1031 Exchange Rules 2026: Complete Guide to Tax-Deferred Real Estate Exchanges

A 1031 exchange lets you [sell investment property](/blog/selling-rental-property-guide) and defer paying capital gains tax by reinvesting the proceeds into another investment property. For real estate investors with significant gains, this can save hundreds of thousands in taxes.

But 1031 exchanges have strict rules. Miss a deadline by one day, and you'll owe full taxes on your gains. Use the wrong type of property, and the exchange fails. Work with the wrong intermediary, and you could lose everything.

This guide covers everything you need to execute a successful 1031 exchange in 2026: current rules, timelines, strategies, and common mistakes that trigger tax bills.

[What Is a 1031 Exchange](/blog/1031-exchange-guide)?

Section 1031 of the Internal Revenue Code allows you to [defer capital gains](/blog/1031-exchange-vs-opportunity-zones) tax when you sell investment or business property and reinvest the proceeds in similar property.

Key concept: You're not avoiding taxes—you're deferring them. The tax bill comes due when you eventually sell without doing another 1031, or when you die (though your heirs may get a [stepped-up basis](/blog/selling-inherited-property)).

Why it matters:

Without 1031: Sell a property with $300,000 in gains, pay $60,000-90,000 in federal and state taxes.

With 1031: Reinvest all proceeds, keep that $60,000-90,000 working for you.

Over decades, the compounding effect is massive. This is how investors build $10M+ portfolios from one rental house.

Basic 1031 Exchange Requirements

1. Property Must Be "Like-Kind"

Since 2018, only real property (real estate) qualifies. Before 2018, you could exchange cars, equipment, etc. That's gone.

What qualifies:

• Rental property for rental property
• Apartment building for retail center
• Raw land for industrial property
• Single-family rental for multifamily
• US property for US property

Key: Both properties must be held for investment or business use.

What doesn't qualify:

• Primary residence (use a different exclusion)
• Property held primarily for sale (flip properties)
• Real estate for stocks/bonds
• US property for foreign property
• Vacation home you use personally (unless you follow strict rules)

2. Equal or Greater Value

To defer 100% of taxes, your replacement property must be:

• Equal or greater value than property sold
• Equal or greater debt
• All cash proceeds reinvested

Example:

Relinquished property (selling):

• Sale price: $500,000
• Mortgage payoff: $200,000
• Net proceeds: $300,000

Replacement property (buying):

• Purchase price: $600,000 minimum
• New mortgage: $200,000 minimum
• Cash invested: $400,000 (your $300,000 proceeds + $100,000 new cash)

If you buy for less than $500,000 or take cash out, you'll pay tax on the difference (called "boot").

3. Qualified Intermediary Required

You cannot touch the money. The IRS requires a Qualified Intermediary (QI) to hold funds between sale and purchase.

How it works:

1. Before closing sale, hire QI and sign exchange agreement
2. QI receives proceeds at sale closing
3. QI holds funds in secure account
4. QI transfers funds to close on replacement property
5. QI provides documentation for your tax return

Cost: $800-1,500 for basic exchanges, more for complex deals.

Critical: Choose a reputable QI. If they go bankrupt or steal funds (it happens), you lose the money AND owe taxes. Verify they use separate accounts and have fidelity insurance.

4. Timeline Requirements: 45 and 180 Days

These are hard deadlines. No extensions, even for weekends, holidays, or natural disasters (in most cases).

45-day identification period:

• Starts: Day after you close sale
• Ends: Day 45, midnight
• Action: Identify replacement properties in writing to QI

180-day exchange period:

• Starts: Day after you close sale OR tax return due date, whichever is earlier
• Ends: Day 180
• Action: Close on replacement property

Example timeline:

• Jan 15: Close sale of relinquished property
• Mar 1: Deadline to identify replacement property (45 days)
• Jul 14: Deadline to close on replacement property (180 days)

If your tax return is due April 15 and you haven't closed by then, you must file for extension or the exchange fails.

Identification Rules: Three Options

You must identify potential replacement properties in writing by day 45. You have three options:

Three-Property Rule

Identify up to 3 properties of any value. You can buy 1, 2, or all 3.

Most common approach. Gives you options without restrictions.

Example:

1. 4-plex in Phoenix - $580,000
2. Single-family in Charlotte - $520,000
3. Retail center in Tampa - $1.2M

You can close on any combination that meets the value requirement.

200% Rule

Identify unlimited properties, but total value can't exceed 200% of relinquished property value.

Example:

Relinquished property: $500,000 You can identify properties totaling up to $1,000,000:

1. Duplex - $300,000
2. SFR - $250,000
3. Condo - $200,000
4. Land - $180,000
5. Commercial - $70,000

Total: $1,000,000 (200% of $500,000)

95% Rule

Identify unlimited properties of unlimited value, but you must close on 95% of identified value.

Rarely used. If you identify $5M in property, you must buy $4.75M worth. Too risky for most investors.

Best practice: Use the 3-property rule. Identify your top choice plus two backups in case deals fall through.

Types of 1031 Exchanges

Delayed Exchange (Most Common)

Sell first, buy later (within 180 days). This is the standard 1031 exchange described above.

Pros: Simple, flexible Cons: 45-day deadline pressure

Reverse Exchange

Buy replacement property first, then sell relinquished property.

When to use: Found perfect replacement property but haven't sold yet.

How it works:

• QI or Exchange Accommodation Titleholder (EAT) takes title to new property
• You have 180 days to sell old property
• Properties swap, completing exchange

Challenges:

• More complex and expensive ($2,500-5,000+)
• Financing is difficult (QI owns the property)
• Must have cash or special financing to acquire

Timeline:

• Day 1: Close on replacement property (held by EAT)
• Day 45: Identify relinquished property in writing
• Day 180: Close sale of relinquished property

Construction/Improvement Exchange

Build on or improve replacement property using exchange funds.

Example: Sell for $800,000, buy land for $200,000, spend $600,000 building a new rental.

Requirements:

• Construction must be completed within 180 days
• QI holds title during construction
• You receive completed property at day 180

Challenges:

• Tight timeline (construction delays are common)
• QI fees higher
• Financing complexity

Simultaneous Exchange

Close sale and purchase same day. Rare in practice due to coordination challenges.

Delaware Statutory Trusts (DST): The Easy Button

Can't find replacement property? Don't want to manage anymore? Consider a DST.

What is a DST?

A Delaware Statutory Trust that owns institutional-grade real estate. You buy fractional interests.

How it works:

• DST owns property (apartment complex, medical building, etc.)
• You invest 1031 proceeds into DST
• Receive pro-rata share of rent and appreciation
• Professional management handles everything
• Completely passive

Benefits:

• Meets 1031 requirements
• Minimum investment often $100,000
• No management responsibilities
• Institutional-quality properties
• Can diversify (invest in multiple DSTs)

Drawbacks:

• Fees typically 1-2% annually
• Less control
• Illiquid (typically 5-10 year hold)
• Fewer tax benefits than direct ownership
• Limited upside compared to well-chosen direct property

When DSTs make sense:

• Can't find suitable replacement property by deadline
• Want to retire from active management
• Estate planning (easier to divide among heirs)
• 1031 from high-value property into smaller pieces

2026 DST market:

Popular options include:

• Class A multifamily (Phoenix, Austin, Charlotte)
• Medical office buildings
• Net-lease retail (Walgreens, CVS, etc.)
• Industrial/warehouse
• Self-storage

Expected returns: 4-6% cash flow, 2-4% appreciation, 6-10% total.

Boot: What It Is and Why It Costs You

"Boot" is anything of value you receive besides like-kind property. Boot is taxable.

Cash Boot

Receive cash at closing = taxable.

Example:

• Sell for $500,000
• Buy replacement for $450,000
• Receive $50,000 cash
• $50,000 is taxable boot

Mortgage Boot

Reduce debt = taxable.

Example:

• Sell property with $200,000 mortgage
• Buy replacement with $150,000 mortgage
• Debt reduced by $50,000
• $50,000 mortgage boot is taxable

How to avoid:

• Take equal or greater debt on replacement
• Add cash to offset debt reduction

Example to avoid boot:

• Selling: $500,000 sale, $200,000 mortgage, $300,000 equity
• Buying: $550,000 purchase
• New mortgage: $250,000
• Cash invested: $300,000

No boot. You increased both value and debt.

Common 1031 Exchange Mistakes

1. Missing the 45-Day Deadline

The #1 killer. The deadline is absolute. Weekends and holidays count.

Protection:

• Identify properties early
• Send identification via certified mail or email with receipt
• Identify 3 properties even if you're sure about one

45th day falls on weekend/holiday: Deadline is that day, not the next business day.

2. Taking Possession of Funds

Touch the money = blown exchange.

Wrong:

• Proceeds deposited to your account, even briefly
• You receive check and forward to QI
• QI is your employee/attorney/agent

Right:

• Hire independent QI before closing
• Proceeds go directly from closing to QI
• You never have access or control

3. Using Property for Personal Use

Property must be investment/business use, not personal.

Vacation home 1031:

• Must rent at fair market rate
• Limit personal use to 14 days or 10% of rental days
• Document rental activity
• Treat as true rental business

Better: Don't 1031 vacation homes unless you follow strict rules and document everything.

4. Related Party Exchanges

Selling to or buying from related parties (family members, controlled entities) triggers special rules:

• Both parties must hold 2+ years
• IRS scrutinizes closely
• Can work but requires careful structuring

Safer: Transact with unrelated parties.

5. Wrong Property Type

Doesn't qualify:

• Primary residence (use [Section 121 exclusion](/blog/capital-gains-home-sale) instead)
• Property held for sale (dealer/flipper)
• Stocks, bonds, partnership interests
• Foreign property

6. Inadequate Replacement Property Value

Buying down in value triggers tax on the difference.

Example:

• Sell for $600,000
• Buy for $500,000
• Pay tax on $100,000 gain

Solution: Buy equal or higher value, or buy multiple properties totaling sufficient value.

7. Poor QI Selection

QIs aren't regulated in most states. Bad QIs have stolen client funds or gone bankrupt.

Due diligence:

• Check how long in business (10+ years preferred)
• Verify separate accounts for client funds
• Confirm fidelity bond and errors & omissions insurance
• Read reviews and check BBB
• Ask for CPA/attorney references

Major QI companies:

• IPX1031
• Asset Preservation Inc
• Accruit
• Investment Property Exchange Services

1031 Exchange Strategy: Building Wealth

The Forever 1031 Strategy

Keep exchanging until death. Your heirs inherit with stepped-up basis—taxes permanently avoided.

Example:

• 1990: Buy duplex for $100,000
• 2000: 1031 into 4-plex worth $250,000
• 2010: 1031 into small apartment, worth $600,000
• 2020: 1031 into larger apartments, worth $1.5M
• 2030: You die, heirs inherit at $2.5M stepped-up basis

Deferred tax: $600,000+ in capital gains never paid.

Your heirs: Inherit $2.5M property with $2.5M basis—no built-in tax liability.

The Consolidation Strategy

Trade multiple small properties for one larger property.

Why:

• Easier management (one property vs. five)
• Better financing terms
• Institutional-grade properties
• Professional management

Example:

• Sell three SFRs: $400,000 + $450,000 + $380,000 = $1.23M
• Buy 20-unit apartment building: $1.3M

The Diversification Strategy

Trade one large property for multiple smaller ones or DST interests.

Why:

• Geographic diversification
• Property type diversification
• Estate planning (easier to divide among heirs)
• Risk mitigation

Example:

• Sell small shopping center: $2M
• Buy: $800k apartments in Phoenix + $700k medical office in Charlotte + $500k DST

The Step-Up in Depreciation

Sell fully depreciated property, buy new property, restart depreciation.

Example:

Old property:

• Owned 30 years
• Fully depreciated (no more deductions)

1031 into new property:

• Purchase price: $1M
• Depreciable basis: $800,000 (excluding land)
• New annual depreciation: $29,090

Restart the tax shelter while deferring gains from old property.

1031 Exchanges and Estate Planning

1031 exchanges are powerful estate planning tools:

Stepped-Up Basis at Death

Your heirs inherit at fair market value, eliminating deferred gains.

Your basis: $100,000 (after decades of depreciation) Value at death: $1.5M Deferred gains: $1.4M

Your heirs' basis: $1.5M (no tax on that $1.4M gain)

Simplification Before Death

In later years, 1031 into DSTs or triple-net-lease properties:

• No management burden
• Easy to value
• Simple to divide among heirs
• Predictable income

Avoiding Probate

Hold property in LLC or trust, making transfer to heirs cleaner.

Cost-Benefit Analysis: Is 1031 Worth It?

Costs:

• QI fees: $800-1,500
• Legal/accounting: $500-2,000
• Extra title/escrow costs: $500-1,000
• Time and stress: Significant

Total cost: $2,000-4,500+

Benefits:

Example:

• Capital gain: $300,000
• Federal tax (20%): $60,000
• State tax (varies): $15,000
• Depreciation recapture (25%): $20,000
• Net Investment Income Tax (3.8%): $11,400
• Total tax bill: $106,400

1031 exchange cost: $3,000 Tax deferred: $106,400 Net benefit: $103,400

Break-even: Any gain over about $20,000 makes 1031 worthwhile.

Alternatives to 1031 Exchange

Section 121 Exclusion (Primary Residence)

• Exclude $250,000 gain ($500,000 married) when selling primary residence
• Must live there 2 of last 5 years
• Can use once every 2 years
• Can combine with 1031 if property was rental first

Opportunity Zones

• Invest capital gains in Qualified Opportunity Funds
• Defer gains until 2026 or sale
• Hold 10 years, pay zero tax on OZ investment gains
• Different strategy than 1031 but worth considering

Installment Sale

• Seller finances, spread gains over years
• Pays tax as principal received
• Different from 1031 but can reduce annual tax hit

Just Pay the Tax

Sometimes paying tax makes sense:

• Small gain
• Need cash for other investment/purpose
• Can't find suitable replacement
• Simplification

Run the numbers. If you're paying 20% on $50,000 gain, that's $10,000. Maybe it's worth it for peace of mind.

State-Specific 1031 Considerations

Some states don't recognize 1031:

• Currently, most states follow federal rules
• But verify with local CPA

Clawback states: Some states tax the gain if you move states after 1031, then sell. Consult CPA if you might relocate.

1031 Exchange Checklist

Before listing property:

• Consult CPA about 1031 feasibility
• Research and hire qualified intermediary
• Sign exchange agreement before closing
• Notify closing agent of 1031 intent

Before sale closing:

• QI agreement signed
• Closing documents reference exchange
• Proceeds will go to QI, not to you

Within 45 days of closing:

• Identify 1-3 replacement properties in writing
• Send to QI via certified mail or documented email
• Keep proof of timely identification

Within 180 days of closing:

• Close on replacement property
• Ensure equal or greater value and debt
• All proceeds reinvested (no boot)
• Title taken in same name as relinquished property

At tax time:

• File Form 8824 (Like-Kind Exchanges) with tax return
• Work with CPA familiar with 1031 exchanges
• Document all exchange-related expenses

The Bottom Line

1031 exchanges are one of the most powerful wealth-building tools in real estate. Deferring taxes lets you keep hundreds of thousands working for you instead of going to the IRS.

Key rules:

• Like-kind real estate only
• Equal or greater value
• Use qualified intermediary
• 45 days to identify
• 180 days to close
• Don't touch the money

Best for:

• Investment property with significant gains
• Investors planning to hold long-term
• Building wealth through multiple exchanges
• Estate planning (step-up basis at death)

Watch out for:

• Tight deadlines (45/180 days)
• Boot (cash or mortgage boot triggers tax)
• Property qualification issues
• QI selection (verify reputation)

In 2026's market, with many investors sitting on huge gains from 2020-2024 appreciation, 1031 exchanges are more relevant than ever. If you're selling investment property, run the 1031 numbers. The tax savings usually far exceed the hassle.

Work with experienced professionals: CPA who specializes in real estate, [real estate attorney](/blog/how-to-build-real-estate-team), and reputable QI. The cost of expert help is tiny compared to the tax you'll save—or the disaster you'll avoid if you mess up the exchange.

Related Articles

• 1031 Exchange for Beginners: Complete Guide to Deferring Capital Gains Taxes
• 1031 Exchange: Defer Taxes, Build Wealth Faster
• [[Rental [Property Depreciation](/blog/rental-property-tax-deductions)](/blog/depreciation-real-estate-guide) Guide: How to Maximize Your Tax Deductions in 2026](/blog/depreciation-rental-property-guide)