1031 Exchange FAQ

A 1031 exchange (named after Section 1031 of the IRS tax code) lets you sell an investment property and defer capital gains and depreciation recapture taxes — if you reinvest the proceeds into another 'like-kind' investment property within 180 days. The tax isn't forgiven; it's deferred until you sell the replacement property without doing another exchange. Most investors chain exchanges together for decades to compound tax-deferred wealth.

The 45-day identification period: You must identify up to 3 potential replacement properties (or more, under the 200% rule) within 45 calendar days of the sale of your relinquished property. The 180-day closing period: You must close on one or more of the identified properties within 180 days of the relinquished sale. Both clocks start on the day you close the sale. These deadlines are absolute — even falling on weekends or holidays doesn't extend them.

Yes. You cannot take 'constructive receipt' of the sale proceeds at any point, or the exchange is disqualified. A qualified intermediary (QI), also called an accommodator or facilitator, is a neutral third party that holds the proceeds in an escrow account, prepares exchange documents, and releases funds to purchase the replacement property. The QI must be engaged before you close on the sale of your original property.

For real estate, 'like-kind' is interpreted broadly. Almost any US-located investment real estate qualifies as like-kind to any other US-located investment real estate. You can exchange a rental house for an NNN property, raw land for a strip mall, or an apartment building for a car wash. What you cannot do: exchange US property for foreign property, exchange your primary residence, or exchange real estate for personal property (that loophole closed in 2017).

No. 1031 exchanges are for investment or business-use property only. Your primary residence is governed by a different (and also very favorable) tax rule — Section 121, the primary residence exclusion, which allows up to $250K ($500K married) of gain tax-free if you lived there 2 of the last 5 years. The two rules are completely separate.

Standard forward exchanges typically run $800–$1,500 in QI fees. Reverse exchanges (where you acquire replacement property before selling) run $4,000–$10,000+ because they're structurally more complex. Improvement exchanges (where you use exchange funds to build on the replacement property) are similarly complex. These fees are small relative to the tax savings — on a $1M gain at a 25% effective rate, a 1031 exchange saves $250K in current taxes.

By default, you can identify up to 3 replacement properties of any value. Under the 200% rule, you can identify more than 3 properties as long as their combined fair market value doesn't exceed 200% of the value of the relinquished property. Under the 95% rule, you can identify even more properties if you close on at least 95% of their combined value. Most investors just use the 3-property default.

Yes. DSTs are IRS-approved 1031 replacement property structures — fractional interests in institutional-quality real estate. DSTs are popular with investors who have exchange funds but can't find the right direct property within 45 days, or who want truly passive ownership. Minimum investments typically start at $100K. DSTs have tradeoffs (less control, lower returns, longer hold periods) so evaluate carefully.

If you miss the 180-day deadline, the exchange fails and you owe full capital gains tax and depreciation recapture on the original sale in the current tax year. There are no extensions for weekends, holidays, or acts of God (with very limited exceptions for federally-declared disaster areas). This is why identifying multiple qualified replacement properties and starting due diligence early is critical.

Florida follows federal 1031 rules without additional state-level complications — there's no Florida state income tax on capital gains, so the exchange is effectively a pure federal tax deferral tool. Florida is also highly attractive as a destination for exchange funds because of the population growth, no state income tax, and strong commercial real estate performance. Many out-of-state investors exchange into Florida properties specifically for these reasons.