1031 Exchange Basics for Business Property (2026)

A 1031 exchange lets you sell business or investment real estate and reinvest the proceeds in other real estate without paying tax on the gain now. You must identify replacement property within 45 days, close within 180 days, keep your hands off the cash by using a qualified intermediary, and report the exchange on Form 8824. The tax is deferred into the new property, not eliminated.

This guide covers 1031 exchange basics for small business owners and landlords: what property qualifies, the deadlines, identification rules, boot, a worked example, and the mistakes that turn an exchange into a taxable sale. It is general information, not tax or legal advice; exchanges are unforgiving, so involve a qualified intermediary and a tax adviser before you list the property.

What qualifies for a 1031 exchange?

According to the IRS Instructions for Form 8824, for 2018 and later years like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale.

Property	Qualifies?	Notes
Rental houses and apartment buildings	Yes	Held for investment
Office, retail, warehouse used in your business	Yes	Held for use in a trade or business
Raw land held for investment	Yes	Land and buildings are like-kind to each other
Your personal residence	No	See the Section 121 home sale exclusion instead
Fix-and-flip properties or developer inventory	No	Held primarily for sale
Equipment, vehicles, machinery	No (since 2018)	Use depreciation rules instead
US property for foreign property	No	US and foreign real property are not like-kind
Partnership interests or LLC membership units	No	The entity can exchange its property, but owners cannot exchange their interests

Like-kind is broad for real estate: you can exchange a rental house for a small office building, or land for a warehouse, as long as both are US real property held for business or investment.

1031 exchange deadlines: 45 and 180 days

1. Day 0: you transfer the relinquished property (closing on the sale). Proceeds go directly to the qualified intermediary.
2. By day 45: identify replacement property in a signed written document delivered to the intermediary or another permitted party. Describe it clearly, for example by street address or legal description.
3. By day 180, or your tax return due date if earlier: receive the replacement property. If your sale closes late in the year, file an extension so the return due date does not cut the 180 days short.

The deadlines run at the same time and are not extended for weekends or holidays, except in federally declared disasters where the IRS announces relief.

Identification rules

You can identify more than one property, within one of these limits:

• Three-property rule: up to three properties of any value.
• 200% rule: any number of properties, as long as their total value does not exceed 200% of the value of the property sold.
• 95% rule: any number of properties of any value, but you must acquire at least 95% of the total value identified.

Most small investors use the three-property rule and identify one main target plus two backups.

The role of the qualified intermediary

If you actually or constructively receive the sale proceeds before buying the replacement, the transaction is a sale, not an exchange. A qualified intermediary (QI) prevents that. You sign an exchange agreement before closing, the QI receives the sale proceeds, and the QI uses them to acquire the replacement property for you. Your real estate agent, attorney or accountant who has worked for you in the past two years generally cannot act as your QI. Ask about the QI's fees, bonding, insurance and whether funds are held in segregated accounts.

Boot and how to avoid unexpected tax

Boot is taxable to the extent of your realized gain. Common sources:

• Cash boot: proceeds you take out or that are used for non-exchange costs.
• Mortgage boot: paying off a $300,000 loan on the old property and taking only a $200,000 loan on the new one, without adding $100,000 of cash, creates $100,000 of debt relief.
• Non-real property: furniture or equipment included in the replacement purchase price.

To defer all the gain, buy replacement property of equal or greater value, reinvest all net proceeds, and replace any debt paid off with new debt or added cash.

Worked example: trading a warehouse for a larger building

These figures are illustrative. A contractor owns a small warehouse bought years ago. Its adjusted basis, after depreciation, is $400,000. He sells it for $900,000 net of selling costs and buys a larger building for $1,100,000.

Item	Full exchange	Takes $50,000 cash
Net sale price	$900,000	$900,000
Adjusted basis of old property	$400,000	$400,000
Realized gain	$500,000	$500,000
Cash boot received	$0	$50,000
Gain recognized now	$0	$50,000
Gain deferred	$500,000	$450,000
Basis of new building (cost minus deferred gain)	$600,000	$650,000

In the full exchange he puts all $900,000 into the new building and borrows the other $200,000. Without the exchange, the $500,000 gain would include depreciation taxed at up to 25% as unrecaptured Section 1250 gain, the rest at capital gains rates, possibly plus the 3.8% net investment income tax and state tax. The deferral keeps that money working in the new property. When he finally sells without exchanging, the deferred gain comes due. If he holds until death, current law generally gives heirs a stepped-up basis.

Reverse and improvement exchanges

Sometimes the right replacement appears before you have sold. In a reverse exchange, an exchange accommodation titleholder buys and holds the replacement property while you sell the old one, under a safe harbor set out by the IRS in Revenue Procedure 2000-37. The same 45 and 180-day framework applies, and the costs are higher. In an improvement or build-to-suit exchange, the accommodator holds the new property while improvements are made with exchange funds, so the value you receive by day 180 includes the work completed. Both require specialist intermediaries and careful contracts.

Vacation homes and mixed-use property

A second home used mostly by your family is generally not held for investment and does not qualify. The IRS provides a safe harbor in Revenue Procedure 2008-16 for dwelling units that are rented at fair rent for enough days and used personally only within limits during the two years around the exchange. Properties with both business and personal use, such as a building with your shop downstairs and your apartment upstairs, can be split: the business part may be exchanged, and the residential part may qualify for the home sale exclusion.

What a 1031 exchange costs

Expect qualified intermediary fees, legal fees and the usual closing costs on both sides. Exchange expenses paid from the proceeds, such as broker commissions and title fees, generally reduce the amount realized and do not create boot, but some charges, such as loan fees, property tax prorations or security deposits, are not exchange expenses and can create taxable boot if paid from exchange funds. Ask your QI and closing agent for a settlement statement review before closing.

Depreciation after a 1031 exchange

The carried-over basis continues to be depreciated over the remaining life of the old property, and any extra basis from added cash or debt is depreciated as a new asset. If you also commission a cost segregation study on the replacement, the interaction between carried-over and new basis needs careful handling. For the basics, see how to calculate depreciation and Section 179 vs bonus depreciation.

Common 1031 exchange mistakes

• Touching the money. Proceeds wired to your account, even for a day, break the exchange.
• Missing day 45. Late identification cannot be fixed.
• Buying down. A cheaper replacement creates boot.
• Exchanging a flip. Property held for resale does not qualify.
• Changing title. The taxpayer who sells should be the one who buys. An LLC sale and personal purchase can fail.
• Related-party exchanges without understanding the two-year holding rule, under which a later disposal by either party can trigger the deferred gain.
• Forgetting state rules. Some states, such as California, track deferred gain when you exchange into out-of-state property.

Reporting the exchange on Form 8824

File Form 8824 with your return for the year you transferred the old property. It records descriptions and dates, the value of property given up and received, boot, recognized and deferred gain, and the basis of the new property. Keep the exchange agreement, QI statements, closing statements and identification letter permanently with your property records, because the basis of the new building depends on them. Capital transactions that are not exchanges are reported on Form 8949 instead.

Running the property after the exchange

Once the new property is in service, clean rent and expense records protect your basis and depreciation. Landlords can bill tenants using a rent invoice template, and managers can use our property management invoice template. If an agent helped with the deal, their fees will appear on a real estate commission invoice and in your closing costs.

Whether you bill tenants, manage properties or charge for services, create professional invoices with our free invoice generator: no sign-up, and download each one as a PDF.