1031 exchange rules and the 45/180-day deadlines

What 1031 defers (and what it doesn't)

IRC §1031 lets you defer capital gains tax and depreciation recapture when you exchange one investment property for another "like-kind" property. The gain doesn't disappear — your basis in the new property carries over reduced, so you'll pay the deferred tax eventually unless you keep exchanging or die holding (the "swap til you drop" play, since heirs get a stepped-up basis).

What 1031 does NOT defer:

• State income tax on the gain (in some states)
• Net Investment Income Tax (NIIT) where applicable
• Recognition of boot (cash or debt relief you receive in the trade)

Who and what qualifies

Property: real property held for investment or productive use in a trade or business. Personal residences do NOT qualify (the §121 exclusion is separate). Investment-to-investment, business-to-business. Foreign property doesn't qualify either.

Taxpayer: the same taxpayer (or disregarded entity) must be on both sides. You can't sell as an LLC and buy in your own name.

The unforgiving timeline

From the moment you close on the relinquished property:

• Day 45: You must identify (in writing, to your QI) the replacement properties. Three rules to pick from:

  • Three-property rule: identify up to 3 properties of any value.
  • 200% rule: identify any number, total FMV ≤ 200% of the relinquished sale price.
  • 95% rule: identify any number, but you must acquire 95% of total identified value.

• Day 180: You must close on the replacement. This is also the deadline by which you must close on at least one of your identified properties — no extensions, even for natural disasters in most years.

Miss either deadline by a day and your entire deferred gain becomes immediately taxable.

Avoiding boot

If your replacement property is smaller than your relinquished property — by price OR by debt — you may receive boot:

• Cash boot: net equity from the sale that wasn't fully reinvested.
• Mortgage boot: debt relief, where your new loan is smaller than the loan paid off.

Boot is taxable up to the amount of your realized gain. Two ways to avoid it:

1. Buy a replacement that's bigger in BOTH price and debt than the relinquished.
2. Bring extra cash to the replacement closing to offset mortgage boot (but extra cash doesn't offset cash boot — only the reverse).

The qualified intermediary requirement

You can never touch the proceeds. The QI holds the cash between sale and replacement. Even if it sits in a "1031 account" you control, the exchange fails. Pick a QI before you list the relinquished property. Most charge $750-2,500 per exchange and provide the identification forms.

Run your specific numbers

Plug your relinquished and replacement parameters into the 1031 Exchange Calculator to see your boot, recognized gain, deferred gain, and replacement basis. As always — this is a math tool. Use a CPA and QI for the real thing.