts. If the other side of the exchange takes over your liabilities, for example because your mortgage is paid off at closing, you are treated as having received money in that amount. You can reduce it by liabilities you take on, or by cash you add, on the replacement side.[3] The common rule of thumb follows from this: to defer all of the gain, buy property of equal or greater value, reinvest all the net proceeds, and replace any debt paid off with new debt or added cash.
Example (hypothetical, no debt involved): an owner sells a building for $2,000,000 that has an adjusted basis of $800,000, a realized gain of $1,200,000. The replacement property costs $1,800,000 and the intermediary returns the remaining $200,000 to the owner. The recognized gain is the smaller of the $1,200,000 realized and the $200,000 of boot, so $200,000 is taxable this year and the rest is deferred.
What deferral costs later
Deferral comes with a lower basis. The basis of property received in a like-kind exchange is generally the same as the basis of the property you gave up, increased by any money you paid.[3] A lower basis means smaller depreciation deductions on the new building and a larger gain when you finally sell outside an exchange.
When that sale happens, the part of a long-term gain on real property that comes from depreciation, known as unrecaptured section 1250 gain, is taxed at a maximum federal rate of 25%, while most other long-term capital gain is taxed at no more than 15% or 20%.[4] Exchanges with related persons carry an extra condition: if either side disposes of the exchanged property within two years, the deferred gain generally becomes taxable, and Form 8824 must be filed for the two years after the exchange.[2]
California follows the property out of state
California conforms to section 1031 but keeps a claim on gains earned in the state. Since 2014, taxpayers who exchange California property for property outside California must file Form FTB 3840 for the year of the exchange and every year after it, generally until the California-source deferred gain is recognized on a California return.[5] California also has no lower rate for capital gains; they are taxed as ordinary income.[6]
There is no 1031 exchange in Canada
Canadian owners cannot defer the gain on a rental building by buying another one. The closest provision, the replacement property rules in section 44 of the Income Tax Act, applies to involuntary dispositions such as expropriation, theft or destruction, and to voluntary sales of “former business property”. The Canada Revenue Agency says the definition of former business property excludes rental property: real property used principally to earn gross revenue that is rent.[7] An apartment building or a leased retail plaza therefore generally does not qualify when it is sold voluntarily.
Where the rules do apply, the replacement must be acquired within set periods: for a voluntary sale of former business property, before the later of the end of the first tax year after the year of sale and 12 months after the end of that year.[7] An owner-operated property used in an active business may qualify; a hotel can raise questions about whether it is a business or a rental, which is a point to settle with a Canadian tax adviser. For Canadian sellers, the tools for spreading the tax are different, such as the capital gains reserve when the buyer pays over several years; see our article on taxes when you sell or refinance a hotel or apartment building.
Sources
- Like-kind exchanges: real estate tax tips — Internal Revenue Service, Updated May 1, 2026. Checked 2026-10-12.
- Instructions for Form 8824 (2025), Like-Kind Exchanges — Internal Revenue Service. Checked 2026-10-12.
- Publication 544 (2025), Sales and Other Dispositions of Assets — Internal Revenue Service. Checked 2026-10-12.
- Topic no. 409, Capital gains and losses — Internal Revenue Service. Checked 2026-10-12.
- 2025 Instructions for Form FTB 3840, California Like-Kind Exchanges — California Franchise Tax Board. Checked 2026-10-12.
- Capital gains and losses — California Franchise Tax Board. Checked 2026-10-12.
- Income Tax Folio S3-F3-C1, Replacement Property — Canada Revenue Agency. Checked 2026-10-12.
