A 1031 exchange, named for the tax code section that authorizes it, lets an investor defer capital gains tax on the sale of investment or business real estate by rolling the proceeds into a new "like-kind" property. It is one of the more powerful tools available to real estate investors, and also one of the easiest to disqualify through a missed deadline or a technical misstep.
What changed in 2026
- The rules apply to real property only, following the tax law change years ago that removed personal property like equipment and vehicles from eligibility — this remains worth double-checking if you learned about 1031 exchanges before that change.
- State-level treatment varies, and some states do not fully conform to federal deferral treatment, so check your state's specific rules before assuming full deferral everywhere.
- Qualified intermediary requirements continue to be scrutinized closely, since using the wrong structure or touching proceeds directly remains the most common way exchanges fail.
How the deferral actually works
When you sell an investment property at a gain, you would normally owe capital gains tax on the profit that year. A 1031 exchange lets you defer that tax by reinvesting the proceeds into a new like-kind property, carrying your original cost basis forward. The tax is not forgiven — it is postponed until you eventually sell without doing another exchange, or in some cases eliminated for heirs through a stepped-up basis at death, though that outcome depends on estate rules you should verify separately.
The two critical deadlines
- 45 days to identify replacement property — starting the day the relinquished property closes, you must formally identify potential replacement properties in writing.
- 180 days to close — the purchase of the replacement property must close within 180 days of the original sale, and this window runs concurrently with, not after, the 45-day identification period.
There is essentially no flexibility on these deadlines outside a small number of federally declared disaster extensions, so plan the entire exchange timeline before you list the property being sold.
| Requirement |
Deadline or rule |
Consequence if missed |
| Identify replacement property |
45 days from sale closing |
Exchange fails, gain becomes taxable |
| Close on replacement property |
180 days from sale closing |
Exchange fails, gain becomes taxable |
| Use a qualified intermediary |
Set up before the original sale closes |
Touching proceeds directly disqualifies the exchange |
| Like-kind property |
Real property held for investment or business use |
Personal residences and most personal property do not qualify |
What counts as like-kind
For real estate, "like-kind" is interpreted broadly — a rental apartment building can be exchanged for raw land held for investment, for example, as long as both properties are held for investment or business use rather than personal use. A primary residence generally does not qualify, and vacation homes face additional rules about how much personal use versus rental use they had before the exchange, similar in spirit to the careful documentation buyers should keep for closing costs on any real estate transaction.
FAQ
Can I do a 1031 exchange on my primary residence?
No, primary residences generally do not qualify. Separate tax provisions apply to primary residence sales instead.
What happens if I cannot find a replacement property in 45 days?
The exchange fails, and the sale becomes a normal taxable transaction. This is why lining up potential replacement properties before selling matters.
Do I need a lawyer or just a qualified intermediary?
A qualified intermediary is required to hold proceeds and handle the exchange mechanics, but many investors also involve a tax professional or attorney given the stakes involved.
Is a 1031 exchange the same as avoiding tax entirely?
No, it defers tax rather than eliminating it, unless the property passes to heirs later with a stepped-up basis. This article is general information, not financial, legal, or tax advice — consult a qualified professional before attempting an exchange.
Where to go next
Related reading: Seller concessions explained, Closing costs explained, and Irrevocable vs revocable trust.