What Landlords Need To Know About 1031 Exchange Rules

A 1031 exchange lets you sell a rental property and put off paying capital gains tax, as long as you reinvest the money in another investment property. You don't handle the cash yourself - a specialist called a qualified intermediary holds it for you. You have 45 days to pick your next property and 180 days to buy it. If you keep some cash, or take on a smaller mortgage without adding cash to make up the difference, you pay tax on part of the gain.

This guide covers the federal rules for US landlords. It explains how the rules work, not how they apply to your situation. Before you sell, confirm your plans with a qualified intermediary and a CPA or tax attorney.

What Is a 1031 Exchange?

A 1031 exchange lets you swap one investment property for another without paying tax on your profit at the time of the sale. It's named after Section 1031 of the tax code. You'll also hear it called a like-kind exchange or a Starker exchange.

Normally, when you sell a rental for more than your basis (roughly what you paid plus improvements, minus the depreciation you've claimed), you pay capital gains tax on the profit. With a 1031 exchange, you move your money into a new property instead of cashing out, so the tax is put off. For the official rules, see IRS Publication 544 and the Form 8824 instructions.

There's no limit on how many times you can do this. You can roll your gains from one property into the next for as long as you like. The tax stays deferred until you sell without doing an exchange.

If you still own the property when you die, your heirs generally inherit it at its current value (called a stepped-up basis). That means the deferred gain may never be taxed.

When you do eventually sell without an exchange, you pay the tax you put off. That's usually two parts: tax on the depreciation you claimed, at up to 25%, and capital gains tax on the rest. The worked example below shows how this adds up. For more on the tax side, see taxes on a rental property sale.

Only real estate qualifies. Since 2018, you can no longer exchange equipment, vehicles or other personal property. Your own home doesn't qualify while you live in it, but a former home or a vacation home can once it's held as an investment.

How a 1031 Exchange Works in 5 Steps

1. Hire a qualified intermediary before you sell. They'll hold your sale money.
2. Sell your rental. The money goes straight to the intermediary, not to you.
3. Pick your next property in writing within 45 days of the sale.
4. Buy it within 180 days of the sale (sooner if your tax return is due first), using the money the intermediary is holding.
5. Report the exchange to the IRS on Form 8824 with that year's tax return.

1031 Exchange: Quick Takeaways

• A 1031 exchange is a swap of real estate held for business or investment.
• Both properties must be in the US.
• A qualified intermediary normally holds your sale money. If you take control of that money before you buy the new property, the exchange can fail.
• You have 45 days to pick your next property and 180 days to buy it. If your tax return is due sooner, the deadline is the return's due date.
• You can buy a cheaper property, but you'll pay tax on part of the gain.
• To defer all of the gain, buy a property that costs at least as much and reinvest all your equity. Replace any mortgage you pay off with a new mortgage or extra cash.
• There's no limit on how often you can exchange. But if you buy and swap properties very quickly, the IRS may question whether you were really investing.

1031 Exchange Rules: The Requirements

To qualify, both properties must be US real estate held for investment or business, and the same person or business must sell and buy. You also can't take control of the sale money along the way. How much you reinvest then decides whether you defer all of the tax or only some of it.

Like-Kind Property Requirement

The property you buy must be "like-kind" to the one you sell. For real estate, this is broad. The IRS looks at the nature of the property, not its grade or quality, so almost any US investment property is like-kind to any other. You can swap a rental house for a commercial building, a small apartment block or raw land.

You can also sell one property and buy several, or sell several and buy one.

Same Taxpayer Requirement

The person or business that sells must be the one that buys. If you sell a property in your own name and buy the new one in a different name, the IRS can reject the exchange.

A single-member LLC is usually treated as the same taxpayer as its owner. Even so, check how the title will be held with your intermediary before you close.

Investment or Business Property Requirement

Both properties must be held as an investment or for use in a business. Your own home doesn't qualify while you live in it. Neither does property you buy mainly to resell, such as a fix-and-flip, because the IRS treats it like stock in a shop.

There's no set minimum time you have to own a property. The IRS looks at the facts, such as how you used the property and what you intended.

US Property Requirement

You can only exchange US property for other US property. Swapping between states is fine and common. State taxes vary, though, and some states, such as California, keep track of the deferred gain after you exchange out. Check the rules in both states first.

Requirements for Full Tax Deferral

The new property can cost more or less than the one you sell. The price only affects how much tax you defer.

As a rule of thumb, you defer all of the tax if you do three things:

• Buy a property that costs at least as much as your net sale price.
• Put all of your equity into the new property.
• Replace any mortgage you pay off, either with a new mortgage or with extra cash.

The exact calculation is a little more involved, so check your figures with your intermediary or CPA.

Anything you come away with other than like-kind property, such as cash you keep, is called boot. So is a smaller mortgage that you don't make up for with cash. You pay tax on boot, up to the amount of your gain. Buying a cheaper property doesn't cancel the exchange. It just means part of the gain is taxed now. For example:

• You sell for $750,000 with a $500,000 mortgage, leaving $250,000 of equity. You buy for $810,000, putting in all $250,000 and taking a $560,000 mortgage. All of the gain is deferred.
• You sell for $615,000 and buy for $510,000. You'd typically end up with about $105,000 in cash or other boot, depending on your mortgages and costs. If so, up to $105,000 of your gain is taxed, and the rest is still deferred.

The worked example below walks through the numbers.

Qualified Intermediary and the Sale Proceeds

You can't have the sale money in your account at any point, even briefly. In a typical exchange, a qualified intermediary holds it for you and uses it to buy the new property. You may also hear them called an exchange facilitator or accommodator.

The rules allow a couple of other set-ups, such as a special escrow account or trust, but most landlords use an intermediary.

Not everyone can be your intermediary. You can't do it yourself. Nor can anyone who's worked for you in the past two years, such as your employee, attorney, accountant, broker or real estate agent. Close family members and companies you control are also ruled out. Title and escrow companies doing routine closing work are fine. See the IRS rules on who can act as your intermediary for the full list.

Timing matters. If you receive or control the sale money before you buy the new property, the exchange can fail and the whole sale becomes taxable. Cash you receive at the end of a completed exchange is different. It's taxed as boot, but the rest of the exchange still counts.

1031 Exchange Deadlines: The 45-Day and 180-Day Rules

You have 45 days from your sale to pick your next property in writing, and 180 days to buy it. If your tax return for that year is due sooner, the return's due date is your deadline instead. Both clocks start the day your sale closes.

The deadlines count every calendar day, including weekends and holidays. The IRS only extends them in limited cases, such as for people affected by a federally declared disaster.

These deadlines apply to delayed exchanges, which is how most exchanges work: you sell, the intermediary holds the cash, and you buy later. A same-day direct swap with another owner is possible, but it's rare.

The 45-Day Identification Rule

Within 45 days of your sale, you must name the property you plan to buy in writing. You sign the list and send it to your intermediary. Each property needs a clear description, such as its street address.

You can name properties under one of three rules:

Most landlords use the three-property rule. The 200% rule suits splitting one sale into several smaller rentals. The 95% rule is rarely used, because you have to buy almost everything on your list.

The 180-Day Exchange Period

You must close on the new property within 180 days of your sale. If your tax return for that year is due sooner, you must close by the return's due date instead.

If you sell late in the year, file a tax extension. That stops your return deadline from cutting your 180 days short.

The two periods run at the same time, not one after the other. You get 45 days to pick a property and a further 135 days to close, 180 days in total.

How Does a 1031 Exchange Defer Tax? A Worked Example

In a full exchange, you pay no tax on the sale now. Instead, the untaxed gain moves into your new property. Here's a simplified example of a landlord swapping a single-family rental for a duplex. It leaves out closing costs and state tax, and the numbers are for illustration only.

You bought a single-family rental for $250,000. Over the years you've claimed $80,000 of depreciation, so your basis is now $170,000. You sell it for $400,000 and pay off the $150,000 mortgage, leaving $250,000 of equity with your intermediary.

Your gain is $230,000 ($400,000 minus your $170,000 basis). Of that, $80,000 comes from depreciation and $150,000 from the property going up in value.

In the full exchange, all $250,000 of equity goes into a $520,000 duplex, with a new $270,000 mortgage covering the rest.

In the partial exchange, you put $210,000 into a $360,000 duplex with a $150,000 mortgage, and keep $40,000 in cash. That $40,000 is boot and is taxed now, but the other $190,000 of gain is still deferred.

With no exchange, your federal tax on the $230,000 gain could be roughly $42,500. That's up to $20,000 on the $80,000 of depreciation, which is taxed at up to 25%, plus $22,500 on the $150,000 increase in value at a 15% capital gains rate. Capital gains rates are 0%, 15% or 20% depending on your income (see the IRS guide to capital gains rates).

Higher earners may also owe an extra 3.8% tax on investment income, and you may owe state tax on top.

In the full exchange, none of that tax is due now. The deferred gain carries into the duplex through its basis. Your basis in the duplex is $290,000 (the $520,000 price minus the $230,000 deferred gain), not $520,000.

That lower basis has two effects. Your depreciation deductions are smaller, and you'll have a bigger taxable gain if you later sell without exchanging.

This is why your records matter. Your intermediary and tax preparer will need your original purchase price, your cost basis, the improvements you've made and the depreciation you've claimed each year.

Pros and Cons of a 1031 Exchange

The trade-off is simple. You put off the tax on your sale. In return, you accept tight deadlines, strict rules about the money, and a lower basis in the property you buy.

Pros of a 1031 Exchange

The benefits all come from keeping your full equity invested, instead of losing part of it to tax each time you sell.

1. Tax Deferral Benefits

The main advantage is that you don't pay capital gains tax when you sell. By putting the money into a new property, you put off the tax, so all of your equity keeps working for you.

2. Increased Cash Flow

Swapping a property with lower rent for one that earns more can boost your cash flow. For example, trading a single-family rental for a duplex or a small apartment building can raise your monthly rental income, with no tax on the sale.

3. Portfolio Diversification

You can reshape your portfolio without a tax bill. You might trade into a different type of property, or a rental in a stronger market in another state. You could also swap one large property for several smaller ones.

4. Wealth Accumulation

Because you don't pay tax on each swap, you can keep trading up into bigger or better properties over time. That grows both the value of your portfolio and your rental income.

Cons of a 1031 Exchange

The drawbacks come from the strict rules, and from the fact that the tax is only put off.

1. Strict Identification Period

You have only 45 days from your sale to name your next property in writing. Miss that deadline and the exchange fails, so the sale is taxed.

2. Pressure to Buy Quickly

In a competitive market, 45 days goes fast. The pressure can push you to overpay or settle for a weaker property. Many investors start looking before they even list the property they're selling.

3. Market and Economic Risks

The wider market can affect your exchange. Rising interest rates make borrowing more expensive and can move prices. That can make it harder to find and finance the right property within the deadlines.

4. Debt Requirements

To defer all of the tax, you generally need to reinvest all of your equity and replace any mortgage you pay off, with a new mortgage or extra cash. If you can't get the financing you expected, the shortfall can become taxable boot.

5. The Tax Is Deferred, Not Forgiven

Your new property takes on the lower basis of the one you sold. Your depreciation deductions are smaller as a result. And the tax you put off comes due if you ever sell without exchanging.

Different Types of 1031 Exchanges

There are four main types of 1031 exchange:

• Simultaneous exchange: you sell and buy on the same day, either directly with the other owner or through an intermediary.
• Delayed exchange: you sell first, your intermediary holds the money, and you buy within the 45-day and 180-day deadlines. This is the most common type.
• Reverse exchange: you buy the new property before you sell. A company called an exchange accommodation titleholder holds (or "parks") the new property for you. Under the IRS rules for reverse exchanges, you then generally have 45 days to name the property you'll sell and 180 days to sell it.
• Improvement (build-to-suit) exchange: some of the exchange money pays for building work on the new property before you take ownership. Only work finished by the time you take ownership, within the 180 days, counts toward the amount you reinvest.

How To Get Started With a 1031 Exchange

Start before you list your property. Choose an intermediary, start looking for your next property, gather your records, and plan to report the exchange on Form 8824.

Find a Qualified Intermediary

Choose your intermediary before you close the sale. The exchange agreement has to be signed before closing. Once the sale money reaches you, it's too late to set up an exchange.

You can get referrals from CPAs, real estate attorneys, escrow and title companies, or real estate agents. Ask how they protect client money, for example in separate accounts with insurance or a bond. Have your attorney review the exchange paperwork.

Fees vary by company and by type of exchange. Reverse and improvement exchanges cost much more than a standard delayed exchange, because someone has to take ownership of a property for you. Get written quotes before you list.

Identify an Eligible Property

You'll need to name your next property within 45 days of your sale, so start looking early.

The property you buy must be US real estate held as an investment or for business. To defer all of the tax, it also needs to meet the full-deferral rules above.

Gather Your Property Records

Have these details ready for your intermediary and tax preparer, along with your usual landlord tax documents. They'll need your contact details, the escrow or title officer's details and escrow number, and:

• The property you're selling and the date you bought it
• What you paid for it, and the improvements you've made since
• The depreciation you've claimed each year
• How you've used the property while you've owned it
• Whether you've already agreed a sale
• Your current mortgage balance and equity

And for the new property:

• The property you'd like to buy
• The purchase price
• How you plan to finance it

The depreciation and improvement history is usually the hardest part to pull together, especially if you bought the property years ago. If you track your rentals in Landlord Studio, you can record expenses and improvements against each property and keep the receipts attached. You can then run reports to hand to your accountant, which makes working out your basis much quicker.

How Do You Report a 1031 Exchange? Form 8824

You report a 1031 exchange to the IRS on Form 8824, Like-Kind Exchanges. You file it with your tax return for the year you sold your old property. That's still the right year even if you buy the new property the following year.

1031 Exchange Rules & Capital Gains

A 1031 exchange lets landlords keep growing a rental portfolio without paying capital gains tax on every sale. The rules are strict, though. You can't take control of the sale money, the deadlines are only extended in rare cases like disaster relief, and the tax is put off rather than cancelled.

If an exchange doesn't fit your plans, there are other ways to reduce capital gains tax on investment properties. Either way, talk to your intermediary and CPA before you list, get your records ready, and make the exchange part of your wider real estate tax planning.

1031 Exchange FAQs

Is the 1031 exchange changing or going away?

No. As of 2026, 1031 exchanges are still fully available for rental and investment real estate. The One Big Beautiful Bill Act, signed on July 4, 2025, left the 1031 rules unchanged. There's no cap on the gain you can defer and no income limit.

The last major change to the law came in 2017, when the Tax Cuts and Jobs Act limited exchanges to real estate from 2018. Treasury then issued detailed rules in 2020 on what counts as real estate.

In 2021, the Biden administration proposed capping deferrals at $500,000 of gain per person a year ($1 million for married couples filing jointly). It never became law. Proposals like this do come up from time to time, so check the current rules with your intermediary or tax professional before you sell.

What are the 1031 exchange rules for depreciated property?

Exchanging a rental you've depreciated doesn't normally trigger depreciation recapture. The recapture tax is deferred along with the rest of the gain and carries into your new property. It comes due when you eventually sell without an exchange, when the depreciation part is taxed at up to 25%.

You can owe some recapture tax in an exchange if you receive boot, such as cash. Some items that come with a rental, such as freestanding appliances, don't count as real estate for a 1031 exchange and may be taxed separately.

Being depreciated faster for tax purposes, for example after a cost segregation study, doesn't automatically rule an item out. Permanently attached fixtures can still count as real estate under the IRS definition of real property for exchanges. If your property has had a cost segregation study, review the exchange with a tax professional.

What is the 2-year rule for 1031 exchanges?

Sometimes you do an exchange with a related party, such as a close family member or a company you control. If so, you both generally have to keep the property you received for at least two years. This comes from Section 1031(f) of the tax code.

If either of you sells within two years, the deferred tax becomes due. There are a few exceptions, such as a death.

It's often confused with the separate 24-month rule for vacation homes and former homes.

Can I use a 1031 exchange on a vacation home or a former home?

Yes, if it's held as an investment. The IRS safe harbor for vacation homes gives a clear test. The home counts as an investment if you owned it for at least 24 months. For the home you sell, that's the 24 months before the sale. For the home you buy, it's the 24 months after. In each of those two years:

• You rented it out at a fair rent for at least 14 days.
• You used it yourself for no more than 14 days, or 10% of the days it was rented, whichever is greater.

A home that doesn't meet this test can still qualify, but you'll need to show it was genuinely held as an investment.

Can I move into a property I bought through a 1031 exchange?

Yes, eventually, but not straight away. If you move in too soon, the IRS may decide you never held it as an investment. Plan to rent it out first, ideally for the full 24 months under the vacation home safe harbor.

If you later sell it as your main home, you may be able to use the home sale exclusion. It lets you avoid tax on up to $250,000 of gain ($500,000 for married couples filing jointly). But you can only claim it if you've owned the home for at least five years since the exchange, and part of the gain may still be taxable. IRS Publication 523 explains the rules.

Going the other way? See how to convert a primary residence to a rental property.

What is a reverse 1031 exchange?

A reverse 1031 exchange is when you buy your new property before you sell your old one. A company called an exchange accommodation titleholder holds the new property for you. You then generally have 45 days to name the property you're selling and 180 days to sell it.

It's useful when you've found the right property and can't risk losing it while you wait for a buyer. It costs more and takes more planning than a standard exchange. See the types of 1031 exchanges to compare.

What is 'like-kind property' under the 1031 exchange rules?

The name is a bit misleading. It doesn't mean you have to swap a house for another house. For real estate, like-kind is about the property being an investment, not its type. So almost any US investment property, from a duplex to raw land or a commercial building, can be swapped for any other.

Your own home, stocks, bonds, partnership interests and property you mainly buy to resell don't qualify. See the requirements above for details.

How do you determine if your property qualifies for a 1031 exchange?

Your property generally qualifies if it's US real estate that you hold as an investment or for business. You also need to be swapping it for other US real estate held the same way.

It doesn't qualify if you mainly bought it to resell, or if you live in it as your home. A former home or a vacation home can qualify once it's held as an investment.

How much does a 1031 exchange cost?

The main cost is the intermediary's fee, which depends on the company and the type of exchange. Reverse and improvement exchanges cost much more than a standard one. You'll also pay the usual closing costs on both the sale and the purchase, plus your CPA's or attorney's fees.

Weigh those costs against the tax you'd pay on a straight sale. On a small gain, an exchange may not be worth it.