Selling an appreciated investment property triggers tax on the gain plus recapture of depreciation. A like-kind exchange defers both, provided you reinvest the proceeds into replacement real property within strict timeframes and never take possession of the money.
The mechanism is well established and the execution requirements are unforgiving. Most failed exchanges fail on process rather than on eligibility.
What changed in 2026
- Real property only remained the rule. Personal property exchanges stayed unavailable, which removed equipment and vehicle exchanges permanently.
- Reverse exchange structures stayed available and complex. Acquiring replacement property before selling remained possible through specific arrangements.
- Intermediary due diligence got more attention. The risk of an intermediary failing while holding proceeds became better recognised.
- The deadlines stayed rigid. No general relief mechanism emerged for missed timeframes.
The two deadlines
Both run from the date you close the sale of the relinquished property, and both are firm.
45 days to identify replacement property, in writing, meeting specific identification rules — commonly identifying up to three properties without value restriction, or more under value-based tests.
180 days to close on replacement property, or the due date of your tax return for that year including extensions, whichever comes first.
That second clause catches people selling late in the year: without extending the return, the 180 days can be truncated.
The deadlines do not pause for financing problems, failed inspections, or a seller withdrawing. The identification period in particular is short, which is why serious exchangers begin looking for replacement property before selling.
| Milestone |
Deadline |
| Sale closes |
Day 0 |
| Identify replacement in writing |
Day 45 |
| Close on replacement |
Day 180, or return due date |
You cannot touch the money
The requirement that most often invalidates an exchange.
If you receive the sale proceeds — even briefly, even into an account you control — the exchange fails and the gain is recognised. A qualified intermediary must hold the funds between the sale and the purchase.
The intermediary must be engaged before the sale closes. Arranging one afterwards does not work, because you have already had constructive receipt.
This makes intermediary selection consequential. They hold substantial funds, they are not subject to the regulation banks are, and intermediary failures have caused real losses. Checking their bonding, insurance, and how funds are held is worth doing before rather than after.
What carries forward
The gain is deferred, not eliminated. It carries into the replacement property as a reduced basis.
Two consequences follow.
Depreciation on the new property is lower, because it is based on the carried-over basis rather than on what you paid. So an exchange reduces your ongoing deductions relative to buying outright — a real cost that is frequently omitted from the comparison.
Depreciation recapture carries forward too. The recapture you deferred is still there, attached to the new property, and it arrives on an eventual taxable sale — see depreciation recapture.
Receiving anything other than like-kind property — cash, debt relief, other assets — is "boot" and is taxable to that extent. Reducing your mortgage in the exchange counts, which surprises people who fully replaced the property value but reduced the debt.
Suspended passive losses also do not release, because an exchange is not a fully taxable disposition — see passive activity losses.
Common mistakes
- Engaging an intermediary after closing. Too late; the exchange fails.
- Missing the 45-day identification. No extension available.
- Selling late in the year without extending the return. Truncates the 180 days.
- Reducing debt without adding cash. Debt relief is boot.
- Attempting to exchange personal property. No longer eligible.
- Not checking the intermediary's safeguards. They hold your proceeds.
- Ignoring the reduced depreciation. A real ongoing cost of deferral.
FAQ
Can I exchange into a different type of real property?
Real property is broadly like-kind to other real property, so exchanging an apartment building for land or commercial premises is generally permitted. Both must be held for investment or business use.
What about a property I want to live in eventually?
Converting exchanged property to personal use has specific rules and holding period expectations. Doing so too quickly invites challenge.
Is it worth it for a small gain?
Frequently not. The constraints — deadlines, intermediary costs, reduced future depreciation, and being forced to buy within a window — can outweigh a modest deferral. Paying the tax and buying freely is sometimes the better answer.
What if I cannot find replacement property?
The exchange fails and the gain is recognised in the year of sale. That is why identifying candidates before selling matters so much.
Where to go next
For what the deferral is postponing, read depreciation recapture. For the alternative spreading approach, installment sales, and for the losses an exchange does not release, passive activity losses.
This is general information, not tax advice. Exchange requirements are strict and failures are expensive; work with qualified professionals.