Selling a rental that has gone up in value can trigger a large tax bill. A 1031 exchange lets you push that bill into the future, as long as you roll the sale into another investment property and follow a strict set of rules. This guide explains those rules in plain English.
Note: This article is general education about federal tax rules. It is not tax, legal, or financial advice. A 1031 exchange has to be set up before you close on the sale, and small errors can make the whole gain taxable. Talk to a CPA or tax attorney and a qualified intermediary before you list a property you plan to exchange.
What a 1031 exchange is
A like-kind exchange under Section 1031 of the Internal Revenue Code lets you sell one investment property and buy another without paying tax on the gain right away. The gain is deferred, not forgiven. It carries into the new property and can come due later if you sell without exchanging again.
Since the 2017 Tax Cuts and Jobs Act, Section 1031 applies only to real property. According to the IRS, exchanges of machinery, equipment, vehicles, artwork and other personal or intangible property no longer qualify for exchanges after 2017. For landlords, that means the building and land qualify, but the appliances and furniture inside generally do not.
Both properties must be held for productive use in a trade or business or for investment. The IRS also says real property held primarily for sale, such as a house you are fixing to flip, does not qualify. "Like-kind" is broad for real estate, so a single-family rental can be exchanged for a fourplex or a small commercial building.
Did the 2025 tax law change 1031 exchanges?
No. Section 1031 was discussed as a possible way to raise revenue, but the tax law enacted in July 2025, often called the One Big Beautiful Bill Act, did not limit or repeal it. Intermediaries and tax firms that tracked the bill reported that Section 1031 was left out of both the House and Senate versions, so confirm current rules with your CPA in the year you sell.
The two deadlines: 45 days and 180 days
Most failed exchanges fail on timing. The clock starts the day you transfer the property you are selling. Under Treasury regulations, two periods run at once.
- 45-day identification period. You must identify possible replacement properties in writing by midnight of the 45th day after the sale closes.
- 180-day exchange period. You must receive the replacement property by the earlier of the 180th day after the sale or the due date, including extensions, of your tax return for the year of the sale.
The tax return nuance matters for late-year sales. If you close in December, day 180 lands in June, but your return is normally due in April. Unless you file an extension, the April due date can cut your exchange period short. The IRS fact sheet on like-kind exchanges says these limits cannot be extended for hardship, except in presidentially declared disasters.
How identification works
The identification must be in writing, signed by you, and delivered to a person involved in the exchange, such as your qualified intermediary. The IRS notes that telling your own attorney, real estate agent or accountant is not enough. Describe each property clearly, such as by street address.
The regulations limit how many properties you can name. You must meet one of these three tests:
- Three-property rule. Identify up to three properties of any value.
- 200 percent rule. Identify any number of properties, as long as their combined fair market value is no more than 200 percent of the value of the property you sold.
- 95 percent rule. Identify more than that, but only if you actually buy at least 95 percent of the combined value of everything you identified.
Most small landlords use the three-property rule: a first choice and two backups, no value math.
Qualified intermediaries and the cash you cannot touch
In a typical deferred exchange, you sell first and buy later. During that gap, the sale proceeds cannot pass through your hands. According to the IRS, taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction. This is called actual or constructive receipt.
The standard solution is a qualified intermediary. The intermediary signs a written exchange agreement with you, receives the sale proceeds at closing, holds them, and uses them to buy the replacement property. You cannot act as your own intermediary. The IRS also says your real estate agent, broker, accountant or attorney generally cannot serve in that role if they have acted as your agent.
Pick the intermediary before you close. Once proceeds land in your own account, it is too late to fix.
Boot, debt replacement and when you owe some tax
A 1031 exchange does not have to be all or nothing. If you receive cash or other property that is not like-kind, often called boot, you generally owe tax on the gain up to the value of that boot. The IRS says gain is recognized to the extent of the other property and money received.
Debt counts too. Under Treasury regulations, a mortgage that is paid off or assumed in the sale is treated like money you received. A new mortgage on the replacement property can offset it.
As a rule of thumb, to defer all of the gain you generally need to buy a replacement worth at least as much as the property you sold, reinvest all the net cash, and take on at least as much debt or add cash to cover the difference.
Depreciation and basis carry over
You do not get a fresh start on the new property. The IRS explains that the basis of property acquired in a 1031 exchange is generally the basis of the property you gave up, with some adjustments. That means your past depreciation follows you, and your depreciable basis is usually lower than if you had bought the new property outright.
This is why exchange records matter for years. Your CPA will need the old property's purchase price, improvements and depreciation history to compute the new basis and continue depreciation correctly. If you want a refresher on what you deduct each year, see our guide to tax deductions every landlord should know and how they map to Schedule E.
A worked example with round numbers
The numbers below are illustrative only. They ignore closing costs, intermediary fees, depreciation recapture details and state taxes, all of which change real results.
Say you bought a rental for $400,000 and have taken $100,000 of depreciation, so your adjusted basis is $300,000. You sell it for $500,000. Your realized gain is $200,000. At closing, $200,000 goes to pay off the mortgage, and the remaining $300,000 goes to your qualified intermediary.
| Scenario | Replacement price | New loan | Cash to you | Gain taxed now | Gain deferred |
|---|---|---|---|---|---|
| A: Trade up, reinvest everything | $550,000 | $250,000 | $0 | $0 | $200,000 |
| B: Trade down, take some cash | $450,000 | $200,000 | $50,000 | $50,000 | $150,000 |
| C: Same price, smaller loan | $450,000 | $150,000 | $0 | $50,000 | $150,000 |
In Scenario A, the full gain is deferred. Your basis in the new property is roughly $350,000, which is the $550,000 price minus the $200,000 deferred gain. In Scenario B, the $50,000 of cash is boot. In Scenario C, you take no cash, but your debt drops by $50,000 with no new cash added, and that net debt relief is treated like boot.
Related parties, homes and vacation properties
Related-party exchanges
Exchanges with family members or entities you control face extra rules. According to the Form 8824 instructions, if either party disposes of the property within two years after the last transfer in a related-party exchange, the deferred gain generally becomes taxable, unless an exception applies. You also file Form 8824 for the two years after the exchange.
Your primary residence does not qualify
The IRS says property used primarily for personal use, like a primary residence, a second home or a vacation home, does not qualify. The home sale exclusion under Section 121 is a separate rule. Mixed-use histories need a CPA.
The vacation home safe harbor
A vacation home you also rent out can qualify under the safe harbor in IRS Revenue Procedure 2008-16. You must own it for at least 24 months before the exchange.
In each of those two 12-month periods, you must rent it at a fair rental for 14 days or more. Your personal use cannot exceed the greater of 14 days or 10 percent of the days rented. Similar tests apply for 24 months after you acquire a replacement dwelling.
Reporting the exchange on Form 8824
You report a like-kind exchange on IRS Form 8824 with your tax return for the year you transferred the property. The form covers the dates, any related-party relationship, boot received and the basis of the new property.
Plan your paperwork early. If you hold rentals in an entity, the same entity generally needs to sell and buy, so read our guide on should you put your rental property in an LLC before restructuring around a sale. State tax treatment also varies, so ask your CPA how your state handles deferred gain.
Common 1031 exchange mistakes checklist
- Closing the sale before hiring a qualified intermediary.
- Letting sale proceeds land in your personal or business bank account.
- Missing the 45-day identification deadline, or identifying properties only verbally.
- Identifying four or more properties without meeting the 200 percent or 95 percent test.
- Forgetting that the tax return due date can shorten the 180-day period without an extension.
- Buying a cheaper replacement or taking a smaller loan without planning for boot.
- Selling to or buying from a relative without understanding the two-year rule.
- Losing the depreciation and improvement records your CPA needs to set the new basis.
Treat the exchange as one step in a bigger plan. Before you identify a replacement, run it through a due diligence checklist and a step-by-step guide to buying a rental property. Then compare the numbers using our guide on rental property ROI and how to measure real returns and improve them. More acquisition guides live in our Property Acquisition hub for landlords evaluating, financing and buying rental property.
Frequently asked questions
Can I do a 1031 exchange on my primary residence?
No. The IRS says property used primarily for personal use, including a primary residence, does not qualify. A home sale may instead qualify for the separate Section 121 exclusion.
What happens if I miss the 45-day or 180-day deadline?
The exchange generally fails, and the sale is taxed as a regular sale. The IRS says these deadlines cannot be extended for hardship, except in presidentially declared disasters.
Do I have to reinvest all the cash to defer all the tax?
Generally, yes. Any cash or non-like-kind property you receive is boot and is taxable up to your gain. A drop in mortgage debt that you do not offset can also count as boot.
Did the 2025 tax law eliminate 1031 exchanges?
No. The tax law enacted in July 2025 left Section 1031 in place. Exchanges are still limited to real property held for business or investment, as they have been since 2018.
What to do next
A 1031 exchange rewards landlords who can prove their numbers. Your CPA will ask for the original purchase price, years of expenses and improvements, depreciation history, and clean income records for the property you are selling. Scattered receipts make that slow.
Shuk helps you keep clean records for each property. Schedule E-aligned expense organization with digital receipts lets you tag every expense by property, vendor and date and mark items as depreciable for your accountant. Ten built-in reports, including Profit and Loss, export to Excel and PDF for tax preparation.
You can also assign a dedicated bank account to each property so rent routes to the right account. Property Documents inside each property stores leases, closing statements, loan documents and depreciation schedules. For more on how this supports tax season, read how expense tracking software simplifies tax prep for landlords.
At as low as $2 per unit per month, billed annually, with no setup fees and no contract, and with White Glove Onboarding included at no additional cost, Shuk makes keeping exchange-ready records for every property feasible for landlords and small property managers with up to 200 units.
Book a demo at shukrentals.com/book-a-demo to see how Schedule E-aligned expense organization, exportable Profit and Loss reports, dedicated bank accounts per property and property document storage work together so your CPA has what they need when you sell or exchange a rental.
