Real Estate Tax Strategy 2026 Pillar IRC §1031 Educational — Not Tax Advice

1031 Exchange Mechanics: The 2026 Investor's Guide to Like-Kind Real Estate Tax Deferral

A real estate sale can hand 25%–40% of your gain to the IRS, the state, and the Net Investment Income Tax — unless you structure the disposition as an IRC Section 1031 like-kind exchange. This is the definitive 2026 pillar guide to 1031 exchange mechanics: the four exchange types (simultaneous, delayed, reverse, improvement), the 45-day and 180-day deadlines (and the tax-return-due-date trap that quietly kills late-year exchanges), the three identification rules, the Qualified Intermediary safe harbor and disqualified-person rules, the cash-boot and mortgage-boot math, the depreciation-recapture priority, the Rev. Proc. 2000-37 reverse-exchange QEAA, the Rev. Proc. 2008-16 vacation-home safe harbor, the Rev. Rul. 2004-86 Delaware Statutory Trust framework, the Rev. Proc. 2002-22 TIC framework, the state-level California 3.33% withholding and clawback (with Oregon and Massachusetts cousins), the One Big Beautiful Bill of July 2025 (which preserved Section 1031 unchanged), three full worked numerical examples, ten common mistakes, and the architecture for fitting a 1031 exchange into a complete capital stack. Patrick Pychynski is a capital architect — not a CPA, attorney, or QI — and this guide is educational. Always engage qualified tax and legal counsel before executing.

Patrick Pychynski , Founder — Stacking Capital

| May 6, 2026 | 64 min read

TL;DR — Key Takeaways

▸A 1031 exchange defers federal capital gains tax, depreciation recapture, and (in most states) state income tax when you swap one investment or business-use real property for another — per IRC §1031. Tax is deferred, not forgiven; the deferred gain rolls into the basis of the replacement property.
▸Real property only since TCJA 2017. Personal property (equipment, vehicles, artwork, intangibles) no longer qualifies — only real property held for productive use in a trade or business or for investment is eligible (Tax Adviser, final regs).
▸Two clocks run concurrently: 45 days to identify replacement property in writing, 180 days to close — or the due date of your tax return for the year of sale, whichever is earlier (IPX1031 timelines).
▸Three identification rules: the 3-Property Rule (up to three at any value), the 200% Rule (any number, total FMV ≤ 200% of relinquished value), or the 95% Exception (any number, but you must close on at least 95% of identified value) — per IPX1031’s identification rules.
▸A Qualified Intermediary (QI) is mandatory in delayed and reverse exchanges. The exchanger cannot touch the proceeds — constructive receipt blows up the deferral. QIs are unregulated at the federal level; choose carefully (Adventures in CRE QI checklist).
▸To defer 100% of gain: replacement value ≥ relinquished value, replacement debt ≥ relinquished debt (or replace shortfall with new equity), and reinvest all net proceeds. Anything you keep is “boot” — taxable, with depreciation recapture (25%) recognized first (First American Exchange).
▸Four exchange types: simultaneous (rare), delayed/forward (the standard), reverse (buy first), and improvement/build-to-suit (construct on the replacement during the 180-day window). Reverse and improvement exchanges run under Rev. Proc. 2000-37’s QEAA safe harbor.
▸DSTs and TICs let you exchange into fractional institutional real estate. DSTs (Rev. Rul. 2004-86) operate under seven strict prohibitions; TICs (Rev. Proc. 2002-22) cap at 35 owners and require unanimous consent.
▸State traps live below the federal rules. California imposes 3.33% withholding plus a clawback on out-of-state replacements; Oregon withholds 8%; Massachusetts and several other states enforce their own clawback regimes (Realized Holdings clawback explainer).
▸2026 status: Section 1031 was preserved in the One Big Beautiful Bill signed July 4, 2025 — no caps, no sunset for real estate exchanges (IPX1031 tax reform update; BlueLion 1031).

Free 1031 capital architecture review. Stacking Capital’s advisors map your exchange against your wider capital stack — relinquished economics, replacement-property financing, debt-replacement math, QI shortlist, and the post-exchange cash-out-refi plan — before you set the 45-day clock. Book a free strategy session with a Stacking Capital advisor — we are not your QI, attorney, or CPA, and we work alongside the ones you choose.

Mandatory Tax & Legal Disclaimer — Read First

Patrick Pychynski is a capital architecture strategist and funding advisor — not a CPA, tax attorney, or Qualified Intermediary. Stacking Capital does not provide tax, legal, or accounting advice and is not licensed to do so. Nothing in this article is a recommendation to execute, structure, or rely on a 1031 exchange for any specific transaction.

Section 1031 is governed by the Internal Revenue Code, Treasury Regulations, IRS revenue procedures and rulings, state tax codes, and a deep body of case law. Outcomes depend on facts that vary materially by transaction — entity structure, holding period, intent, debt characteristics, state of residence and property location, related-party rules, and timing. Engage a CPA, tax attorney, and a federally registered Qualified Intermediary before structuring any exchange.

Patrick’s role — and Stacking Capital’s role — is the capital architecture: how the relinquished and replacement deals are financed, where the equity sits inside your capital stack, what debt-replacement math the exchange will require, what DSCR the replacement property must support, and which commercial lending products fit your hold strategy. Tax strategy belongs to your tax advisor; QI mechanics belong to your intermediary; this article and our advisory work belong to the deal architecture around them.

1. What a 1031 Exchange Actually Is — And What It Is Not

A 1031 exchange — named after Section 1031 of the Internal Revenue Code — lets a real estate investor sell one investment or business-use property and reinvest the proceeds into another “like-kind” property without recognizing capital gains or depreciation recapture in the year of sale. Per the IRS like-kind exchange guidance, “no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment if exchanged solely for like-kind real property to be similarly held.” That single sentence is the entire engine of the strategy.

The vocabulary matters. Section 1031 is a deferral, not a forgiveness. Per IRS Fact Sheet FS-08-18, the gain that would otherwise be recognized at sale is rolled into the basis of the replacement property — you carry the embedded tax forward, often for decades, and only realize it if you eventually cash out without another exchange. The IRS will tell you this clearly. Promoters sometimes won’t. Treat every “1031 to eliminate taxes” pitch as a vocabulary error: the only true elimination of a 1031-deferred gain is the step-up in basis your heirs receive at your death under IRC §1014.

The TCJA 2017 Narrowing — Real Property Only

Before January 1, 2018, Section 1031 covered both real property AND personal property — equipment, vehicles, livestock, artwork, franchise rights, and many forms of intangibles. The Tax Cuts and Jobs Act narrowed the section to real property only. Per The Tax Adviser’s coverage of the final regulations issued in 2020, Treasury and IRS rewrote Treas. Reg. §1.1031(a)-3 to define “real property” in detail, then issued the 2020 final regulations resolving the question of incidental personal property transferred with the realty (the “15% rule”). Today, equipment included in a sale that exceeds 15% of the replacement property’s value is treated as separately bought and sold — with gain on the personal-property portion ineligible for deferral.

For real estate investors and operators, the TCJA narrowing is mostly invisible — the building, the land, the air rights, the water rights, the leasehold interests with 30+ years remaining, the easements, all qualify as real property under the final regulations. The narrowing matters most for businesses that historically used 1031 for non-real-estate assets (fleet vehicles, restaurant equipment, aircraft, livestock); those exchanges are gone.

Like-Kind Exchange vs. Sale-and-Rebuy — Why the Distinction Compounds

Same gross transaction; very different economics.
Feature	1031 Like-Kind Exchange	Sale & Rebuy
Federal capital gains tax	0% at time of exchange (deferred)	Up to 20% LTCG due in year of sale
Depreciation recapture (IRC §1250)	Deferred	25% on unrecaptured Section 1250 gain
Net Investment Income Tax (3.8%)	Deferred	Applies to high earners on the gain
State income tax	Deferred (most states)	Due at sale (CA, OR, MA also enforce clawbacks)
Basis in replacement property	Carryover (reduced) basis	Stepped up to full purchase price
Cash available to reinvest	~100% of net proceeds	~65–80% of net proceeds (after combined federal + state + recapture + NIIT)
Mandatory reporting	IRS Form 8824 in year of exchange	Schedule D / Form 4797 in year of sale

The compounding effect is what changes investor behavior. A $1.2M property sale that produces $400K in deferred federal-and-state tax leaves $400K working in the next deal instead of in the U.S. Treasury. Redeployed at an 8% blended unlevered return for ten years, that $400K becomes roughly $863K of additional equity — without any improvement in your underlying real estate strategy. Per IRS Publication 544, the deferral mechanism is the only feature of the U.S. tax code that effectively allows pre-tax compounding inside a real-asset portfolio.

Form 8824 — The Paper Trail

Every 1031 exchange must be reported on IRS Form 8824 (“Like-Kind Exchanges”) for the tax year in which the relinquished property was transferred — even if no gain is recognized. Per Publication 544, recognized gain (boot or partial deferrals) is also reported on Form 8949 / Schedule D for capital gain treatment or Form 4797 for ordinary recapture. Failure to file Form 8824 can convert what would have been a fully deferred exchange into a fully taxable sale on audit. Your CPA owns this form; verify it is filed.

2. The Four Types of 1031 Exchanges

The IRS recognizes four operational structures for a 1031 exchange. In practice, one of them — the delayed (forward) exchange — accounts for the overwhelming majority of transactions, but the other three are the right tool for specific fact patterns that come up more often than investors expect.

Four structures, four cost and risk profiles.
Type	Sequence	Typical QI Fees	Best Use Case
Simultaneous	Both close same day	$750–$1,500	Same-day deed-for-deed trade (rare)
Delayed (Forward)	Sell first, buy within 180 days	$750–$2,000	~95% of modern exchanges
Reverse	Buy first, sell within 180 days	$6,000–$10,000+	Replacement is found but relinquished is not yet sold
Improvement / Build-to-Suit	Buy and improve before acquisition	$7,500–$12,000+	Construction or major capex on replacement

2A. Simultaneous Exchange

In a simultaneous exchange, both properties close on the same day — the relinquished deed and the replacement deed are executed and recorded as a back-to-back event. Per Publication 544, simultaneous exchanges are governed by IRC §1031 itself rather than the deferred-exchange regulations at Treas. Reg. §1.1031(k)-1, which means the 45- and 180-day safe harbors do not apply (there is no waiting period to regulate). Modern financing, title work, and due diligence almost never line up same-day, so true simultaneous exchanges are rare — mostly seen in agricultural land swaps, parking lots, and raw land trades between two known parties who have been negotiating for months. A QI is still used to prevent constructive receipt and to paper the exchange.

2B. Delayed (Forward) Exchange — the Standard

The delayed exchange — also called the “Starker” exchange after the 1979 Ninth Circuit case that made non-simultaneous exchanges workable — is the default structure. The taxpayer sells the relinquished property first, the QI holds the proceeds in a segregated account, the taxpayer identifies replacement property in writing within 45 days, and the QI closes on the replacement property within 180 days. Per IPX1031’s timeline guidance, the delayed exchange is the structure the 1991 Treasury regulations at Treas. Reg. §1.1031(k)-1 were written for, and more than 95% of today’s exchanges run this way.

The operational sequence, at a level of detail that matters:

Engage the QI before closing on the relinquished property. Per Accruit’s mistakes list, setting the exchange up after closing is the single most common way to blow up the deferral — you cannot retroactively 1031 a completed sale.
Sign the exchange agreement and the assignment. The QI is assigned the rights of the seller under the relinquished sales contract; the QI is then assigned the rights of the buyer under the replacement contract.
Close the relinquished property. Sale proceeds wire directly from the settlement agent to the QI’s qualified escrow / qualified trust account — the taxpayer never has dominion over the funds.
45-day identification clock runs. The taxpayer delivers a signed written identification notice to the QI by midnight of Day 45 naming the replacement property or properties.
180-day closing clock runs concurrently from the same start date. The QI wires funds to close on one or more of the identified replacement properties.
File Form 8824 with the tax return for the year of relinquished-property sale.

2C. Reverse Exchange

A reverse exchange flips the order: the replacement property is acquired before the relinquished property is sold. The taxpayer cannot hold title to both simultaneously — that would disqualify the exchange — so an Exchange Accommodation Titleholder (EAT), typically a single-member LLC owned by the QI, “parks” title to the replacement property. Within 45 days of the EAT’s acquisition, the taxpayer identifies the relinquished property in writing; within 180 days, the relinquished property must be sold and its proceeds used to settle the parked position.

The controlling guidance is Revenue Procedure 2000-37, as modified by Rev. Proc. 2004-51, which sets out the “Qualified Exchange Accommodation Arrangement” (QEAA) safe harbor. Per Atlas 1031’s reverse-exchange guide, typical QI/EAT fees for a reverse exchange run $6,000–$10,000 or more — three to ten times the cost of a straight forward exchange — because the EAT structure requires a separate LLC, a separate closing, and the EAT must hold mortgage debt or a non-recourse loan from the taxpayer to carry the parked property.

The risk is asymmetric. Per First American Exchange’s reverse guide, if the relinquished property fails to sell within the 180-day window, the EAT simply transfers title to the taxpayer — the exchange fails, the taxpayer now owns both properties, and the original sale (when it does happen later) is fully taxable. The reverse exchange is therefore a bet that the relinquished property will close within six months.

Advisor Strategy Note #5 — Reverse 1031 Pays for Itself in Deal Security

Investors hear “$7,500 in QI fees instead of $1,500” and flinch. What they are not calculating: the cost of losing the right replacement property because they could not act without selling first. In competitive markets, the best properties do not wait for contingency buyers — they go to the cash, the 1031 buyer with a reverse exchange already set up, or the institutional buyer with no financing contingency. If you have found an exceptional replacement and reasonable confidence the relinquished property will sell in 180 days, the reverse pays for itself many times over in deal security alone, before you count the tax deferral. The correct comparison is not “forward fees vs. reverse fees” — it is “reverse fees vs. the NPV of the deal you lose by waiting.”

2D. Improvement / Build-to-Suit (Construction) Exchange

An improvement exchange uses exchange proceeds to construct on or improve a replacement property before it transfers to the taxpayer. Exchange funds cannot be spent on property the taxpayer already owns — so the improvements must happen while title sits with an EAT. Per IPX1031’s build-to-suit guide, only improvements that are completed within the 180-day window count toward replacement-property value; work still in progress at Day 180 does not count toward the exchange value and can create boot on the unfunded portion.

The forward improvement exchange sequence: sell the relinquished property, have the EAT acquire the replacement (or the raw land), draw exchange funds to pay contractors as improvements are completed, and transfer the improved property to the taxpayer by Day 180 at its then-improved fair market value. The reverse improvement exchange combines the EAT-parks-first structure with the improvement mechanic — the most expensive and most logistically complex of all four types, but sometimes the only way to structure a ground-up development within an exchange.

3. The 45-Day and 180-Day Timeline — What Actually Happens, Day by Day

Two clocks govern every delayed and reverse exchange. They start the calendar day after the relinquished property closes (or the day after the EAT acquires the replacement, in a reverse). They run concurrently — not sequentially — and neither clock can be extended for weekends, holidays, or hardship except in the single narrow disaster scenario discussed below.

The 45-Day Identification Period

By midnight of Day 45, the taxpayer must deliver a signed, written Identification Notice to the QI — or, in narrow cases, to the seller of the replacement property or the settlement agent. The notice must identify the replacement property or properties with sufficient specificity: a legal description, a street address, or an identifiable name. Verbal IDs are invalid. An ID delivered to the taxpayer’s own attorney or broker is invalid because those parties are disqualified persons or agents under Atlas 1031’s disqualified-person rules.

An identification can be revoked and re-filed before Day 45 — useful if a deal collapses early in the window and the taxpayer wants to swap one identified property for another. After Day 45, the list is locked. The IRS does not accept “substitute” properties or amendments after the deadline. Per IPX1031’s timeline page, the practical best practice is to deliver the identification to the QI by close of business on Day 44 with confirmation of receipt, not on Day 45 itself.

The 180-Day Exchange Period

The replacement property must be received by the taxpayer by the earlier of:

180 calendar days after the transfer of the relinquished property, OR
The due date of the taxpayer’s federal income tax return (including extensions) for the year the relinquished property was sold.

The Tax-Return Trap (October Closings)

If the relinquished property closes after October 17 of the tax year, the 180-day window will end after the normal tax return due date (April 15). The IRS uses the earlier of the two dates — meaning a November 1 closing reduces the effective exchange window from 180 days to about 165 days unless the taxpayer files an extension on the underlying tax return. Filing the extension to October 15 restores the full 180 days. This is one of the highest-frequency, lowest-visibility errors in late-year exchanges. Your tax advisor should flag it automatically — if not, raise it yourself before Day 1.

No Extensions — Period

The 45- and 180-day deadlines do not extend if the deadline falls on a Saturday, Sunday, or legal holiday. Per IPX1031, missed deadlines kill the exchange and the entire gain is recognized in the year the relinquished property closed.

The single exception: Revenue Procedure 2018-58 postponements. When a federally declared disaster (or an action by the President of the United States in response to a terroristic or military action) covers the taxpayer’s area, the IRS may issue a notice extending both the 45- and 180-day periods by up to 120 days. The IRS publishes specific notices — for example, hurricane-related extensions for affected counties — and only taxpayers in the listed disaster areas qualify. Your tax advisor and QI should check the IRS’s most recent disaster relief notices the day a deadline becomes tight.

Day-Count Examples

Three closings, three different effective windows.
Relinquished Closing	Day 45 ID Deadline	Day 180 Closing Deadline	Tax Return Due (no extension)	Effective Closing Cutoff
March 15, 2026	April 29, 2026	September 11, 2026	April 15, 2027	September 11, 2026 (full 180 days)
October 1, 2026	November 15, 2026	March 30, 2027	April 15, 2027	March 30, 2027 (full 180 days)
November 15, 2026	December 30, 2026	May 14, 2027	April 15, 2027	April 15, 2027 (only 151 days unless extension filed)

4. The Three Identification Rules

The 45-day identification notice must comply with one of three alternative rules. The taxpayer picks the rule that fits the deal. Per IPX1031’s identification-rules overview and Leader Bank’s 200% Rule explainer, the three rules are independent — meet any one, and the identification is valid.

Rule 1 — The 3-Property Rule

The taxpayer may identify up to three replacement properties of any fair market value, with no aggregate value limit. The taxpayer does not have to close on all three; they close on one, two, or all three, in any combination, up to the full exchange value. This is the most common rule in use and the default for most single-replacement-property exchanges.

Rule 2 — The 200% Rule

The taxpayer may identify any number of replacement properties as long as their total fair market value does not exceed 200% of the relinquished property’s value. Per Leader Bank, the 200% cap is measured at the time of identification using the taxpayer’s good-faith estimate of FMV. This rule is used when the taxpayer wants flexibility across multiple properties — portfolio swaps, DST identifications where several sponsor offerings are still being evaluated, or markets where properties fall out of contract at higher rates.

Rule 3 — The 95% Exception

If the taxpayer violates both the 3-Property and 200% Rules — identifying more than three properties and exceeding 200% of relinquished value — the identification is still valid if the taxpayer actually closes on at least 95% of the aggregate fair market value of all identified properties. This is a rescue provision, not a planning tool. Missing the 95% threshold by one cancelled property voids the entire exchange.

Choose one rule before Day 45.
Rule	Properties Allowed	Value Cap	Closing Required	Typical Use
3-Property Rule	Up to 3	Any value	Any subset	Default for single-property exchanges
200% Rule	Unlimited	≤200% of relinquished FMV	Any subset	Portfolio / multi-DST / high-fallout markets
95% Exception	Unlimited	No cap	≥95% of identified value	Rescue when both prior rules are broken

What a Compliant Identification Notice Looks Like

A compliant ID notice must be (1) in writing, (2) signed by the exchanger, (3) delivered on or before midnight of Day 45, and (4) delivered to a non-disqualified party — almost always the QI. Each identified property must be described unambiguously: a street address, a legal description, an assessor’s parcel number, or a distinguishable name (“The Oak Tree Apartments, 123 Oak Street, Austin, TX”). For DST interests, the notice names the DST, the sponsor, the property held inside the DST, and the percentage or dollar interest being acquired.

Partial-interest identifications — where the taxpayer intends to acquire an undivided tenant-in-common interest, a DST beneficial interest, or a specific floor of a commercial building — must describe the fractional interest clearly, including the percentage and the underlying property. Per IPX1031, an ambiguous identification is treated as no identification and the exchange fails.

5. Like-Kind Property — What Actually Qualifies

“Like-kind” in the Section 1031 context is one of the most misunderstood phrases in real estate tax law. Investors routinely assume it means similar in type, use, or quality — apartments for apartments, offices for offices, retail for retail. It does not. For real estate, the definition is extremely broad: any real property held for productive use in a trade or business or for investment is like-kind to any other real property similarly held, regardless of property type, grade, or quality.

What Qualifies as Like-Kind

Per The Tax Adviser’s coverage of the 2020 final regulations, the following qualify as like-kind for 1031 purposes:

Multifamily (apartments) exchanged for single-family rentals, industrial, office, retail, self-storage, medical office, hotel, or raw land — all like-kind.
Commercial real property of all subtypes (office, industrial, retail, hospitality, medical, data centers, cell towers).
Raw land and farmland held for investment or agricultural use.
Leasehold interests with at least 30 years remaining, including renewal options.
Water rights, mineral rights, air rights, easements, and conservation easements — where state law treats them as real property.
Tenant-in-common (TIC) interests structured under Rev. Proc. 2002-22.
Delaware Statutory Trust (DST) beneficial interests structured under Rev. Rul. 2004-86.
U.S.-to-U.S. real property. U.S. real property is not like-kind to foreign real property under IRC §1031(h); both the relinquished and replacement must be U.S. real property (or both foreign-to-foreign).

What Does Not Qualify

Primary residences and second homes held primarily for personal use — though certain vacation homes can qualify under the Rev. Proc. 2008-16 safe harbor (see below).
Property held primarily for sale to customers — flipper inventory, subdivided lots, condo conversions. The key test is intent at the time of acquisition and use.
Stock, partnership interests, and most LLC interests — even if the underlying entity owns real estate. The exception is a single-member disregarded LLC, where the member is treated as holding the property directly.
Personal property — equipment, vehicles, livestock, artwork, intangibles — excluded by TCJA 2017.
Foreign real property paired with U.S. real property.

Vacation Home Safe Harbor (Rev. Proc. 2008-16)

A vacation home or second home qualifies for 1031 treatment only if it is held primarily for investment, not personal use. Per Asset Preservation Inc.’s vacation-home guidance, the safe harbor in Rev. Proc. 2008-16 requires, for each of the 24 months before (relinquished) or after (replacement) the exchange:

The property is rented at fair rental for at least 14 days per 12-month period; AND
The owner’s personal use does not exceed the greater of 14 days or 10% of the days rented at fair rental in that 12-month period.

Properties outside the safe harbor can still qualify on facts and circumstances, but the safe harbor is the cleanest path. Per IPX1031, many investors who bought vacation rentals during the 2021–2023 short-term-rental boom now need to document compliance carefully before relying on 1031 treatment.

The Two-Year Holding-Period Question

There is no statutory minimum holding period for the relinquished property, but the IRS can challenge an exchange if the property was not “held for productive use in a trade or business or for investment.” Per IPX1031’s two-year rule discussion, most tax practitioners counsel a 24-month minimum hold on both relinquished and replacement properties to build a clean record of investment intent. Short holds — especially under 12 months — invite scrutiny of whether the property was actually held for sale (ineligible) versus held for investment (eligible). Related-party exchanges under IRC §1031(f) have their own two-year rule: both parties must hold their acquired properties for at least two years, or the exchange is retroactively unwound.

6. The Qualified Intermediary — The Single Highest-Risk Decision in the Exchange

A Qualified Intermediary (QI) is a federally non-licensed, state-regulated-in-patches third party that holds the exchange proceeds between the relinquished and replacement closings. The QI is what prevents the taxpayer from having constructive receipt of the proceeds — and constructive receipt ends the exchange. If the check clears into the taxpayer’s account, if the funds wire to the taxpayer’s attorney’s trust account under the taxpayer’s control, or if the settlement agent “holds” the money in the taxpayer’s name even briefly, the exchange is dead before it starts.

Why a QI Is Required

Treas. Reg. §1.1031(k)-1(g) creates four safe harbors against constructive receipt: (1) security or guarantee arrangements, (2) qualified escrow accounts, (3) qualified trusts, and (4) Qualified Intermediary safe harbor. The QI safe harbor is the one that makes delayed and reverse exchanges operationally practical. The QI enters into a written exchange agreement with the taxpayer, is assigned rights under both the relinquished and replacement sales contracts, and receives the proceeds at relinquished closing. Without one of the four safe harbors, the exchange fails under the assignment-of-income doctrine.

Who Cannot Be a QI — Disqualified Persons

Per Atlas 1031’s disqualified-person reference, the IRS deems certain parties “agents” of the taxpayer and therefore unable to serve as QI:

The taxpayer’s attorney, accountant, investment banker or broker, or real estate agent, if that person has served in that role within the two years before the exchange.
Any person related to the taxpayer under IRC §267(b) or §707(b) (family members, controlled entities).
Any employee of the taxpayer.
Any entity in which the taxpayer has a 10%-or-greater ownership interest.

The two-year look-back is strict. An attorney who drafted the taxpayer’s partnership agreement 18 months ago cannot serve as QI, even if the partnership is unrelated to the exchange. Taxpayers who try to use their own lawyer or CPA as QI — often to save fees — lose the exchange on audit every time.

QI Regulation — Or the Lack of It

There is no federal licensing requirement for QIs. Anyone can hold themselves out as a Qualified Intermediary. A handful of states — notably California, Nevada, Colorado, Idaho, Oregon, Virginia, and Washington — have passed state-level QI statutes requiring bonding, insurance, and/or registration. Everywhere else, QI selection is caveat emptor.

History provides several cautionary examples: in 2008–2009, several large QI firms collapsed holding hundreds of millions of dollars in client funds — LandAmerica 1031 Exchange Services filed for bankruptcy with approximately $400M in exchange funds trapped in illiquid auction-rate securities; investors recovered pennies on the dollar after years of litigation. These failures drove the Federation of Exchange Accommodators (FEA) to establish a voluntary industry certification (CES — Certified Exchange Specialist) and push for stronger state-level bonding.

How to Vet a QI — Seven Non-Negotiables

Per Adventures in CRE’s QI selection checklist, the following should be verified in writing before engaging any QI:

Fidelity bond covering employee theft or misappropriation — $1M minimum for retail exchanges, $5M+ for institutional.
Errors & Omissions (E&O) insurance of similar or higher limits.
Segregated qualified escrow or qualified trust account structure — client funds held in dual-signatory accounts at a major bank, not commingled with operating funds.
Bank used — JPMorgan Chase, Bank of America, U.S. Bank, Wells Fargo, or a comparable-grade depository. A QI using a small state bank with no public ratings is a red flag.
CES (Certified Exchange Specialist) credentials for the lead account officer — the FEA’s voluntary certification.
Publicly verifiable financial strength — parent-company ratings, tenure, and client references. National QIs with institutional parent companies (insurance company or title insurer parent) are meaningfully safer than one-person shops.
Written exchange agreement reviewed by your attorney before signing — not every QI agreement is investor-protective.

Recommended QI Partners (Not Our Competitors)

Stacking Capital does not serve as QI and does not compete with QI firms. We work alongside QIs on the capital-stack side — financing, DSCR, debt replacement, post-exchange refi strategy. The firms below are among the institutional QIs our clients commonly engage. This is not an endorsement of any specific QI for any specific transaction — run your own vetting against the seven-point checklist above.

Institutional QIs commonly engaged by sophisticated investors. Verify bonding, escrow structure, and state registration independently.
QI Firm	Parent / Affiliation	Profile
IPX1031	Fidelity National Financial (NYSE: FNF)	One of the largest national QIs by volume; extensive regional presence; strong publicly available educational library.
First American Exchange Company	First American Financial (NYSE: FAF)	Title-insurer parent with deep balance sheet; broad national coverage.
Accruit	Independent / institutional	Technology-forward QI; strong documentation workflows.
Asset Preservation, Inc. (API)	Stewart Title (NYSE: STC)	Title-insurer parent; established reverse- and improvement-exchange practice.
1031 Corp	Independent	Long-tenured regional / national QI; strong mid-market practice.
Investment Property Exchange Services (IPXIS)	Affiliated with IPX1031	Retail-and-institutional offerings; nationwide.
Realized Holdings	Independent / institutional	QI services paired with DST marketplace; valuable when replacement strategy may involve DSTs.

QI Fees — Forward vs. Reverse

Per Deferred.com’s QI cost breakdown, typical fee ranges as of 2026:

Delayed (forward) exchange base fee: $750–$2,000 for one relinquished and one replacement property; add ~$350–$500 per additional property.
Reverse exchange: $6,000–$10,000+ (includes EAT setup, separate LLC, and the parking-period carrying structure).
Improvement / build-to-suit exchange: $7,500–$12,000+ depending on construction complexity.
Wire fees, legal review, and state-specific recording are usually additional.
Float on exchange funds: some QIs split interest earned on escrow balances with the taxpayer; others keep it all. Ask.

7. Boot Mechanics — Where Most Partial Failures Live

“Boot” is the part of an exchange that does not qualify for non-recognition treatment — the chunk that gets taxed inside an otherwise successful exchange. Boot can come in two flavors: cash boot (money or non-like-kind property received) and mortgage boot (debt relief that is not offset by new debt or new cash). Per Deferred.com’s boot calculation walkthrough and Realized Holdings’ boot guide, the rule of thumb is simple: anything you walk away with that is not real property is boot, and boot is taxable to the extent of recognized gain.

Cash Boot

Cash boot is generated whenever the taxpayer pulls cash out of the exchange — either by acquiring a less-expensive replacement property and keeping the leftover proceeds, by holding back closing-cost reimbursements that are not exchange-eligible, or by trading down on equity. If a taxpayer sells a $1M property, pays off a $400K mortgage, has $580K of net proceeds in the QI account, and buys a $530K replacement — the $50K not reinvested is cash boot. The taxpayer recognizes $50K of gain in the year of sale, even though the rest of the exchange is otherwise valid.

Mortgage Boot — The One Most Investors Miss

Mortgage boot is generated when the taxpayer’s debt at closing on the replacement is less than the debt that was paid off on the relinquished — even if the replacement value is higher overall. Per JTC Group’s boot guide, the rule is that debt relief is treated as cash received unless offset by either new debt of equal or greater amount or new cash brought into the exchange.

Worked Example — Mortgage Boot

The trap of trading up in price but down in debt

Investor sells a $1.0M property with a $600K mortgage and $400K of equity. After closing costs, $380K wires to the QI. Investor buys a $1.1M replacement — trading up on price — but only borrows $400K, putting the $380K of QI proceeds and $320K of new cash to make up the difference. Mortgage boot calculation:

Mortgage Boot

Relinquished mortgage paid off$600,000

Replacement mortgage taken on$400,000

Mortgage relief (boot before offset)$200,000

Offset: new cash brought in($320,000)

Net mortgage boot recognized$0

Because the new cash ($320K) more than offset the $200K debt relief, no mortgage boot is recognized. If the investor had borrowed $300K instead of $400K and brought only $220K of new cash, mortgage relief of $300K would be offset by only $220K of new cash — leaving $80K of mortgage boot taxable in the year of sale.

Boot Tax Priority — Recapture Hits First

When boot is recognized, the IRS taxes the gain in a specific order. Per First American Exchange’s depreciation-recapture explainer and Accruit’s recapture guide:

Unrecaptured Section 1250 gain is recognized first — taxed at a maximum federal rate of 25% on accumulated depreciation taken on the relinquished property.
Long-term capital gain is recognized next — taxed at 0%, 15%, or 20% federally depending on income.
Net Investment Income Tax (3.8%) may apply on top of either layer for high-income taxpayers.
State income tax applies separately at state-specific rates.

The recapture-first rule is unforgiving. If a property has $200K of accumulated depreciation and the taxpayer recognizes $50K of boot, the entire $50K is taxed at the 25% recapture rate — not the 20% LTCG rate — because the recapture layer is exhausted before the capital gain layer is touched. For a long-held depreciated property, the marginal rate on boot is effectively 25% federal + state tax + potentially NIIT.

Common Boot Sources — Watch the Closing Statement

Closing costs paid from exchange funds that are not on the IRS’s short list of “exchange expenses” (broker commissions, exchange fees, recording fees, transfer taxes are eligible; loan-related costs, prepaid taxes, prepaid insurance, and prorations are typically not).
Earnest money refunds, security-deposit transfers, and prorated rent credits received in cash rather than rolled into the exchange.
Personal property transferred with the relinquished real estate in excess of 15% of replacement value (post-2020 final regulations).
Seller financing carried back to the buyer of the relinquished property — the note proceeds are typically boot unless structured carefully through the QI.
Mortgage relief not matched by new mortgage or new cash as covered above.

8. Replacement Property Value Rules and Basis Math

To fully defer all gain on a 1031 exchange, three arithmetic conditions must be met simultaneously. Break any one and the broken portion becomes boot.

Three simultaneous tests. Meet all three = full deferral.
Requirement	Rule	Breach = Boot
Equal or greater value	Replacement FMV ≥ relinquished FMV (net of selling costs)	Cash boot on the shortfall
Equal or greater equity	All net proceeds reinvested	Cash boot on held-back proceeds
Equal or greater debt	Replacement debt ≥ relinquished debt, OR offset by new cash	Mortgage boot on unoffset relief

Basis in the Replacement Property — The Carryover Formula

Per First American Exchange’s basis walkthrough, the taxpayer’s basis in the replacement property is calculated as:

Replacement Property Basis Formula

Adjusted basis of relinquished property+

Additional cash paid into exchange+

Gain recognized (boot)+

Net mortgage increase (new debt − old debt, if positive)−

Cash received−

Loss recognized=

Basis in replacement property

The replacement basis is almost always lower than the replacement property’s purchase price — because the deferred gain sits embedded in the basis as a discount. This reduced basis means depreciation deductions on the replacement are based on the carryover basis, not the purchase price. Investors who exchange into materially higher-value replacements often split depreciation into two schedules: (1) continuation of the relinquished property’s depreciation schedule on the carryover basis portion, and (2) a new 27.5-year residential or 39-year commercial depreciation schedule on the excess basis portion (the additional dollars invested above carryover).

This two-schedule approach is the default under Treas. Reg. §1.168(i)-6. Taxpayers can elect to treat the entire replacement as a new asset under IRC §168(i)(7) in limited cases, but the default carryover-plus-excess method is what most CPAs apply. Get this right or the year-one depreciation deduction on the replacement is wrong.

9. Reverse Exchange Deep Dive — Rev. Proc. 2000-37 and the EAT

The reverse exchange is the single most operationally complex common 1031 structure. The taxpayer has found the replacement property first and must acquire it before the relinquished property sells — otherwise the target deal goes to another buyer. The mechanics, costs, and risks differ materially from the forward exchange.

The QEAA Safe Harbor

Revenue Procedure 2000-37 established the “Qualified Exchange Accommodation Arrangement” (QEAA) safe harbor in September 2000. Before Rev. Proc. 2000-37, reverse exchanges existed only under non-safe-harbor case law (Bartell and related cases), and the IRS took the position that most reverse structures failed under the Bolker/Alderson doctrine. The QEAA framework gives taxpayers a clear path: if the arrangement satisfies the safe harbor’s conditions, the IRS will not challenge the EAT’s holding of the replacement property as constructive ownership by the taxpayer.

The safe harbor requires, per IPX1031’s Rev. Proc. 2000-37 explainer:

The EAT holds “qualified indicia of ownership” — legal title or equivalent — from the moment of acquisition.
The EAT and taxpayer execute a written QEAA agreement no later than five business days after the EAT acquires the parked property.
The relinquished property is identified no later than 45 days after the parked property is acquired.
The combined time during which the EAT holds both the parked property and title to any relinquished property cannot exceed 180 days.
The EAT is treated as the beneficial owner for federal income tax purposes during the parking period — including filing tax returns on the parked property.

Financing the EAT Position

The EAT cannot borrow directly against the parked property from a conventional lender using the taxpayer’s credit — the single-member LLC would not qualify for standard acquisition financing. Typical structures: (1) the taxpayer lends cash to the EAT through a non-recourse note secured by the parked property; (2) the taxpayer arranges bridge financing from a private lender, hard-money lender, or institutional bridge fund that will lend to an EAT-style SPV; (3) the taxpayer prepays the full acquisition price as a loan to the EAT, carrying the entire position in cash. Per our hard money and bridge loans guide, bridge lenders that routinely fund EAT-held reverse exchanges understand the structure and can close quickly — the right relationship matters.

Reverse Exchange Economics — When It Pays For Itself

A reverse exchange costs three to ten times a forward exchange at the QI level, plus bridge-loan carrying costs on the EAT position. Per Atlas 1031 and First National Realty Partners’ reverse 1031 guide, typical all-in cost ranges:

QI/EAT fees: $6,000–$10,000+
Bridge financing: 9–12% interest, 2–3 points origination, 6-month term typical
Legal review and QEAA drafting: $2,500–$7,500
Double closing costs (EAT acquires; then EAT transfers to taxpayer)
Additional accounting for the EAT tax return during parking period

The math to run: compare the all-in reverse-exchange cost to the NPV of the replacement property opportunity. If the best replacement on the market is $1.5M and the second-best is $1.3M (at comparable cap rates and locations), and the difference between winning and losing the $1.5M deal is $200K of long-term NPV, spending $25–$50K to execute a reverse is clearly economic. If the next alternative is only $20K worse in NPV, the forward exchange wins on cost alone.

10. Construction / Improvement (Build-to-Suit) Exchanges

The improvement exchange solves a specific problem: the taxpayer wants to use exchange proceeds to build or improve on the replacement property, but exchange funds cannot be spent on property the taxpayer already owns. The work has to happen before title transfers — which means title must sit with an EAT while improvements are completed. Per IPX1031’s build-to-suit overview, improvement exchanges can be structured as either forward or reverse variants.

Forward Improvement Exchange Mechanics

Relinquished property closes; proceeds wire to QI.
EAT acquires the replacement property (or the raw land).
Exchange funds are drawn from the QI account to pay contractors, architects, and suppliers as improvements are completed.
The taxpayer, authorized by the EAT as project manager, oversees construction.
By Day 180, the improved property transfers from the EAT to the taxpayer at its then-improved fair market value.

The Day-180 Completion Trap

Only improvements completed within the 180-day window count toward replacement-property value. Work still in progress at Day 180 does not count — meaning a $500K improvement budget where only $300K of work has been completed creates $200K of boot exposure on the unfunded portion. Per First American Exchange’s build-to-suit guide, the best practice is to budget for improvements to be 90%+ complete by Day 150, with a buffer for inspections, certificates of occupancy, and final draws. Construction delays past Day 180 cannot be cured.

Qualifying improvements are capital improvements — structural work, tenant improvements, new construction, ground-up development, site work, and major mechanical systems. Routine maintenance and cosmetic repairs that would be expensed on the income statement (painting, patching, minor landscaping) may not count as capital improvements for exchange-value purposes. Capital expenditures must be properly depreciable to qualify.

Reverse Improvement Exchange

A reverse improvement exchange stacks the reverse mechanic on top of the improvement mechanic: the EAT acquires the replacement, improvements are made during the parking period before the relinquished has sold, and the whole package transfers to the taxpayer within 180 days. This is the most expensive structure in the 1031 universe — typical fees $10,000–$15,000+ plus bridge financing and carrying costs on both the acquisition and the construction draws. Per IPX1031, reverse-improvement exchanges are the right tool for ground-up developers exchanging into new construction who cannot wait for the relinquished sale to close before acquiring the land and breaking ground.

11. Special Cases — Multi-Property, Drop-and-Swap, Death-and-Step-Up, Refi-Out

Multi-Property Exchanges

A taxpayer can exchange one relinquished property for multiple replacements (consolidation in reverse) or multiple relinquished properties for one replacement (consolidation forward). The 45- and 180-day clocks are measured from the first relinquished property closing in a multi-property forward exchange — meaning if you close on three properties spread over 60 days, the third closing has already burned 60 days off both clocks. Per IPX1031’s pitfall list, sophisticated investors structure simultaneous closings on multiple relinquished properties or accept tighter effective windows on later closings.

Partial Exchanges

A partial exchange is one where the taxpayer intentionally takes some boot — perhaps to pay off an unrelated debt, or to access capital for a different project — while still deferring the rest. The taxpayer recognizes gain on the boot portion (in the order described in §7) and defers gain on the like-kind portion. This is a valid structure, not a failed exchange. Treas. Reg. §1.1031(b)-1 governs the “recognition of gain to the extent of money or other property received.”

The Drop-and-Swap

When a partnership or LLC owns the relinquished property and not all partners want to exchange, the “drop-and-swap” technique distributes the property out of the entity (the “drop”) into individual tenants-in-common interests held by each partner, then each individual partner does — or does not — their own 1031 exchange (the “swap”). Per IPX1031’s partnership-and-1031 guide, the IRS scrutinizes drop-and-swap structures because the “held for investment” requirement applies at the partner level — partners who held the partnership interest, not the property itself, must be able to argue they held the TIC interest for investment.

Best practice from most tax counsel: drop well in advance of the sale — ideally 12–24 months before listing — to build a holding-period record that supports the investment-intent argument. Last-minute drops on the eve of closing are the most aggressive variant and the most likely to be challenged on audit. The reverse strategy (“swap-and-drop”) reverses the order: the entity does the exchange, then later distributes out the replacement property to partners. Both have valid use cases; both demand careful tax counsel.

Death and Step-Up — The Only True Elimination

Per IPX1031’s estate-planning guide and Realized Holdings’ step-up explainer, the deferred gain in a 1031 exchange disappears entirely at the taxpayer’s death under IRC §1014. Heirs receive a stepped-up basis equal to the property’s fair market value on the date of death (or the alternate valuation date six months later if elected). The deferred gain — potentially decades of accumulated appreciation and recapture — is wiped out for income-tax purposes. The estate may be subject to federal estate tax if total estate value exceeds the exemption, but that is a separate calculation from the income tax that 1031 deferred.

The strategy this enables is sometimes called “swap till you drop”: execute 1031 exchanges across decades of investing, accumulate substantial real estate equity at very low embedded basis, hold to death, and let the next generation inherit at stepped-up basis. The economic effect is to convert what would otherwise be deferred income tax into either zero income tax (no estate tax owed if under exemption) or estate tax only (typically lower than the combined federal income + state + recapture + NIIT that would have hit on a sale).

The 1031-Plus-Cash-Out-Refi Strategy

Per Realized Holdings’ cash-out-refi rules and FNRP’s 1031-plus-refi guide, loan proceeds are not taxable income. After completing a 1031 exchange and holding the replacement property long enough to establish independent business purpose — the conventional guidance is 6–12 months — the taxpayer can execute a cash-out refinance on the replacement property and pull liquidity without triggering recognition of the deferred gain. The refinance is not part of the exchange transaction and is not boot.

The IRS can challenge a too-quick refinance under the step-transaction doctrine if the cash-out clearly was pre-planned as part of the exchange. The waiting period and an independent business purpose for the refinance — rate reduction, a different lender relationship, capital for a separate project — provide the documentation that defends the structure on audit.

Advisor Strategy Note #8 — The 1031 + Cash-Out Refi Holy Grail

Here is the play that separates sophisticated investors from the rest: do a 1031 exchange into a quality replacement property, wait 6–12 months, then execute a cash-out refinance. Loan proceeds are not taxable income — there is no capital gains event on a refinance. You now have liquidity without boot recognition, AND you maintain the full 1031 deferral on the exchange. Timing is everything: too quick, and the IRS may treat it as a step transaction designed to circumvent the exchange requirements. Document the business purpose — rate reduction, a separate project, a different lender relationship, a switch from a bridge to a permanent product. We coordinate this routinely with our DSCR and CRE financing work; the cash-out refi is where the post-exchange capital architecture really shines.

12. Delaware Statutory Trusts (DSTs) and Tenant-In-Common (TIC) Structures

Two fractional-ownership structures qualify as 1031 replacement property: the Delaware Statutory Trust (DST) and the tenant-in-common (TIC) interest. Both let an investor exchange into institutional-quality real estate without sole-ownership management responsibilities — useful for retirees, investors moving toward passive holdings, and investors facing a 45-day deadline with no active replacement candidate. The two structures look similar from a marketing perspective but differ materially in legal mechanics.

Delaware Statutory Trusts — Rev. Rul. 2004-86

A DST is a separate legal entity formed under Delaware statutory law that holds title to one or more properties. Investors purchase beneficial interests in the trust; the trustee — typically the sponsor — manages the underlying real estate. Per Hall CPA’s DST overview, the IRS recognized DST beneficial interests as direct ownership of the underlying real estate — eligible for 1031 treatment — in Revenue Ruling 2004-86.

The Seven Deadly Sins — What a DST Trustee Cannot Do

Rev. Rul. 2004-86 enumerates strict prohibitions on the DST trustee’s authority. Violating any of them collapses the DST’s tax classification and disqualifies the structure for 1031 purposes. Per EisnerAmper’s DST guide and Medalist DST’s estate-planning explainer, the “Seven Deadly Sins” are:

The trustee cannot accept new capital contributions from investors after the offering closes.
The trustee cannot renegotiate the terms of any existing loans or borrow new funds, except in narrow situations.
The trustee cannot reinvest the proceeds from the sale of any DST property.
The trustee cannot make capital improvements other than those required by law, by lease terms, or for normal repair and maintenance.
Cash held between distributions can only be invested in short-term debt obligations.
All distributions of cash, other than required reserves, must be distributed currently to investors.
The trustee cannot enter into new leases or renegotiate existing leases, except in single-tenant net lease situations where the lease has terminated due to tenant default or bankruptcy.

The Seven Deadly Sins exist to prevent the DST from being treated as an active business or partnership for tax purposes. The structural cost: DST investors are passive by design. If the DST’s underlying property requires lease renegotiation, capital improvements beyond minor repair, refinancing, or any active management response to changing markets, the DST cannot do it — and the property may be sold at a suboptimal time as a result.

Tenant-In-Common (TIC) — Rev. Proc. 2002-22

A TIC structure has multiple investors hold direct fractional title to the same real property as tenants in common. Revenue Procedure 2002-22 provides the IRS’s safe-harbor conditions for treating TIC interests as direct property ownership rather than as a partnership interest (which would not qualify for 1031). The key conditions:

Maximum 35 co-owners per property.
Each co-owner holds an undivided fractional fee interest in the entire property — not a unit, floor, or specific portion.
Major decisions — sale of the property, new debt, lease renegotiations — require unanimous consent of all co-owners.
Co-owners may not act jointly under a partnership-style agreement; the property cannot file as a partnership.
Each co-owner separately holds title and shares in income and expenses based on their percentage.

DST vs. TIC — Operational Differences

Both qualify; very different mechanics.
Feature	DST	TIC
Authority	Rev. Rul. 2004-86	Rev. Proc. 2002-22
Investor count	Hundreds (no statutory cap)	Maximum 35
Decision making	Trustee (sponsor) sole authority within Seven Sins	Unanimous co-owner consent for major decisions
Investor role	Fully passive beneficial interest	Direct title holder; some active rights
Financing	Sponsor arranges non-recourse loan; DST is borrower	Each co-owner signs the loan; full recourse possible
Liquidity	Sponsor-defined exit; secondary market thin	Co-owner sale subject to unanimous-consent rules
Common use	Retiring investors, estate planning, 45-day rescue	High-net-worth co-investors with aligned strategies

Per First National Realty Partners’ TIC vs. DST comparison and Accruit’s history of the two structures, the modern market is dominated by DSTs — the operational simplicity of a single sponsor managing the asset is meaningfully easier than the unanimous-consent dynamics of a 35-investor TIC. TIC structures persist for sophisticated co-investors who specifically want shared decision-making and direct title.

Advisor Strategy Note #6 — DSTs Are the Lazy Investor’s 1031

I say this with respect for what DSTs accomplish in estate planning. But if you are an active operator who creates value through improvements, repositioning, and active management — a DST turns you into a passive investor with zero say in operations. The Seven Deadly Sins exist precisely to prevent active management. Know yourself. If you want out of the management game entirely (especially for estate planning with the step-up at death), DSTs are excellent. If you are still in building mode and your edge is operational, stay in active replacement property and pass on the DST pitch. The best DST investors I work with are explicitly transitioning to passive; the worst use DSTs as a default because they could not find a real replacement in 45 days.

Advisor Strategy Note #12 — The DST-as-Rescue Vehicle

Here is a strategy I have seen save investors at the last minute: if your 45-day deadline is approaching and you do not have a solid replacement property identified, DST interests can be identified and often closed within days. DST sponsors maintain inventory of pre-structured offerings; some can accommodate last-minute investors with clean funds. Identifying a DST interest buys time and protection for the exchange. Combined with the 3-Property Rule, you can identify up to three: one or two traditional properties you are still pursuing, and one DST as the safety net. If you find a traditional property in time, you close on it; if not, the DST closes and the exchange is preserved. Pay the marginal cost; do not let a 45-day clock convert a $2M deferral into a fully taxable sale.

13. Tax Math — Federal Rates, State Traps, and the Clawback States

Federal 1031 mechanics apply uniformly across the United States. State rules do not. A successful federal exchange can still trigger state withholding, state-level clawbacks, or state-specific reporting that investors overlook until the check arrives — or the audit letter does.

Federal Tax Layers Deferred by a 1031

What a successful exchange defers at the federal level.
Tax Layer	Rate (2026)	Applies To
Long-term capital gain	0% / 15% / 20%	Gain above adjusted basis, held 12+ months
Unrecaptured Section 1250 gain	25% (maximum)	Accumulated depreciation on real property
Net Investment Income Tax	3.8%	High-income taxpayers (single > $200K, MFJ > $250K MAGI)
Short-term capital gain	Ordinary rates (10–37%)	Gain on property held < 12 months (also ineligible for 1031 intent)

California — Withholding Plus Clawback

California is the single most complex state for 1031 exchanges, for two reasons. First, California imposes 3.33% withholding on the gross sale price (or the gain, at the seller’s election) of California real property sold by non-residents — including California residents who have moved out of state. Form 593 is the relevant withholding certificate; exchangers complete the form to certify the transaction is a 1031 exchange and qualify for a withholding exemption, but the mechanics require active documentation.

Second — and this is where investors get blindsided — California enforces a clawback provision. Per Realized Holdings’ clawback explainer and Madras Accountancy’s state-specific guide, when a California investor exchanges California property for out-of-state replacement property, California tracks the deferred California-source gain. When the out-of-state replacement is eventually sold without another exchange — in any tax year, even decades later — California claims its tax on the original California gain. The Franchise Tax Board enforces this via FTB Form 3840, filed annually after the out-of-state exchange, to maintain California’s claim.

The solutions California investors actually use: (1) exchange into another California property to stay in-state, (2) execute additional 1031 exchanges from the out-of-state replacement to continue deferring and filing Form 3840, or (3) hold to death and let the step-up extinguish both federal and California gain.

Advisor Strategy Note #10 — The California Clawback Is the Tax Your 1031 Doesn’t Tell You About

California investors who exchange California property for a Texas or Florida replacement think they have escaped California forever. They have not. The California Franchise Tax Board’s clawback means that when you eventually sell the out-of-state replacement without another exchange, California comes looking for its share of the original California gain — at the then-current California income-tax rates, which can run past 13% at the top. This is legal, enforceable, and rarely discussed at closing. The solution: exchange into another CA property (stay in-state), continue 1031 exchanges from the replacement, or plan to hold until death. Whatever your strategy, know that filing FTB Form 3840 annually is not optional — it is how California tracks the liability until the day it collects.

Oregon — 8% Withholding

Oregon imposes a higher statutory withholding rate — 8% on the gross sale price or 8% on the gain — when non-Oregon-resident sellers dispose of Oregon real property, per Oregon Department of Revenue guidance. Oregon also enforces a clawback similar to California’s when Oregon investors exchange Oregon property for out-of-state replacement. Oregon Form OR-18-WC is the withholding certificate; 1031 exchangers file exemption documentation to avoid the withhold, but must then file Oregon tax returns tracking the deferred gain.

Massachusetts — Clawback Without a Specific Withholding Rate

Per GCA 1031’s Massachusetts reference, Massachusetts follows the federal 1031 deferral but enforces a clawback-style rule where Massachusetts-source gain deferred in an exchange remains Massachusetts-taxable when the replacement property is eventually sold. Massachusetts does not have California-style withholding, but the Department of Revenue tracks the deferred liability through the taxpayer’s state returns.

Other States With Clawback or Reporting Rules

Per Madras Accountancy’s cross-state guide, investors exchanging across state lines should specifically check: Oregon, California, Massachusetts, Montana (clawback-style tracking), and New York (non-resident withholding mechanics). States without an income tax — Florida, Texas, Tennessee, South Dakota, Nevada, Wyoming, Washington (at the sale-level), Alaska — impose no state-level tax on real estate gain and are favored destinations for exchange replacements. Before any cross-state exchange, have your CPA confirm which state’s filing and withholding rules apply at both the relinquished and replacement locations.

14. The 10 Most Common 1031 Mistakes — And How to Avoid Each One

Compiled from Accruit’s top-ten mistakes list, IPX1031’s pitfall guide, and Northmarq’s mistakes analysis, these are the ten failure modes that recur year after year. Each one is preventable with advance planning.

Setting up the exchange after closing the relinquished sale. The QI, exchange agreement, and assignment must be in place before closing. A wire that hits the seller’s attorney trust account even for an hour is constructive receipt. The fix: engage the QI at the listing stage, not the closing stage.
Missing the 45-day identification deadline. The most common failure is not filing the ID notice at all, because the investor assumed “deals in negotiation” counts. Only a written, signed notice delivered to the QI counts. The fix: calendar Day 30 as an internal deadline, deliver by Day 44, confirm receipt.
Identifying a property that cannot close. Investors ID their “dream” property without pre-qualifying financing, environmental review, or seller commitment — and then watch it fall through with no substitute. The fix: the 3-Property Rule lets you identify three; use all three slots.
Using a disqualified person as QI. Attorney, CPA, broker, family member, controlled entity — all disqualified. The fix: use an institutional QI with no two-year service relationship to the taxpayer.
Triggering mortgage boot by trading down on debt. The investor assumes matching purchase price is enough. The fix: match or exceed old debt with new debt, or offset with new cash brought into the exchange.
Pocketing cash boot without realizing it. Closing costs paid from exchange funds that are not exchange-eligible, security deposits received in cash, prepaid rent credits — all create boot. The fix: review the settlement statement line by line with your CPA before closing.
Buying property in a different taxpayer entity than the one that sold. The “same taxpayer rule” requires that whoever sold the relinquished must acquire the replacement — same name, same entity, same EIN (with the single-member disregarded LLC exception). The fix: coordinate entity structure with your tax counsel before listing.
Failing to file Form 8824. Every exchange, even fully deferred with zero recognized gain, must be reported on Form 8824. The fix: add Form 8824 to the tax-prep checklist in the year of sale.
Ignoring state withholding and clawback rules. California, Oregon, and Massachusetts investors assume federal deferral equals state deferral; it does not always. The fix: run a state-specific analysis at both the relinquished and replacement locations before signing a QI agreement.
Rushing a reverse exchange without lining up bridge financing. Reverse exchanges need bridge debt to let the EAT carry the parked property; investors who assume a bank will fund an EAT-held LLC are frequently surprised. The fix: secure bridge financing commitments before engaging the QI for a reverse.

15. 2026 Legislative Landscape — What Happened, What Did Not, and What to Watch

Section 1031 has survived every major tax reform effort for more than a century — the provision traces to the Revenue Act of 1921. The most recent significant threat was the 2021 Biden administration proposal to cap like-kind deferral at $500,000 per taxpayer per year. That proposal did not pass. The latest major legislative event was the One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025 — and Section 1031 was fully preserved.

The One Big Beautiful Bill — Section 1031 Preserved

Per IPX1031’s tax-reform updates and IPX1031’s July 2025 legislative update, the OBBBA did not cap, sunset, or narrow Section 1031 for real estate exchanges. The provision remains in force exactly as it existed under the post-TCJA framework: real property only, deferred (not forgiven) gain, 45-day and 180-day clocks, QI safe harbor, QEAA safe harbor for reverse and improvement structures. Per BlueLion 1031’s 2025 analysis, the broader real estate lobby — led by the Federation of Exchange Accommodators (FEA) — mounted a coordinated campaign through 2023, 2024, and 2025 that made narrowing or eliminating Section 1031 politically costly in both chambers.

FEA Advocacy — The Industry Defense

The Federation of Exchange Accommodators publishes its position, economic impact studies, and state-by-state deferral data on its advocacy page. The central economic argument: 1031 exchanges produce incremental transaction velocity in real estate markets that drives transfer taxes, recording fees, broker commissions, and downstream employment. Multiple EY and Ling-Petrova studies commissioned by the FEA and real-estate industry groups estimated that eliminating or severely capping 1031 would reduce GDP contribution by tens of billions of dollars annually and suppress rental housing supply — figures that carried weight in the OBBBA drafting process.

What Is Still on the Watchlist

Proposals that have been discussed but did not pass in OBBBA — and could resurface in future tax legislation:

An annual cap per taxpayer (the 2021 Biden proposal was $500K).
An inheritance-based elimination — stripping the step-up in basis for 1031-deferred gains (would effectively end “swap till you drop”).
Tighter related-party rules restricting family-member and controlled-entity exchanges.
Stricter vacation-home and short-term-rental qualification — proposed in several committee drafts over the past five years.

None of these are current law. All have been seriously debated. An investor planning long-horizon exchanges should maintain awareness of federal tax-reform cycles and coordinate with a tax advisor on contingency planning if the landscape changes.

16. Three Worked Examples — The Math Made Concrete

The mechanics make sense in the abstract. The dollar consequences become concrete only when the math runs end to end. Three illustrative examples, simplified for clarity. None is a recommendation for any specific transaction; consult your CPA before applying any of these structures.

Example A — Standard Delayed Exchange (Multifamily to Multifamily)

Scenario

An investor sells a 12-unit apartment building in Texas for $1,800,000. Adjusted basis is $700,000 (original cost $1,000,000 less $300,000 of accumulated depreciation). Mortgage balance: $750,000. Closing costs: $90,000.

Without 1031 Exchange — Federal Tax

Tax on Sale (Federal Only)

Sale price$1,800,000

Closing costs($90,000)

Net amount realized$1,710,000

Adjusted basis($700,000)

Total realized gain$1,010,000

Of which: unrecaptured §1250 (depreciation) × 25%$300,000 × 25% = $75,000

Of which: LTCG ($710K) × 20%$710,000 × 20% = $142,000

NIIT 3.8% on $1,010,000$38,380

Total federal tax due in year of sale$255,380

With 1031 Exchange Into a Replacement

Investor exchanges into an $1,950,000 replacement multifamily, takes a new $850,000 mortgage, and brings $50,000 of new cash to round the math. All net proceeds reinvested, replacement value > relinquished value, replacement debt > relinquished debt — full deferral.

Federal Tax With Exchange

Boot recognized$0

Federal tax due in year of sale$0

Cash preserved for next deal$255,380

The $255,380 is not eliminated — it sits embedded in the replacement’s reduced basis. If the replacement is held to death and inherited, IRC §1014 step-up extinguishes it for the heirs. If sold without another exchange, the deferred gain is recognized at then-current rates.

Example B — Reverse Exchange (Replacement Found First)

Scenario

An investor identifies a $2.5M industrial flex property in Florida; the seller has a competing all-cash offer with a 30-day close. The investor’s relinquished property — an $1.8M retail strip in Georgia — is listed but not under contract. Investor cannot wait for the relinquished sale.

Reverse Exchange Setup

Reverse Exchange Cost Stack (Day 0)

EAT acquires Florida replacement at$2,500,000

Bridge loan to EAT (12-month, 10%, 2 points)$1,800,000

Investor cash to EAT for balance$700,000

QI/EAT setup fees$8,500

Bridge origination (2 pts on $1.8M)$36,000

Legal QEAA documentation$5,000

All-in incremental cost vs. forward exchange~$49,500 + 6 mo. of bridge interest

Day 165 — Relinquished Closes

Georgia retail strip closes for $1,800,000. Net proceeds (after $80K closing) = $1,720,000. Proceeds wire to QI; QI pays off bridge ($1.8M + ~6 mo. interest) and refunds excess to investor or rolls to investor’s new equity layer. Day 168: EAT transfers Florida replacement to investor.

The $49,500 in incremental costs (plus bridge interest ~$90K over 6 months) buys the deal that the all-cash offer would otherwise have won. If the deferred gain on the Georgia property is $400K at 25%/20% blended rates, deferring ∼$95K of federal tax pays for half the reverse-exchange cost in tax savings alone — the rest is paid for by capturing a deal the investor otherwise would have lost.

Example C — DST as 45-Day Rescue

Scenario

An investor sells a $1.4M single-tenant retail property. Day 30 of the 45-day window arrives. Two replacement properties under negotiation have stalled — one failed environmental review, one seller pulled out. The investor faces total exchange failure and $280K of recognized gain at federal + state rates.

The DST Rescue Mechanic

On Day 32, the investor identifies two properties using the 3-Property Rule: a $1.0M industrial single-tenant net lease (still in negotiation) and a $700K beneficial interest in a multifamily DST sponsored by a national operator with a property in Phoenix. By Day 44, the industrial deal collapses; the DST closes Day 50 inside the 180-day window. Full $1.4M reinvested across the DST and a small additional cash supplement.

Outcome Compared

Without DST rescue: federal+state tax on $1.4M sale~$280,000

DST acquisition fees / sponsor load~$70,000 (5% load)

Net tax-savings benefit of rescue~$210,000

Plus ongoing DST income at projected 5–6% AAR~$70K/yr passive income

The DST is not a perfect outcome — the investor is now passive, the sponsor controls all decisions, and DST liquidity is constrained — but it is dramatically better than the recognized-gain alternative. The DST is the safety net, not the goal.

17. Disambiguation — 1031 vs. Opportunity Zones, §121, Installment Sales, and Cash-Out Refi

The 1031 exchange is sometimes discussed as if it were the only tax-deferral mechanic in real estate. It is not. Four other strategies are commonly confused with — or compared against — a 1031 exchange. Each has specific use cases where it beats the 1031 and specific traps where it cannot replace one.

1031 Exchange vs. Qualified Opportunity Zones (QOZ)

Per IPX1031’s OZ-vs-1031 comparison, Caliber’s four-differences analysis, and Cherry Bekaert’s OZ-vs-1031 guide:

Both defer gain. Very different economics and eligibility.
Feature	1031 Exchange	Qualified Opportunity Zone
Eligible assets	Real property only (post-TCJA)	Any capital gain (stocks, real estate, business sale)
Reinvestment target	Real property of equal/greater value	Qualified Opportunity Fund; 10%+ of gain invested
Timing window	45/180 days	180 days from realization of gain
Deferral period	Indefinite (until sale or death)	Fixed — deferred gain recognized December 31, 2026
Appreciation on reinvestment	Deferred as part of next exchange	Tax-free after 10-year hold (original QOZ framework)
Step-up at death	Full IRC §1014 step-up applies	Limited; varies by OZ program vintage
Best fit	Real estate investors staying in real estate	Investors with large non-real-estate gains wanting real estate exposure

1031 Exchange vs. IRC §121 Principal Residence Exclusion

Section 121 excludes up to $250,000 ($500,000 for married filing jointly) of gain on the sale of a principal residence — if the taxpayer owned and used the home as their primary residence for at least 2 of the 5 years before sale. Section 121 is an exclusion, not a deferral — the gain is permanently exempt from tax within the cap. Section 121 applies only to primary residences; Section 1031 applies only to investment or business-use property. The two sections can be combined on a property that is first a rental and later converted to a primary residence (a “§121 / §1031 combination”), but the coordination rules under IRC §121(d)(10) reduce the §121 exclusion by the depreciation taken while the property was a rental.

1031 Exchange vs. Installment Sale (IRC §453)

Per Madras Accountancy’s 1031-vs-installment analysis and Realty Exchange Corporation’s installment-sale-and-1031 guide, an installment sale under IRC §453 lets the seller recognize gain over the years in which principal payments are received — useful when the seller is also the lender (seller carry-back). The installment structure spreads gain recognition but does not eliminate it. A 1031 exchange defers gain indefinitely. In practice, investors choose installment sales when they cannot find a replacement property in 180 days and want to smooth the tax hit, or when they are acting as lender to a buyer. The two can be combined in edge cases, but the coordination is complex.

1031 Exchange vs. Cash-Out Refinance

A cash-out refinance extracts equity from a property without selling — no realization event, no tax due on the loan proceeds. Per Realized Holdings’ cash-out rules, refinance proceeds are not taxable because they are not income. The cash-out does not replace a 1031 exchange — if the investor later sells, the full gain is still taxable. But the two combine powerfully: 1031 into a quality replacement, hold 6–12 months, cash-out refi to access liquidity without triggering the deferred gain. The refi is the capital-access mechanism; the 1031 is the tax-deferral mechanism. They are complementary tools.

18. The 1031 Exchange Inside the Capital Stack

A 1031 exchange is not just a tax transaction. It is a capital architecture decision — it changes the equity layer of the replacement deal, sets the debt layer, and influences the DSCR the replacement must support. This is where Stacking Capital’s role becomes concrete: not the QI work, not the tax filing, but the financing and capital-stack architecture around the exchange.

The Equity Layer — What the Exchange Contributes

Exchange proceeds come to the replacement deal as equity — specifically, as equity that cannot be disturbed during the 180-day window without triggering boot. The practical implication: on the replacement closing statement, exchange proceeds must fund purchase price and eligible exchange expenses, not working capital or reserves. Lenders structuring senior debt on the replacement must coordinate their closing-day draw sequence with the QI’s wire of exchange funds. Banks, DSCR lenders, and bridge lenders with meaningful 1031 experience know this workflow; lenders without experience sometimes try to structure closings in ways that create boot inadvertently.

The Debt Layer — Matching or Exceeding Relinquished Debt

As covered in §7 and §8, replacement debt must equal or exceed relinquished debt to avoid mortgage boot, or be offset by new cash brought into the exchange. For investors moving from one asset class to another — say, from multifamily to net-lease retail — the debt layer mechanics matter enormously. DSCR requirements differ; maximum LTV differs; prepayment structures differ. Per our commercial real estate lending guide, a 1031 exchange into a new asset class often requires a product switch — for example, from Fannie Mae agency multifamily to a life-insurance-company loan on single-tenant net lease.

DSCR Math on the Replacement — Why It Matters More Post-Exchange

Per our DSCR guide, lenders underwrite the replacement property on its own in-place cash flow. If the replacement is under-stabilized or has a meaningful vacancy gap, the DSCR may not support the debt the exchange math requires — forcing either a bridge-to-perm structure or additional cash equity (which reduces the proceeds available for the exchange). For investors considering value-add replacement properties, the bridge loan layer becomes part of the exchange architecture.

Owner-Occupied Replacements — The SBA 504 Option

If the replacement property is owner-occupied commercial real estate — the taxpayer’s operating business occupies 51%+ — an SBA 504 loan can be an efficient capital structure for the replacement. The 504 program allows up to 90% financing (50% bank first + 40% CDC second), which means the investor deploys less exchange equity on the replacement and preserves cash for other deals. Coordination with the SBA lender and the QI is essential because the SBA’s closing timelines do not always line up with the 180-day exchange window.

Investor / DSCR Replacements — The Non-QM Path

For investor (non-owner-occupied) replacement properties — 1–4 unit residential, small multifamily, mixed-use — DSCR investor loans are often the cleanest financing vehicle. They qualify on property cash flow rather than borrower tax returns — useful in an exchange year when the taxpayer’s returns may look atypical because of the transaction itself. For self-employed investors where tax returns understate earning power, bank statement loans are an alternative non-QM path.

The Post-Exchange Cash-Out Refi — Completing the Architecture

As described in §11 and Advisor Note #8, the 1031-plus-cash-out-refi is where the capital architecture delivers its full value — liquidity without recognition, capital available for the next deal, deferred gain preserved for eventual step-up. This final move requires coordination across QI (already done by then), tax advisor (business-purpose documentation), and the post-exchange permanent lender. The entire sequence — relinquished sale, exchange, replacement closing, hold period, cash-out refi — is a single capital-architecture decision made at Day 0, not three separate transactions.

For the broader four-layer framework — senior debt, mezzanine, preferred equity, common equity — and how exchange proceeds sit inside it, see our capital stacking guide. For the underwriting math lenders run on replacement properties, see our global cash flow analysis guide and use-of-funds playbook.

Frequently Asked Questions — 33 Investor Questions on 1031 Exchanges

Compiled from the questions investors ask most often during exchange planning sessions. Each answer is informational; consult your CPA, attorney, and QI before relying on any of them in a transaction.

Do I have to use all the money from my property sale in the 1031 exchange?

To defer all capital gains, yes. All net proceeds must be reinvested and the replacement property must equal or exceed the relinquished property's value. Any cash you keep becomes taxable boot. Partial exchanges are allowed but you owe tax on the boot received.

Can I do a 1031 exchange on my primary residence?

No. Section 1031 requires property held for productive use in trade or business or investment. Your primary residence is personal-use property and does not qualify. The applicable benefit for a primary residence is the Section 121 exclusion: $250,000 single, $500,000 married filing jointly, with a 2-of-5-year residency requirement.

Can I live in the property I acquire through a 1031 exchange?

Not immediately. The replacement property must be held as investment property. After meeting Rev. Proc. 2008-16 safe-harbor requirements (24-month hold with proper rental and personal-use ratios), you may convert it to a primary residence — but you must hold the property at least 5 total years since the exchange to use the Section 121 exclusion at sale.

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

The exchange fails entirely and all gain from the sale of the relinquished property is recognized as taxable in the year of sale. There is no extension available except for federally declared disasters under Rev. Proc. 2018-58.

Can I identify more than three replacement properties?

Yes — using the 200% Rule (any number of properties as long as aggregate fair market value does not exceed 200% of the relinquished property's FMV) or the 95% Exception (any number, but you must acquire at least 95% of the identified aggregate FMV).

Can I exchange a single property for multiple replacement properties?

Yes. You can sell one property and purchase two, three, or more replacement properties as long as you satisfy the identification rules and acquire them within the 180-day window. Deferred gain is allocated proportionally by fair market value across the replacements.

Can I exchange multiple relinquished properties for a single replacement?

Yes. You can sell multiple relinquished properties and roll all proceeds into a single replacement. The 45-day and 180-day clocks start on the first relinquished property closing.

Does my replacement property have to be in the same state as my relinquished property?

No. U.S. real property is like-kind to all other U.S. real property regardless of state. However state-specific withholding requirements (California 3.33%, Oregon 8%) and clawback provisions can apply at the eventual exit.

Can I exchange an apartment building for raw land?

Yes. Improved and unimproved real property are like-kind to each other under Section 1031. Quality and grade do not matter for like-kind treatment — only character and nature.

What if the 45th day or 180th day falls on a weekend or holiday?

The deadline stands. There is no extension for weekends or holidays. The only IRS-recognized extension mechanism is Rev. Proc. 2018-58 disaster postponement.

Can I be my own Qualified Intermediary?

No. The QI cannot be the exchanger or a disqualified person. You need an independent third party who has not been your agent (employee, attorney, accountant, broker, real estate agent) within the two-year period ending on the date of the first relinquished property transfer.

Can my attorney be my QI?

No. If your attorney has represented you in the prior two years, they are a disqualified person under Treas. Reg. 1.1031(k)-1(k) and cannot serve as your QI. Even if they have not, it is generally inadvisable and legally risky.

What is constructive receipt and why does it matter?

Constructive receipt means you have legal access to or control over the exchange proceeds even if you have not physically received the cash. If you have the right to receive funds, the exchange is disqualified. The QI must hold funds under an agreement that restricts your right to access them.

Do I have to buy property worth more than what I sold?

To defer all gain, yes. Replacement property must equal or exceed the relinquished property in value, you must reinvest all equity, and you must replace all debt or offset with cash. You can do a partial exchange (buying less) but will recognize taxable gain on the downsize amount.

How long do I have to hold a property before I can exchange it?

There is no statutory minimum holding period for non-related-party exchanges. The IRS examines investment intent. Most tax advisors recommend at least 1–2 years of legitimate investment use. For related-party exchanges, both parties must hold the exchanged properties for two years post-exchange.

Can I do a 1031 exchange if I am flipping properties?

No. Property held primarily for sale (dealer property or fix-and-flip inventory) does not qualify for Section 1031. The property must be held for investment or business use, not as inventory.

Is depreciation recapture always deferred in a 1031 exchange?

Generally yes if the exchange is fully structured (no boot, replacement value at or above relinquished value, replacement debt at or above old debt). If boot is received, depreciation recapture is taxed first at up to 25% before any remaining recognized gain is taxed at long-term capital gains rates.

Can I exchange into a Delaware Statutory Trust as my replacement property?

Yes. Revenue Ruling 2004-86 established that interests in a properly structured DST qualify as like-kind replacement property for Section 1031 purposes, provided the DST adheres to the 'Seven Deadly Sins' restrictions.

Can I exchange property with a partner who wants to exit?

Partnership interests are not eligible for 1031 exchange. However if the partnership distributes tenancy-in-common interests to individual partners before the sale (drop-and-swap), individual partners may do their own exchanges. This is complex and should be done well in advance with guidance from a tax attorney.

What happens to depreciation when I do a 1031 exchange?

The accumulated depreciation from the relinquished property carries over into the replacement property. The carried-over basis continues depreciating on the remaining years of the original schedule, while any new basis added (the difference between purchase price and carried-over basis) starts a fresh schedule.

Can I use 1031 exchange proceeds to improve the replacement property?

Yes — through a Build-to-Suit (Improvement) Exchange. An Exchange Accommodation Titleholder holds title during construction. Exchange funds pay for improvements. Only improvements completed within the 180-day window count toward replacement property value.

What is the difference between a simultaneous exchange and a delayed exchange?

In a simultaneous exchange both properties close on the same day with deeds swapped — extremely rare in modern practice. In a delayed (forward) exchange, the relinquished property closes first, proceeds go to the QI, and the replacement property is acquired within 180 days. Delayed exchanges are the overwhelming majority of modern 1031 transactions.

Can I exchange into foreign real property?

No. U.S. real property and foreign real property are not like-kind to each other. Section 1031 exchanges work only within U.S. borders (or foreign-to-foreign under separate rules).

Can I use a 1031 exchange for a vacation home?

Only if the vacation home meets the Rev. Proc. 2008-16 safe harbor: 24-month ownership, rented at fair market rate for 14 or more days per year, personal use limited to the greater of 14 days or 10% of rental days in each of two consecutive 12-month periods.

Can the same property be used as relinquished and replacement property?

No. Rev. Proc. 2004-51 clarified that a taxpayer cannot receive the same property they transferred to the EAT as replacement property in a reverse exchange.

What is the difference between a 1031 exchange and a 1033 exchange?

Section 1031 covers voluntary like-kind exchanges. Section 1033 covers involuntary conversions — when property is destroyed, condemned, or stolen and insurance proceeds or condemnation awards are reinvested. Section 1033 has longer replacement periods (generally 2–3 years) but otherwise operates similarly.

Can a corporation, LLC, or trust do a 1031 exchange?

Yes. Section 1031 is available to individuals, C corporations, S corporations, partnerships, LLCs (including disregarded single-member LLCs), and trusts. The taxpayer who sells must be the same taxpayer who acquires the replacement property.

What is the tax rate on 1031 exchange boot?

Boot is taxed at the investor's applicable capital gains rate for the recognized portion. Depreciation recapture (Section 1250) is taxed first at up to 25% federal. Remaining recognized gain at long-term capital gains rates (0%, 15%, or 20%) plus 3.8% NIIT if applicable. State taxes apply by property location.

Does a 1031 exchange affect my mortgage interest deduction?

Not directly — the exchange itself does not affect deductibility of mortgage interest on the replacement property. Interest on investment property is generally deductible subject to applicable investment interest expense limitations.

What happens to my 1031 deferred gain when I die?

Under IRC Section 1014, heirs receive a step-up in basis to the property's fair market value at date of death. All accumulated deferred gains from prior 1031 exchanges are permanently eliminated — the deferred gain is never taxed. This is the most powerful long-term tax strategy available to real estate investors.

Is Section 1031 under threat from Congress?

As of mid-2025, Section 1031 is fully intact. The 'One Big Beautiful Bill' signed by President Trump on July 4, 2025 did not change 1031 rules. The Biden administration's proposed $500K cap did not pass. However, 1031 is frequently targeted in tax reform discussions and cannot be considered permanently safe from legislative change.

Can I do a 1031 exchange if I have a mortgage on the relinquished property?

Yes. The mortgage is paid off at closing and proceeds net of the payoff go to the QI. To avoid mortgage boot you must ensure the replacement property carries equal or greater debt or offset any debt reduction with additional cash.

What is like-kind for real estate — does property type matter?

For real estate, like-kind is defined very broadly. Any real property held for investment or business use is like-kind to any other real property held for investment or business use, regardless of property type, quality, or grade. Apartments, commercial, raw land, industrial, NNN retail, storage, farmland — all are like-kind to each other.

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Tell us your exchange — relinquished property, expected sale price, current debt, target replacement type, and any QI shortlist you have already considered — and we will deliver a written 1031 capital-architecture review within 5 business days. The review covers debt-replacement math, replacement-property DSCR analysis, financing product recommendations across all eligible loan types, QI selection criteria specific to your structure, and the post-exchange cash-out-refi roadmap. Patrick is not your QI, attorney, or CPA — we work alongside the ones you choose. The plan is engineered against your numbers, not a referral fee.