1031 Exchange Basics for Rental Owners
Four rules decide if your swap defers the tax: like-kind, 45 days, 180 days, and boot.
How we made this guide: AI agents drafted it from our own tests and the sources listed at the end. Taras Kornichuk checked every claim and edited the text.
Contents
What is a 1031 exchange?
A 1031 exchange is a trade of one investment property for another that defers the tax on your gain. The name comes from section 1031 of the Internal Revenue Code.
The IRS page on like-kind exchanges states the core rule. If you exchange real property used for business or held as an investment only for other like-kind property, you generally do not recognize a gain or loss. The tax does not go away. It moves into the new property, and you may owe it when you sell that one.
Since January 1, 2018, section 1031 covers only real property. The Tax Cuts and Jobs Act removed personal and intangible property, such as equipment, vehicles and artwork (IRS).
What does not qualify:
- Your main home. It is not held for business or investment.
- Property held mainly for sale. The IRS excludes it. A house you buy to fix and flip is the common case.
- Foreign property for US property. The Form 8824 instructions say these are not like-kind.
This is general information, not tax advice. Check the current law or ask a tax professional.
What property qualifies as like-kind?
Like-kind means the same nature or character, not the same quality or use. The IRS Form 8824 instructions say real properties are generally like-kind, whether they are improved or unimproved.
So a rental owner has wide choice. These swaps can qualify:
| You give up | You receive | Like-kind? |
|---|---|---|
| Single-family rental | Fourplex | Yes, both are real property held for investment |
| Duplex | Vacant land held for investment | Yes, improved and unimproved both count |
| Rental condo | Small retail building | Yes, if both are held for business or investment |
| Rental house in Ohio | Rental house in Mexico | No, US and foreign property are not like-kind |
| Rental house | Your new main home | No, a main home is personal use |
| Rental house | Shares in a REIT | No, stock in a company is not the same real property |
Watch for: related parties. The Form 8824 instructions list special rules for an exchange with your spouse, child, grandchild, parent, grandparent, brother, sister, or a related company. If the related party or you sell the property within 2 years after the exchange, the deferred gain can become taxable that year.
What are the 45-day and 180-day deadlines?
The 45-day and 180-day deadlines are the two clocks in a delayed exchange. Both start on the day you transfer the property you give up.
The Form 8824 instructions set them out:
- Day 0. You close the sale of your old rental.
- By day 45. You identify the replacement property in writing. Pub 544 says to describe it clearly, for example with the legal description or street address.
- By day 180, or your tax return due date if earlier. You receive the replacement property.
The “whichever is earlier” part catches owners. Say you sell on December 1. Day 180 falls at the end of May. But your federal return is due April 15. Unless you file an extension, the exchange window closes on April 15.
Worked timeline, with an example sale date:
| Event | Date |
|---|---|
| Sale of old rental closes | 2026-03-02 |
| Day 45: identification due | 2026-04-16 |
| Day 180: replacement must close | 2026-08-29 |
| 2026 return due date (with extension) | 2027-10-15 |
| Deadline that applies | 2026-08-29 (the earlier date) |
The clocks do not stop for weekends or a slow lender. Many owners line up candidate properties before they list the old one.
What is a qualified intermediary?
A qualified intermediary (QI) is the party that holds the exchange money so you never touch it. IRS Pub 544 defines a QI as a person who is not a disqualified person and who signs a written exchange agreement with you.
Under that agreement, the QI:
- Acquires the property you give up.
- Transfers that property to the buyer.
- Acquires the replacement property.
- Transfers the replacement property to you.
Why the QI matters: if you receive the sale cash, the deal can turn into a taxable sale. Pub 544 lists the QI exchange as one of the safe harbors for a delayed exchange.
Your own agent cannot serve as a QI in most cases. Pub 544 calls such a person a disqualified person. The Form 8824 instructions add a risk: if the QI fails to meet the timing rules, your transaction may not qualify, and the gain may be taxable.
Questions to ask a QI before you sign:
- Where will the money sit? Ask for a separate account in your name or a qualified escrow.
- What insurance or bond covers the funds?
- What does the QI charge, and when?
- Who checks the 45-day notice?
What is boot?
Boot is any money or other property that is not like-kind. The IRS says that if you receive boot as part of the exchange, you must recognize gain to the extent of the boot.
Boot shows up in three common ways:
- Cash back at closing. You sell for more than you reinvest and keep the difference.
- Less debt on the new property. Pub 544 treats a liability the other party takes over from you as money you received, in many cases.
- Non-real property. Furniture or a car thrown into the deal.
Worked example, with made-up numbers:
| Line | Amount |
|---|---|
| Sale price of old rental | $400,000 |
| Adjusted basis of old rental | $250,000 |
| Realized gain | $150,000 |
| Price of replacement rental | $370,000 |
| Cash you keep (boot) | $30,000 |
| Gain taxed now | $30,000 (the boot, because it is less than the gain) |
| Gain deferred | $120,000 |
A loss works differently. The IRS says you cannot recognize a loss in a like-kind exchange, even when boot is part of the deal.
How do you report a 1031 exchange?
You report a like-kind exchange on IRS Form 8824. The instructions say to file it for the year you transfer property in the exchange.
The form asks for the dates you gave up the old property, identified the new one and received it. It also computes boot, gain recognized and the basis of the new property.
If the exchange was with a related party, you file Form 8824 for the next 2 years too.
Before you start: a 1031 checklist
- Confirm both properties are investment property, not a home or a flip.
- Pick a QI before you close the sale. The agreement must exist before the transfer.
- Put the 45-day and 180-day dates on a calendar, and check your tax return due date.
- Compare debt on the old and new property. Less debt can create boot.
- Track depreciation. The deferred gain includes past depreciation. See /guides for related owner guides.
- Talk to a tax professional. State tax rules on exchanges can differ from federal rules.
If you sell a rental and buy a bigger one, management costs change too. Run the new numbers with our property management fee calculator.
This is general information, not tax advice. Check the current law or ask a tax professional.
Questions
What is a 1031 exchange?
A 1031 exchange is a swap of real property held for business or investment for other like-kind real property. Under Internal Revenue Code section 1031, you do not recognize the gain at the time of the swap, so the tax is deferred.
What are the 1031 exchange deadlines?
You must identify the replacement property within 45 days after you transfer the property you give up. You must receive it within 180 days, or by the due date of your tax return with extensions, whichever is earlier.
Can I do a 1031 exchange on my home?
No. Section 1031 covers real property held for business or investment. Your main home is personal use. A home sale may qualify for the separate section 121 exclusion instead.
What is boot in a 1031 exchange?
Boot is money or other property that is not like-kind. Per the IRS, you must recognize gain to the extent of the boot you receive, so boot is taxable up to the amount of your gain.
Do I need a qualified intermediary?
For a delayed exchange, most owners use a qualified intermediary (QI). The QI holds the sale money under a written agreement so you never receive it. IRS Pub 544 treats the QI exchange as a safe harbor.
Can I exchange a rental house for an apartment building?
Yes, in most cases. The Form 8824 instructions say real properties are generally like-kind, whether improved or unimproved. US property and foreign property are not like-kind.
