1031 Exchanges — A Landlord's Introduction

TL;DR: A 1031 like-kind exchange defers all federal capital gains tax (typically 15-20%) plus 25% depreciation recapture when you sell one rental and buy another. You have 45 days to identify a replacement and 180 days to close, both from the sale date. You must use a Qualified Intermediary from before the sale — you cannot touch the money. Miss any of these and the entire deferral is voided.

_Last reviewed: July 2026 · 6 min read_

If you're selling one rental to buy another and want to skip the capital gains tax, the honest answer is: the IRS Section 1031 like-kind exchange lets you defer the tax indefinitely — but the rules are strict, the deadlines are firm, and you MUST use a Qualified Intermediary from the start. DIY 1031 exchanges usually fail.

Okoniq Property Hub keeps records on both properties in one place so the exchange paperwork trail is clean.

What is a 1031 exchange?

Under Section 1031, you can defer capital gains tax on the sale of business or investment real estate by using the proceeds to buy "like-kind" replacement property. Instead of paying ~15-20% federal capital gains + 25% depreciation recapture + state tax at sale, you roll the entire basis into the new property. Tax is deferred until you eventually sell the replacement (or forever, if the property is held until death and heirs get stepped-up basis).

Since 2018, 1031 exchanges apply ONLY to real estate. Personal property (equipment, vehicles) no longer qualifies.

What counts as "like-kind"?

For real estate, "like-kind" is broad:

• Rental house → apartment building ✓
• Vacant land → strip mall ✓
• Single-family rental → office building ✓
• Rental in California → rental in Florida ✓
• Primary residence → rental ✗ (can't be your home)
• Rental → primary residence ✗ (must be replaced with investment property)

Both properties must be held for productive use in trade, business, or investment. See the IRS Like-Kind Exchange page.

What are the deadlines?

Two brutally strict deadlines:

45 days from the sale of the relinquished property to formally identify the replacement property/properties in writing.

180 days from the sale to close on the replacement property.

Both start on the day the relinquished property closes and both must be met — no extensions except in federally-declared disasters. Miss either deadline and the exchange collapses; the sale becomes fully taxable.

You can identify up to 3 potential replacements (regardless of value) OR any number as long as total value is ≤ 200% of the relinquished property's sale price.

What's a Qualified Intermediary?

A Qualified Intermediary (QI) — sometimes called an accommodator — is an independent third party who holds the sale proceeds between the two closings. You cannot touch the money during the exchange; if you do, the exchange is invalidated.

Typical QI fees: $800–$2,500 depending on complexity. Choose a well-established QI (bonded, insured, uses segregated accounts) — QI failures have cost taxpayers millions when smaller QIs went bankrupt holding client funds.

What is "boot" and why does it matter?

Boot is any non-like-kind property or cash you receive in the exchange. Common sources:

• Cash boot — you received cash from the sale that didn't go into the replacement
• Mortgage boot — the replacement's mortgage is smaller than the relinquished's (net debt reduction)
• Property boot — you traded down or received other assets

Boot is taxable in the year of exchange, even though the rest of the gain is deferred. Common goal: acquire replacement property that's equal to or greater than the relinquished (both in value AND in debt) to avoid boot entirely.

When does a 1031 exchange make sense?

A 1031 makes sense whenever you want to keep the money working in real estate rather than pay 25-40% of it to the IRS. Compare the three main exit strategies:

| Strategy | Federal tax at sale | Best when | |---|---:|---| | Simple sale | ~15-20% capital gains + 25% depreciation recapture + 3.8% NIIT (if AGI > $200k) | You need the cash out for non-real-estate goals | | 1031 exchange | $0 deferred indefinitely | You want a bigger, better, or geographically-different rental | | Hold until death | $0 forever (heirs get stepped-up basis) | You're 60+ and never plan to cash out |

Almost always use a 1031 if you're:

• Trading up to a bigger rental
• Diversifying (one rental → several)
• Relocating investment property to a different market
• Consolidating multiple properties into one

Might not make sense if:

• You want to cash out (defeats the purpose)
• You're near retirement and can use the stepped-up basis approach instead
• You've owned so long that recapture wipes out most gain and simple sale is cleaner

On a $400,000 gain, a successful 1031 exchange defers roughly $60,000-$100,000 in federal tax alone. State tax deferral is often similar. That's the amount that stays working in your new property instead of the IRS.

Related: depreciation recapture at sale, stepped-up basis explained.

Keep both properties' records tight

A 1031 audit years later requires proof of the intent, timing, and use of both properties. Okoniq Property Hub stores closing documents, improvement receipts, and rental history per property — a decade of records that stays organized. Related: Schedule E deductions in 2026 and the Taxes & Accounting hub.

Frequently asked questions

Can I do a "reverse" 1031?

Yes — buy replacement first, then sell the relinquished within 180 days. But it's much more complex, more expensive, and requires a specialized QI. The relinquished property must still be sold within the deadline.

What if I want to move into the property later?

Perfectly legal, but you must first hold it as an investment/rental for a "reasonable" period (IRS guidance suggests 2 years minimum, though there's no hard rule). Then you can convert to personal use. To eventually use the Section 121 exclusion, additional 5-year hold rules apply.

Do I need to reinvest 100%?

To avoid boot, yes — the replacement property's value AND net debt must be ≥ the relinquished. Reinvesting less generates taxable boot.

Related reading

• Depreciation recapture at sale — the 25% tax you owe even after a 1031 falls apart
• Stepped-up basis explained — the alternative strategy for landlords over 60
• Schedule E deductions in 2026 — the annual deductions that keep your effective tax rate low between exchanges

From the Okoniq team. We help thousands of landlords keep property paperwork organized — closing docs, improvement receipts, rental history — so a 1031 audit years later has clean records to pull from. Try it free · First 30 days on us. No credit card until day 31.

Not tax advice. 1031 exchanges are technical and one mistake voids the whole transaction — always work with a Qualified Intermediary + a CPA experienced with 1031s.

FAQ

How long do I have to close on a replacement property in a 1031 exchange?

You have 180 days from the date your relinquished property closes to complete the purchase of the replacement property. This deadline runs concurrently with (not in addition to) the 45-day identification period, and the IRS grants extensions only for federally declared disasters.

Can I use a 1031 exchange to swap a rental property in one state for a rental in another state?

Yes — like-kind real estate exchanges work across state lines. You can sell a rental in California and buy a replacement in Florida, Texas, or any other state, as long as both properties are held for investment or business use.

What happens if I miss the 45-day identification deadline?

The entire exchange is invalidated and the sale of your relinquished property becomes fully taxable in that year. You'll owe capital gains tax (15-20%), depreciation recapture (25%), and possibly the 3.8% net investment income tax — no partial deferral is allowed.

Do I pay any tax at all during a successful 1031 exchange?

You defer all federal capital gains and depreciation recapture tax as long as you avoid "boot" — meaning the replacement property's value and debt are equal to or greater than what you sold. If you receive cash back or reduce your mortgage, that boot amount is taxable even though the rest of the gain is deferred.