Overview

Like‑kind (1031) exchanges remain a powerful tax‑deferral tool for U.S. real estate investors in 2025. The rules let you defer capital gains tax when you swap qualifying investment or business property for another qualifying property, not when you sell for cash and reinvest. Key IRS guidance includes Topic 409 and Form 8824 instructions (see IRS Topic 409: Like‑Kind Exchanges and Form 8824: Reporting a 1031 Exchange).

Key rules and terms

  • Eligible property: Only real property held for investment or used in a trade or business qualifies after the 2018 tax changes—the exchange of most personal property is no longer allowed (Tax Cuts and Jobs Act). Owner‑occupied primary residences do not qualify. (IRS Topic 409)
  • Like‑kind standard: For real estate, the standard is broad—most real property in the U.S. is considered like‑kind to other real property when held for investment (e.g., an office building for an apartment complex).
  • Timelines: You must identify replacement property within 45 days of transferring the relinquished property and complete the exchange within 180 days (calendar days) or by the due date of your tax return, including extensions, whichever is earlier (IRC §1031 enforcement practice; IRS guidance).
  • Qualified intermediary (QI): To maintain deferral, the proceeds must not be received by the exchanger. A QI holds funds and documents during the exchange. Using an experienced QI is essential—see our guide on Qualified Intermediary in a 1031 Exchange.
  • Boot and recognized gain: Cash or non‑qualifying property received in the exchange (“boot”) triggers recognition of some gain. Boot reduces the tax‑deferred basis carryover.
  • Basis after exchange: Your basis in the replacement property is generally the carryover basis from the relinquished property, adjusted for gain recognized and any boot received.
  • Related‑party and holding‑period rules: Special rules apply to exchanges with related parties; IRS may require a longer holding period (commonly two years) to prevent tax avoidance.

Common exchange types

  • Simultaneous exchange: Old and new deeds transfer on the same day.
  • Delayed exchange: Most common—relinquished property is sold first; identify and purchase replacement property within the 45/180 windows.
  • Reverse exchange: You acquire replacement property first and park it with an exchange accommodation titleholder; useful when a desirable replacement is available before a sale—see our Reverse 1031 Exchange article.
  • Improvement (construction) exchange: Allows funds to be used to improve replacement property during the exchange period when structured properly.

Practical example (realistic illustration)

A client sold a rental building for $500,000 with an adjusted basis of $200,000 (unrealized gain $300,000). By using a delayed 1031 exchange and buying a $700,000 apartment building, the client deferred the $300,000 gain. If the client had taken $50,000 cash back (boot), that $50,000 would be taxable in the year of exchange and reduce the deferred basis accordingly.

Common mistakes and how to avoid them

  • Missing the 45‑day identification window or misidentifying properties—strict and non‑extendable.
  • Handling sale proceeds directly—works against deferral. Use a reputable QI.
  • Treating property held primarily for resale (inventory) as eligible—inventory is not qualifying property.
  • Overlooking reporting requirements: you must file IRS Form 8824 with your tax return for the year of the exchange.

Reporting and documentation

  • File Form 8824 (like‑kind exchanges) for the year you transfer the relinquished property (IRS Form 8824). Keep detailed closing statements, the QI agreement, identification notices, and exchange correspondence.
  • Retain records for several years—basis calculations and holding‑period proofs can be audited.

Professional tips

  • Plan early: Identify potential replacement properties before marketing the relinquished asset to avoid rushed decisions.
  • Coordinate financing: Loan timing and assumptions can complicate exchanges—discuss debt allocation with your QI and lender.
  • Consider alternatives: If a 1031 exchange doesn’t fit your goals, explore installment sales, opportunity zones, or other tax strategies (see our Tax Strategies for Real Estate Investors guide).

Internal resources

Authoritative sources

Disclaimer

This article is educational and not individualized tax, legal, or investment advice. For transaction‑specific guidance, consult a CPA, tax attorney, or qualified intermediary experienced with 1031 exchanges.