1031 Exchange Rules 2026: The Complete Guide

A 1031 exchange lets you defer — potentially forever — the capital gains tax you'd owe when selling an investment property. Done right, it's one of the most powerful tax-deferral tools in real estate. Done wrong, the IRS disqualifies the entire exchange and the tax bill arrives anyway. Here's how it actually works.

Use the 1031 Exchange Calculator to see your specific tax-deferral estimate before reading further.

What a 1031 exchange is (and isn't)

IRC § 1031 allows a real estate investor to sell one investment property and buy another — while deferring the capital gains tax on the sale — as long as the proceeds flow through a qualified intermediary and certain timing rules are met.¹

It's a deferral, not a permanent elimination. When you eventually sell the replacement property without doing another 1031, the deferred gain from all prior exchanges becomes taxable. The exception: if you hold the property until death, your heirs receive a stepped-up cost basis and the deferred gain disappears entirely under current law.

What it's not: A swap, a barter, or a simultaneous exchange. The law was originally structured as a direct swap, but the Starker decision (upheld by Congress in 1984) established the deferred exchange structure used today — sell first, buy replacement later, within defined time limits.

What the tax deferral is actually worth

Before getting into mechanics, it helps to know what you're protecting. When you sell an appreciated investment property, your tax exposure has three components:

1. Long-term capital gains tax. For 2026: 0% on taxable income up to $49,450 (single) or $98,900 (MFJ); 15% in the middle range; 20% above $549,900 (single) or $613,700 (MFJ).²
2. Unrecaptured §1250 depreciation. All depreciation you've taken on the property is recaptured at a maximum 25% rate — regardless of your income level.³
3. Net Investment Income Tax (NIIT). 3.8% on net investment income if your modified AGI exceeds $200,000 (single) or $250,000 (MFJ). Not inflation-adjusted.⁴

The mechanics: how a 1031 exchange works

Step 1: Engage a qualified intermediary before closing

A qualified intermediary (QI) — also called an exchange accommodator — is a third party who holds the sale proceeds between the sale of the relinquished property and the purchase of the replacement property. You cannot touch the money. The moment you receive the proceeds — even briefly — the IRS treats it as constructive receipt, and the exchange fails.¹

The QI must be engaged before the relinquished property closes. You cannot sign a sales contract and then decide to do a 1031 — the QI assignment must happen first. Most real estate attorneys and title companies can refer you to a qualified intermediary; use one your advisors have vetted, since the proceeds sit with them.

Step 2: Sell the relinquished property

The relinquished property must be held for productive use in a trade or business, or for investment — not for sale. The clock starts ticking the day the relinquished property closes.

Step 3: Identify replacement property within 45 days

You have exactly 45 calendar days from the close of the relinquished property to identify potential replacement properties in writing to your QI.⁵ This deadline is absolute. IRS grants no extensions except in presidentially declared disasters.

Identification rules. You can identify replacement properties under one of three rules:

• Three-Property Rule: Identify up to 3 properties regardless of their fair market value. Most common.
• 200% Rule: Identify any number of properties as long as their combined fair market value doesn't exceed 200% of the relinquished property's value.
• 95% Rule: Identify any number of properties, but you must actually close on 95% of the identified value. Rarely used; extremely hard to satisfy.

Identification must be specific — a street address or legal description. "A commercial property in Phoenix" doesn't satisfy the requirement.

Step 4: Close on replacement property within 180 days

You must close on the replacement property within 180 calendar days of the relinquished property's close — or by your tax return due date (including extensions), whichever is earlier.⁵

The "whichever is earlier" piece catches people. If you close the relinquished property in October and don't file an extension, your 180-day window gets cut short by April 15. Always file an extension when doing a late-year 1031.

What qualifies as like-kind property

Since the Tax Cuts and Jobs Act of 2017, "like-kind" for IRC § 1031 means real property exchanged for real property held for investment or business use.⁶ Personal property — equipment, art, vehicles, aircraft — no longer qualifies.

Within real property, "like-kind" is interpreted broadly. You can exchange:

• A single-family rental for a commercial warehouse
• A strip mall for an apartment complex
• Raw land for an office building
• Your interest in a multifamily property for a Delaware Statutory Trust interest

What you cannot exchange into: your primary residence, a vacation home you use personally more than 14 days per year, or property held primarily for sale (house flips). Property you convert from personal use to rental use may qualify — the IRS requires "held for investment" at the time of exchange, which courts have interpreted flexibly, but generally the longer you've held it as a rental, the stronger the position.

Boot: when taxes come due anyway

Boot is the taxable portion of an exchange — money or property value you receive that isn't the replacement property. Three common ways boot gets triggered:

1. Cash boot. You receive cash at closing — perhaps because the replacement property cost less than the relinquished property's sale price. Taxable immediately.
2. Mortgage boot. You have a $400K mortgage on the relinquished property but only a $250K mortgage on the replacement. The $150K reduction in debt is treated as cash boot. This surprises many investors.
3. Non-like-kind property received. Personal property received as part of a transaction.

Taxable gain = lesser of (a) realized gain or (b) boot received. If you took $80K of depreciation and received $50K of cash boot, you're taxed on $50K — first as §1250 recapture, then as capital gain if there's remainder. Your QI should walk through the exact calculation before closing.

Delaware Statutory Trusts (DSTs)

A Delaware Statutory Trust is a real estate ownership structure where multiple investors hold fractional beneficial interests in a property (often institutional-grade commercial real estate — NNN retail, apartment complexes, industrial). The IRS ruled in Revenue Ruling 2004-86 that DST interests qualify as like-kind replacement property for 1031 purposes.⁷

DSTs are useful when:

• You need to deploy proceeds quickly and can't identify a direct replacement in time
• Your sale amount is too small to buy a diversified replacement property outright
• You want passive income without landlord responsibilities
• You're approaching retirement and want institutional management without an active portfolio

Reverse exchanges

In a standard exchange, you sell first, then buy. In a reverse exchange, you acquire the replacement property first — before selling the relinquished property. This is useful when you find the perfect replacement but haven't sold yet, or when market conditions favor buying before selling.

Reverse exchanges are governed by Rev. Proc. 2000-37 and require an Exchange Accommodation Titleholder (EAT) — a related entity that holds title to either the relinquished or replacement property during the exchange period. The 45/180-day windows still apply, starting from the EAT's acquisition date. Reverse exchanges are significantly more complex and expensive than standard exchanges; budget $3,000–$8,000+ in QI/EAT fees.

Build-to-suit exchanges

If you want to build improvements on the replacement property as part of the exchange, a construction (build-to-suit) exchange lets you do it. The EAT holds title while construction occurs; you identify the improved property as your replacement. The full exchange value — including improvements — must be completed and transferred to you within the 180-day window. Construction must be done by day 180 or the unimproved value is what counts.

Related party rules

If you exchange with a related party (family member, entity you control), the IRS requires that both parties hold their properties for at least 2 years after the exchange.¹ Either party selling within 2 years triggers the deferred gain. These rules exist to prevent basis laundering through controlled transactions.

When a 1031 might not be the right move

The 1031 instinct is usually right, but not always. Situations where paying the tax now might be better:

• You're in a low tax bracket this year. If your LTCG rate is 0% due to low income, there's little to defer. Harvesting the gain tax-free and getting a fresh basis may beat deferring into a year when rates could be higher.
• You can offset with passive loss carryforwards. If you've been accumulating suspended passive activity losses (from rental properties where you don't qualify for REPS), a sale triggers the release of those carryforwards — they can offset the gain dollar-for-dollar. Check your REPS status here.
• The replacement property is a bad deal. Never buy a bad property just to complete a 1031. A $150K tax bill is better than a $300K loss on a forced acquisition. The discipline test for 1031 exchanges: would you buy this replacement property if you weren't doing an exchange?
• You want to diversify out of real estate entirely. A 1031 locks you into real property. Qualified Opportunity Zone funds offer deferral and potential elimination — but require deploying into an OZ (not every market has one). Installment sales offer another deferral structure worth modeling.
• Estate planning angle. If you're in your 70s or older, holding appreciated real estate for stepped-up basis at death may outperform a 1031 into a replacement property you'll have to manage. Run the numbers with an advisor.

The advisor's role in a 1031

A 1031 exchange touches tax, real estate, estate planning, and sometimes securities (DSTs). It rarely fits neatly in one advisor's lane. What a fee-only advisor who works with real estate investors can do:

• Model the tax deferral vs. paying now — sometimes the numbers surprise you
• Analyze boot exposure before you sign on a replacement property
• Integrate the exchange into your broader estate plan (basis step-up vs. perpetual deferral)
• Coordinate with your CPA and QI to make sure the mechanics are lined up
• Evaluate DSTs vs. direct replacement based on your income goals and timeline
• Flag passive activity loss carryforward opportunities that interact with the sale

Generalist advisors typically model 1031s as a binary — do it or don't. Specialists model the cascade: what happens at each subsequent exchange, what the step-up looks like at death, and how it integrates with your full portfolio.

Sources

1. IRC § 1031, 26 U.S.C. § 1031 (LII/Cornell) — like-kind exchange requirements, related party rules, QI constructive receipt rules
2. IRS Rev. Proc. 2025-32, 2026 inflation adjustments — long-term capital gains rate thresholds: 0% at $49,450/$98,900 (single/MFJ); 20% at $549,900/$613,700 (single/MFJ). Also Kiplinger 2026 capital gains thresholds.
3. IRC § 1(h)(1)(D) and § 1250 — unrecaptured §1250 depreciation taxed at maximum 25% rate. IRS Topic 409.
4. IRC § 1411 — Net Investment Income Tax, 3.8% above $200K/$250K MAGI, not inflation-adjusted. IRS NIIT overview.
5. Treas. Reg. § 1.1031(k)-1 — 45-day identification and 180-day exchange period. IPX1031 exchange timeline.
6. Tax Cuts and Jobs Act of 2017, Pub. L. 115-97, § 13303 — restricted § 1031 to real property only, effective January 1, 2018.
7. Rev. Rul. 2004-86 — IRS ruling that DST beneficial interests qualify as like-kind replacement property under § 1031.

Tax values verified as of April 2026. IRC § 1031 exchange mechanics are governed by statute and Treasury regulations; consult a qualified intermediary and tax advisor before initiating an exchange.