A 1031 exchange lets you sell an investment or business property and put off the tax on the gain, as long as you reinvest in other U.S. real estate within strict deadlines. Section 1031 of the Internal Revenue Code allows it, and it remains fully in force for 2026: the July 2025 tax law left it unchanged.
The tax is deferred, not forgiven. Your old property’s basis carries into the new one, so the gain waits until you sell without exchanging. Many investors exchange again and again. If they hold the last property until death, heirs generally receive a stepped-up basis and the deferred gain may never be taxed.
The savings can be large. Federal capital gains tax (up to 20%), tax on past depreciation (up to 25%), the 3.8% net investment income tax and Illinois income tax (4.95%) can together take a quarter or more of your gain. An exchange keeps that money working in your next property.
What qualifies
Both properties must be real estate held for investment or for use in a business. Since 2018, only real property qualifies; equipment, vehicles and other personal property no longer do.
“Like kind” is broad. Any U.S. investment real estate can be exchanged for any other U.S. investment real estate. Examples that work:
- A Chicago two-flat for a strip mall in Texas
- Vacant land for a single-family rental
- One warehouse for three rental condos
- A rental house for an interest in a Delaware Statutory Trust (DST)
What does not qualify:
- Your primary home (a separate exclusion under Section 121 may apply)
- Property bought to fix and flip, or lots held as inventory by a developer
- Stock, bonds, and partnership or LLC membership interests
- U.S. property exchanged for property outside the U.S.
- A second home used mostly for personal stays
The same taxpayer who sells must buy. If an LLC taxed as a partnership sells, that same partnership must acquire the replacement. A single-member LLC that is disregarded for tax purposes counts as its owner.
The 45 and 180 day deadlines
Two clocks start the day your sale closes, and they run at the same time. Neither one is extended for weekends or holidays.
- Day 45: identify. By midnight of day 45, you must identify your replacement property in a signed, written notice delivered to your qualified intermediary.
- Day 180: close. You must receive the replacement property by day 180, or by the due date of your tax return for the year of the sale, whichever comes first.
The second rule surprises people who sell late in the year. If your return is due before day 180, file an extension so you keep the full 180 days.
| Sale closes | Day 45 (identify by) | Day 180 (close by) | Watch out for |
|---|---|---|---|
| March 2, 2026 | April 16, 2026 | August 29, 2026 | Day 180 is a Saturday; plan to close earlier |
| November 15, 2026 | December 30, 2026 | May 14, 2027 | 2026 return is due April 15, 2027; extend it or the exchange ends that day |
The only relief comes when the IRS postpones deadlines for a federally declared disaster in the area where you or the property are located. Do not plan around it.
A practical calendar looks like this:
- Before listing: talk to your tax advisor and choose a qualified intermediary
- Before closing: sign the exchange agreement; the intermediary is written into the sale closing
- Days 1 to 45: tour, make offers, send the identification letter
- Days 46 to 180: finance, inspect and close on the identified property
- Tax season: report the exchange on Form 8824 (the like-kind exchange report) with your return
How to identify replacement property
The identification must be in writing, signed by you, and describe each property clearly (a street address or legal description). Most investors use one of these rules:
| Rule | What you can identify | Example |
|---|---|---|
| Three-property rule | Up to 3 properties of any value | Sell for $600,000; identify a $550,000 duplex, a $700,000 fourplex and an $800,000 retail unit |
| 200% rule | Any number of properties, if their total value is no more than twice what you sold | Sell for $600,000; identify five condos totaling $1,150,000 |
| 95% rule | Any number and value, but you must actually buy 95% of the total identified | Rarely used; one failed closing can sink the whole exchange |
Identify backups. A deal that falls apart on day 60 cannot be replaced with a property you did not list by day 45.
Qualified intermediaries
You can never touch the sale money. If the proceeds reach you or your own account, even for a day, the exchange fails. A qualified intermediary (QI), sometimes called an accommodator, holds the funds between the sale and the purchase and prepares the exchange documents.
Your QI cannot be your agent within the past two years. That rules out your own attorney, CPA, real estate broker or employee acting in that role, and relatives are excluded too. QIs are lightly regulated in most states, so check how funds are held: in a separate, segregated account, with bonding and insurance, and with two signatures required to move money. A standard delayed exchange often costs roughly $750 to $1,500; reverse and improvement exchanges cost more.
Some national QIs that offer online portals are listed below as examples. They are listed for information only. Ozfield does not endorse, recommend or receive compensation from any of them. Compare fees, fund security and reviews yourself.
| Provider | Background (per the company) |
|---|---|
| IPX1031 | Subsidiary of Fidelity National Financial; headquartered in Chicago |
| Asset Preservation, Inc. | Subsidiary of Stewart Title; in business since 1990 |
| Accruit | Part of Inspira Financial; offers exchange-tracking software |
| Exeter 1031 Exchange Services | San Diego based; funds held through its affiliated trust company; handles reverse and improvement exchanges |
If you want a passive replacement property, online marketplaces such as Realized present Delaware Statutory Trust (DST) offerings. DST interests are securities sold through licensed broker-dealers. Review them with a licensed investment professional.
The Federation of Exchange Accommodators is the industry trade group for QIs and publishes a member directory and a code of ethics.
Boot and a worked example
To defer all of the tax, buy property worth at least the net sale price and reinvest all of the cash. Anything you take out is called “boot” and is taxed up to the amount of your gain. Boot includes cash you keep and a smaller mortgage on the new property that is not made up with added cash.
The facts. Selin bought a Chicago rental for $500,000 and claimed $150,000 of depreciation, so her adjusted basis is $350,000. She sells for $800,000, pays $48,000 in selling costs and pays off a $300,000 mortgage. The QI receives $452,000. Her gain is $402,000.
Without an exchange, at top rates the tax is about $123,000: 25% on the $150,000 of depreciation, 20% on the rest, 3.8% net investment income tax and 4.95% Illinois tax.
| Scenario | Replacement price | New loan | Cash to Selin | Taxable now | Basis in new property |
|---|---|---|---|---|---|
| Full exchange | $1,000,000 | $548,000 | $0 | $0 | $598,000 |
| Partial exchange | $700,000 | $300,000 | $52,000 | $52,000 | $350,000 |
| No exchange | None | None | $452,000 | $402,000 | Not applicable |
In the partial exchange, only the $52,000 of boot is taxed now and the remaining $350,000 of gain is deferred. The deferred gain lowers the basis in the new property, which means smaller depreciation deductions going forward.
Other exchange options
- Reverse exchange. Buy the new property first. A special holding company (an exchange accommodation titleholder) holds title while you sell the old one. The same 45 and 180 day limits apply, counted from the purchase.
- Improvement (build-to-suit) exchange. Use exchange funds to renovate or build on the replacement property. Only work finished and paid by day 180 counts toward the value.
- DST or tenants in common. Buy a fractional share of a large property, such as an apartment complex, for a passive, hands-off replacement. DST interests can also serve as backup identifications.
- Related parties. Exchanges with family members or companies you control are allowed, but both sides generally must keep their properties for two years or the tax comes due.
- Mixed-use and home conversions. A duplex where you live in one unit can combine the home sale exclusion on your unit with a 1031 exchange on the rental unit. A property you receive in a 1031 exchange and later move into must be owned five years before the home sale exclusion can apply.
There is no fixed holding period in the law, but intent matters. Many advisors suggest holding both properties at least one to two years. For a vacation home, the IRS safe harbor requires 24 months of ownership with limited personal use.
Investors outside the U.S.
Nonresident owners can use a 1031 exchange, but only from U.S. property into U.S. property. The bigger issue is FIRPTA withholding. When a foreign person sells U.S. real estate, the buyer must generally withhold 15% of the gross sale price and send it to the IRS.
On an $800,000 sale, that is $120,000 that would not reach the QI. Before closing, the seller can apply to the IRS on Form 8288-B for a withholding certificate showing the gain qualifies for deferral. Apply early: processing takes time, and the closing agent may hold the withheld amount in escrow until the IRS responds.
Foreign owners who hold property through a single-member U.S. LLC still file Form 5472 (the annual report for foreign-owned U.S. LLCs) each year, exchange or not.
Reporting and how we help
Reporting the exchange
Every exchange is reported on IRS Form 8824 with the tax return for the year the old property was sold. The form shows the dates, the identification, any boot, the deferred gain and the basis of the new property. Related-party exchanges are reported again for the two following years.
Illinois follows the federal rules, so a valid exchange also defers Illinois income tax. Some states track the deferred gain when you exchange into property elsewhere; California, for example, requires an annual Form 3840 (California’s exchange-tracking form) until the gain is taxed. Depreciation on the new property must be split between the carried-over basis and any added investment, which is where good records matter.
How our office helps
The best time to call us is before you list the property. Once the sale closes, the clock is running and some mistakes cannot be undone.
- Planning: we estimate the tax with and without an exchange so you know what is at stake
- Coordination: we work with your QI, title company and lender on the exchange documents and deadlines
- Foreign sellers: we prepare the FIRPTA withholding certificate application (Form 8288-B)
- Tax returns: Form 8824, Form 5472 and federal and state returns, with the new depreciation schedules
- Structure: LLC or corporation setup for the replacement property
- Bookkeeping: QuickBooks records that track basis and depreciation from day one
- Insurance: landlord and commercial property coverage in place on closing day
Common questions
Can I exchange my home? No. A primary residence does not qualify, though the home sale exclusion may shelter up to $250,000 of gain ($500,000 for married couples).
Can I sell one property and buy two? Yes, as long as you identify them properly and the total value and reinvested cash meet the rules.
Can I exchange a U.S. rental for property in Turkey? No. U.S. and foreign real estate are not like kind.
Do the 45 and 180 days move if they fall on a weekend? No. Plan to finish early.
What if I miss a deadline? The exchange fails and the sale is taxed normally. If the QI still holds funds, they are usually released after day 45 or day 180, which can push the tax into the following year.
Sources
Published September 28, 2026. Last reviewed October 6, 2026. Tax rules and figures change, so call our office before acting on this for your own situation: 773-536-9272.
