What Is a 1031 Exchange? The 45/180-Day Rules
A 1031 exchange is how serious investors sell a property and pay zero capital gains tax — by rolling the proceeds into another property. It's one of the most powerful wealth-building tools in real estate, but it runs on two deadlines that the IRS does not bend for anyone. Here's exactly how it works.
What a 1031 exchange actually does
Named after Section 1031 of the tax code, it lets you defer federal capital gains tax when you sell investment real estate and reinvest the proceeds into "like-kind" replacement property (Kahn Litwin). It doesn't erase the gain — it carries it forward into the new property, deferring the tax indefinitely as long as you keep exchanging. Estimate your potential deferral with the 1031 exchange calculator.
The two deadlines that make or break it
Both clocks start the day your old ("relinquished") property closes, and they run on calendar days — weekends and holidays included, no extensions outside a federally declared disaster (Reed Corporation CPA):
- 45-Day Identification: You have 45 days to identify, in writing, the replacement property (or properties) you intend to buy.
- 180-Day Closing: You have 180 days total to actually close on the replacement (InvestorSam).
Miss either by a single day and the entire exchange collapses into a fully taxable sale — which on a large gain can mean a $100,000+ surprise tax bill (InvestorSam).
The three identification rules
When you identify replacement candidates within those 45 days, you must follow one of three rules (Apers):
- Three-property rule: identify up to three properties, any value.
- 200% rule: identify unlimited properties, as long as their combined value doesn't exceed 200% of what you sold.
- 95% rule: identify unlimited properties of any value, but you must actually close on at least 95% of what you identified.
The rules you can't break
- Investment property only: both the old and new property must be held for business or investment — never a primary residence (Landsberg Bennett).
- Real estate only: since the 2017 tax law, only U.S. real property qualifies — no equipment, vehicles, or personal property (First American Exchange).
- Use a Qualified Intermediary: a QI must hold the sale proceeds. If you touch the money — even briefly — the IRS calls it "constructive receipt" and the exchange is dead (First American Exchange).
- Equal or greater value: to defer all the tax, your replacement property and its debt must equal or exceed what you sold.
Watch out for "boot"
If you walk away with any cash, or take on less mortgage debt than you had, the difference is called boot — and it's taxable right away (DoorLoop). Model your replacement value, debt, and fees before you commit so you don't accidentally create taxable boot.
Good news for 2026
Despite proposals to cap 1031 benefits (like a rumored $500,000 deferral limit), no such limits were enacted — the full benefit survives intact under the OBBBA for the 2026 tax season (First American Exchange, Kahn Litwin). One filing note: for Q4 sales, your 180-day window can be cut short by your tax return due date, so file an extension (Form 7004/4868) to preserve the full period (IPX1031).
The bottom line
A 1031 exchange can defer a massive tax bill and let you trade up your portfolio tax-free — but it's unforgiving on timing and mechanics. Line up your Qualified Intermediary and replacement candidates before you sell, and estimate the deferral first with the 1031 exchange calculator. If you're also reinvesting in a property you'll improve, pair it with a cost segregation study to stack the tax benefits.
Ready to run your own numbers?
Open the 1031 Exchange Calculator →