HOW-TO GUIDE
How to Do a 1031 Exchange — Complete Practitioner Guide 2026
Step-by-step guide to executing a valid IRC §1031 like-kind exchange — identification rules, qualified intermediary requirements, and boot calculations.
Overview and Why This Matters
A Section 1031 like-kind exchange allows a taxpayer to defer capital gains tax on the sale of investment or business property by reinvesting the proceeds into a replacement property of like kind. The deferral can be indefinite — taxpayers can chain 1031 exchanges throughout their lifetime and receive a stepped-up basis at death under IRC §1014, effectively eliminating the deferred gain entirely. In 2026, 1031 exchanges are limited to real property (TCJA eliminated personal property exchanges effective 2018). A properly executed 1031 exchange can defer $50,000–$500,000+ in capital gains tax on a single transaction.
Step-by-Step Process
Step 1 — Engage a Qualified Intermediary Before Closing
A Qualified Intermediary (QI) — also called an Exchange Accommodator — must be engaged BEFORE the sale closes. The QI holds the exchange proceeds and prevents the taxpayer from having constructive receipt of the funds. You cannot use your attorney, accountant, real estate agent, or family member as a QI. Use a professional QI company. QI fees typically range from $800–$1,500 per exchange.
Step 2 — Execute the Exchange Agreement
The QI prepares an Exchange Agreement that assigns your rights in the relinquished property to the QI. This agreement must be in place before closing. The closing documents should reflect the QI as the party receiving the proceeds, not the taxpayer.
Step 3 — Close on the Relinquished Property
Close on the sale of your relinquished property. The proceeds go directly to the QI — never to you. If you receive any proceeds (even temporarily), the exchange is disqualified and the entire gain is taxable.
Step 4 — Identify Replacement Property Within 45 Days
You have exactly 45 calendar days from the closing date of the relinquished property to identify potential replacement properties in writing to your QI. The 45-day deadline is absolute — there are no extensions except in federally declared disaster areas. Use one of three identification rules: (1) Three-Property Rule: identify up to 3 properties regardless of value; (2) 200% Rule: identify any number of properties with total FMV not exceeding 200% of the relinquished property value; (3) 95% Rule: identify any number of properties if you acquire 95% of the total identified value.
Step 5 — Acquire Replacement Property Within 180 Days
You must close on the replacement property within 180 calendar days of the relinquished property closing (or the due date of your tax return including extensions, whichever is earlier). The 180-day deadline is also absolute. If you file an extension, the 180-day period can extend to the return due date.
Step 6 — Calculate Boot and Taxable Gain
Boot is any non-like-kind property received in the exchange, including cash, net debt relief, or personal property. Boot is taxable to the extent of gain. To fully defer all gain: (1) reinvest all proceeds (no cash boot); (2) acquire replacement property with equal or greater FMV; (3) assume equal or greater debt on the replacement property. If you receive boot, calculate the taxable portion on Form 8824.
Step 7 — Report the Exchange on Form 8824
Report the 1031 exchange on Form 8824 (Like-Kind Exchanges) in the year of the exchange. The form calculates the deferred gain, the basis of the replacement property, and any recognized gain from boot. Attach Form 8824 to your Form 1040 or 1120.
Case Study
David, a real estate investor, sold an apartment building for $1,200,000. His adjusted basis was $400,000, giving him a realized gain of $800,000. Without a 1031 exchange, he would owe approximately $160,000 in federal capital gains tax (20%) plus $30,400 in NIIT (3.8%) plus state tax. David engaged a QI before closing and identified three replacement properties within 45 days. He closed on a $1,400,000 commercial property within 180 days, assuming $200,000 in mortgage. Because he reinvested all proceeds and acquired a higher-value property with more debt, he had zero boot and deferred the entire $800,000 gain. His basis in the replacement property is $600,000 ($1,400,000 FMV minus $800,000 deferred gain).
Client Conversation Script
Client: 'I'm thinking about selling my rental property. I'll have a big gain.' Practitioner: 'Before you sign anything, let's talk about a 1031 exchange. If you reinvest the proceeds into another investment property, you can defer the entire capital gains tax — potentially $100,000 or more. The key is that you need to engage a Qualified Intermediary BEFORE you close. Once you receive the proceeds, it's too late. Can we schedule a call this week to discuss your options?'
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Apply to Join the Marketplace →Frequently Asked Questions
You have exactly 45 calendar days from the closing date of the relinquished property to identify potential replacement properties in writing to your Qualified Intermediary. The deadline is absolute — there are no extensions except in federally declared disaster areas (Rev. Proc. 2018-58).
You must close on the replacement property within 180 calendar days of the relinquished property closing, or the due date of your tax return including extensions, whichever is earlier. If you file an extension for your return, the 180-day period can extend to the return due date.
No. Section 1031 applies only to property held for investment or productive use in a trade or business. A primary residence does not qualify. However, you can convert a primary residence to a rental property, hold it for investment, and then do a 1031 exchange — but you must satisfy the investment holding period requirements.
Boot is any non-like-kind property received in the exchange, including cash, net debt relief (if the replacement property has less debt than the relinquished property), or personal property. Boot is taxable to the extent of gain. To fully defer all gain, you must reinvest all proceeds, acquire equal or greater FMV property, and assume equal or greater debt.
No. The Tax Cuts and Jobs Act (TCJA) eliminated 1031 exchanges for personal property effective January 1, 2018. Section 1031 now applies only to real property. Exchanges of equipment, vehicles, artwork, and other personal property are fully taxable.
The deferred gain carries over to the replacement property through the carryover basis. When you sell the replacement property without doing another 1031 exchange, you recognize the deferred gain plus any additional gain on the replacement property. You can chain 1031 exchanges indefinitely and receive a stepped-up basis at death under IRC §1014, eliminating the deferred gain entirely.
In a reverse exchange, you acquire the replacement property before selling the relinquished property. Reverse exchanges are permitted under Rev. Proc. 2000-37 but require an Exchange Accommodation Titleholder (EAT) to hold title to either the replacement or relinquished property. Reverse exchanges are more complex and expensive ($3,000–$6,000 in QI fees) but allow you to secure a replacement property before your relinquished property sells.
The information on this page is intended for licensed tax professionals (CPAs, EAs, and tax attorneys) and is provided for educational and research purposes only. Tax law is complex and fact-specific — all strategies discussed are subject to limitations, phase-outs, and conditions that may not apply to every client situation. Practitioners should independently verify all information against current IRS guidance, Treasury Regulations, and applicable state law before advising clients. This content does not constitute legal or tax advice.
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