The 1031 Exchange Guide.
Everything you need to understand a 1031 like-kind exchange before you sell — the rules, the deadlines, the pitfalls, and how Delaware Statutory Trusts fit in as replacement property.
What is a 1031 exchange?
A 1031 exchange — named for Section 1031 of the Internal Revenue Code — lets you defer capital gains tax when you sell investment or business real estate by reinvesting the proceeds into another like-kind property. The exchange doesn't eliminate the tax; it postpones it indefinitely, often until your eventual heirs receive a stepped-up basis.
For accredited investors selling appreciated rental property, a successful 1031 exchange can preserve hundreds of thousands of dollars in tax dollars that would otherwise go to the IRS at the time of sale. The trade-off is that the IRS imposes strict rules — and missing any of them disqualifies the entire exchange.
You sell a rental. Instead of taking the cash and paying capital gains tax, you swap into another investment property of equal or greater value. The IRS treats it as a continuation of the same investment, and you defer the tax until you eventually cash out for good.
Who qualifies for a 1031 exchange?
1031 treatment is available to any taxpayer — individual, partnership, LLC, corporation, or trust — who sells real property held for investment or productive use in a trade or business. The same rules apply whether you own one rental house or a hundred-property portfolio.
What disqualifies you:
- Personal-use property. Your primary residence and second homes used personally don't qualify. Section 121 has separate (and more favorable) rules for primary residences.
- Dealer property. If the IRS classifies you as a dealer (someone who buys and sells real estate as inventory rather than holding for investment), 1031 doesn't apply.
- Foreign property exchanged for U.S. property. Like-kind only works within the same country.
- Partnership interests. You can't 1031 your interest in a partnership for an interest in another partnership.
For DST replacement property, there's an additional layer: DSTs are Reg D private placements offered only to accredited investors — generally, individuals with net worth above $1 million (excluding primary residence) or income above $200,000 individually / $300,000 jointly for the past two years.
The two deadlines that matter.
The IRS gives you exactly 180 days to complete a 1031 exchange. Within that window are two firm deadlines you cannot miss. Calendar days only — no extensions for weekends, holidays, or natural disasters in most cases.
Identify replacement property in writing to your Qualified Intermediary by midnight of Day 45. Miss this and the entire exchange fails.
Close on identified replacement property by Day 180. For DST replacements, "closing" means subscription is accepted and funded.
Day 0 is the day you close on the property you're selling. Both clocks start ticking that day. The 45-day window is by far the highest-pressure period — you have to make complete, due-diligence-backed decisions in roughly six weeks.
If you want to know exactly when your Day 45 and Day 180 fall, use our deadline calculator — enter your closing date and it returns both deadlines plus a phase-by-phase checklist.
Identification rules: 3-property, 200%, 95%.
The IRS gives you three different ways to identify replacement property by Day 45. You must choose one — they don't combine.
The 3-Property Rule
Identify up to three properties of any value. Most investors use this rule because it's the simplest. You don't have to close on all three — you just have to identify them by Day 45 and close on at least one by Day 180.
The 200% Rule
Identify any number of properties, but their combined fair market value cannot exceed 200% of the relinquished property's value. Useful when you want flexibility to consider many DST offerings without being capped at three.
The 95% Rule
Identify any number of properties of any value, but you must close on at least 95% of the total identified value. Rarely used — it's a fallback for investors who blow past the first two rules.
For DST investors, the 3-Property Rule is almost always the right choice. It gives you enough optionality to compare a few offerings without forcing you to close on most of what you identify.
The Qualified Intermediary.
The IRS requires a Qualified Intermediary (QI) — also called an exchange accommodator — to hold your sale proceeds throughout the exchange. You cannot touch the funds. Even briefly. Even through your attorney's IOLTA account. Any "constructive receipt" of the proceeds disqualifies the entire exchange.
Practically, this means:
- You must engage a QI before you close on your sale.
- The QI receives the proceeds at closing and holds them in a segregated account.
- When you close on replacement property, the QI funds the purchase directly — funds flow from QI to seller.
- The QI provides written documentation of the exchange for your tax filing.
Not all QIs are equal. Before you sign, ask about audit history, segregated account structure, bonding and insurance, and fee structure. A bad QI can lose your money or your exchange.
What "like-kind" actually means.
Despite the name, the like-kind standard for real estate is broad. Almost any real property held for investment or productive use qualifies as like-kind to almost any other real property held for the same purpose.
Examples of valid like-kind exchanges:
- Apartment building for industrial property
- Raw land for retail center
- Single-family rental for an interest in a Delaware Statutory Trust holding multifamily property
- Office building for medical office portfolio
- 30% interest in a tenants-in-common (TIC) structure for a DST interest
What's not like-kind for real estate purposes:
- Real estate exchanged for stocks, bonds, or partnership interests
- U.S. real estate exchanged for foreign real estate
- Real estate held primarily for personal use
- Real estate inventory held by a dealer
Boot: the tax surprise that catches investors.
"Boot" is anything you receive in the exchange that isn't like-kind property. Boot is taxable. There are two main flavors:
Cash boot
If you take any portion of the sale proceeds rather than reinvest them all, the cash you take out is boot — taxed as capital gain (or ordinary income, depending on the situation).
Mortgage boot
If your replacement property has less debt than your relinquished property, the difference is treated as boot. The fix: either replace the debt level or add cash to make up the difference.
A common mistake: investors close on a replacement property that's slightly smaller or has slightly less debt and accidentally trigger taxable boot they didn't anticipate. The rule of thumb — replacement value ≥ relinquished value, replacement debt ≥ relinquished debt — keeps you safe.
Separately, you should be aware of depreciation recapture. Even in a successful 1031, the depreciation you took on the relinquished property carries forward to the replacement. When you eventually sell the replacement (and don't 1031 again), that recapture comes due at a 25% rate. A 1031 doesn't make depreciation disappear — it just delays the bill.
DSTs as 1031 replacement property.
A Delaware Statutory Trust (DST) is a legal structure that lets multiple accredited investors hold fractional ownership of institutional-grade real estate through a single trust. The IRS recognizes a DST interest as like-kind to direct real estate, which makes DSTs a popular 1031 replacement option — especially for investors who want to defer tax without taking on another property to manage.
DSTs work well for investors who:
- Are tired of active property management (the "tired landlord" profile)
- Want diversification across property types or geographies
- Don't have time during the 45-day window to find and close on direct property
- Are looking for predictable hold periods and known exit timelines
DSTs are not ideal for investors who want full control of the property, want to add value through active management, or need short-term liquidity. DST interests are illiquid and typically held for 5–10 years.
For a deeper dive, read our DST guide covering how DSTs work, how they compare to direct ownership and REITs, and what to look for in a sponsor.
Common 1031 mistakes that disqualify exchanges.
Most failed 1031 exchanges aren't about bad luck. They're about preventable mistakes — usually made before the clock even starts. Here are the ones we see most often:
- Engaging the QI after closing. The QI must be in place before the sale closes. Even one day late kills the exchange.
- Touching the proceeds. Asking for a wire to "cover expenses" is the most common version of constructive receipt. Don't do it.
- Missing Day 45. Identification must be in writing to the QI before midnight of Day 45. No extensions.
- Using the wrong identification rule. Each rule has its own math; mixing them is a fast way to fail.
- Replacing less debt than you had. Mortgage boot is taxable. Add cash or take on equivalent debt.
- Title in the wrong name. Replacement property must be titled in the same taxpayer name as the relinquished property.
- Ignoring depreciation recapture. A successful exchange defers recapture; it doesn't eliminate it. Plan for the eventual bill.
If you're close to Day 45 or Day 180 and haven't lined up replacement property, talk to a specialist immediately. A registered representative familiar with DST offerings can often present qualifying replacement options inside the timeline, even when direct property is no longer feasible.
Frequently asked questions.
What happens if I miss my 45-day deadline?
The exchange fails. The full gain on the relinquished property becomes immediately taxable. The IRS does not grant extensions, even for natural disasters in most cases. If you're approaching Day 45 without identified property, talk to a specialist before the deadline — DST options can sometimes be identified and subscribed within the window when direct property has fallen through.
Can I do a 1031 exchange on my primary residence?
No. Section 1031 applies only to property held for investment or productive use in a trade or business. Personal residences are excluded. Section 121 has separate (and more favorable) rules for primary residences that allow gain exclusion when you sell. If you converted a former primary residence to a rental and held it for a meaningful period, parts of it may qualify — consult your CPA.
Do I have to close on all the property I identify?
Under the 3-Property Rule and the 200% Rule, no — you only have to close on enough replacement property to satisfy the value and debt requirements of your exchange. Under the 95% Rule, you must close on at least 95% of identified value. Most investors use the 3-Property Rule and close on one or two of the identified options.
How long does a 1031 exchange take?
Up to 180 days from the day you close on your sale. Day 45 is the identification deadline; Day 180 is the closing deadline. For DST replacements, subscription paperwork typically completes in 5–10 business days, so most DST closings happen well before Day 180. Direct property exchanges often run closer to the full window due to inspection, financing, and title timelines.
Can I 1031 my property into a DST?
Yes — a DST interest qualifies as like-kind to direct real estate under IRS guidance, and many accredited investors use DSTs as replacement property to defer tax without taking on management responsibility. DSTs are Reg D private placements offered only to accredited investors, and they're illiquid. Hold periods are typically 5–10 years.
What's the difference between boot and depreciation recapture?
Boot is anything you receive in the exchange that isn't like-kind — typically cash you take out or a difference in debt levels. Boot is taxed in the year of the exchange. Depreciation recapture is the deferred tax on depreciation you took on the relinquished property; it carries forward to the replacement and comes due when you eventually sell without 1031-ing again. Recapture is taxed at a 25% federal rate.
Do I need a Qualified Intermediary if I'm doing a DST exchange?
Yes. The QI requirement applies to every 1031 exchange regardless of replacement property type. The QI receives proceeds at sale, holds them in a segregated account, and funds the DST subscription on your behalf. You never touch the proceeds.
What's a "reverse" 1031 exchange?
A reverse exchange is when you acquire replacement property before selling the relinquished property — useful in tight markets where finding replacement first is prudent. Reverse exchanges follow IRS Revenue Procedure 2000-37 and have their own 180-day timeline. They're more complex and expensive than standard exchanges and require an Exchange Accommodation Titleholder (EAT) to hold either the new or old property until the exchange completes.
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