Swapping Investment Property Tax-Deferred: Section 1031
The deadlines, the intermediary, what counts as boot, and the mistakes that turn a tax-deferred swap into a taxable sale.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A Section 1031 exchange lets an owner sell business or investment real estate and buy replacement real estate without recognizing gain, as long as the proceeds go through a qualified intermediary, replacement property is identified within 45 days, and the purchase closes within 180 days. Gain is deferred, not forgiven: the old basis carries into the new property.
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What property qualifies?
Since 2018, only real property qualifies — land, buildings, rental houses, commercial property, and certain long-term leaseholds. Equipment, vehicles, and other personal property do not. Real property held for investment or used in a business qualifies; a primary residence, property held for sale by a dealer, and flips do not. Like-kind is broad for real estate: an apartment building can be exchanged for raw land or a warehouse.
What are the deadlines?
| Deadline | Rule |
|---|---|
| Day 0 | Closing of the relinquished property; proceeds go to the intermediary |
| Day 45 | Written identification of replacement property delivered to the intermediary |
| Day 180 | Closing on the replacement property — or the due date of the return, including extensions, if earlier |
Identification follows one of three rules: up to three properties of any value, any number of properties with total value up to 200 percent of what was sold, or any number if you acquire 95 percent of the identified value. The deadlines are calendar days with no extensions except for federally declared disasters.
What is boot?
Anything received other than like-kind property — cash left over, a reduction in mortgage debt not replaced by new debt or cash, or personal property. Boot is taxable up to the gain. To fully defer, buy property of equal or greater value, reinvest all equity, and replace the debt.
Who is a qualified intermediary?
An independent party that holds the sale proceeds and acquires the replacement property on your behalf. It cannot be you, a related party, or anyone who acted as your employee, attorney, accountant, broker, or real estate agent in the two years before the sale. Touching the proceeds yourself, even briefly, ends the exchange.
What other rules apply?
- Related-party exchanges require both parties to hold the properties for two years after the exchange, or the deferred gain is triggered, with limited exceptions such as death or an involuntary conversion.
- Reverse exchanges, where the replacement is bought first, use an exchange accommodation titleholder under IRS safe-harbor procedures.
- Vacation property qualifies under a safe harbor (Rev. Proc. 2008-16) requiring 24 months of ownership before (for the property sold) or after (for the property bought) the exchange, fair rental of at least 14 days in each 12-month period, and personal use of no more than the greater of 14 days or 10 percent of the days rented.
- Depreciation continues on the carried-over basis, with recapture tracked into the new property.
Frequently asked questions
Can I exchange into a property I already own?
No. Replacement property must be newly acquired.
Can I do a partial exchange?
Yes. The portion not reinvested is taxable boot; the rest is deferred.
What happens to deferred gain at death?
Heirs receive a stepped-up basis, and the deferred gain disappears — the reason some investors exchange repeatedly.
Is a 1031 exchange available for Canadian property?
Only property within the United States is like-kind to U.S. property; foreign property is like-kind only to other foreign property.
Official sources
The IRS explains: “Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.” — Internal Revenue Service, Like-kind exchanges - Real estate tax tips, https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips
The IRS explains: “Use Parts I, II, and III of Form 8824 to report each exchange of business or investment property for property of a like kind.” — Internal Revenue Service, About Form 8824, Like-Kind Exchanges, https://www.irs.gov/forms-pubs/about-form-8824
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk calculates boot and basis before the relinquished property closes, when it can still be fixed. See pricing or book a free fit call.
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