What a 1031 exchange actually does
Section 1031 of the tax code lets you sell investment real estate and roll the full proceeds into replacement real estate without recognizing the gain now. The tax isn't forgiven — your old basis carries into the new property — but deferral is enormously valuable: money that would have gone to federal capital gains (15–20%), depreciation recapture (25%), state tax (up to 13.3%), and possibly the 3.8% net investment income tax keeps compounding in the replacement asset instead. On a $2M sale with $800K of gain and years of depreciation taken, the check you're deferring routinely exceeds $250K.
Held to death, the strategy completes: heirs receive a stepped-up basis and the deferred gain evaporates entirely. "Swap till you drop" is a cliché because it's the actual plan of half the net lease owners in America.
The rules that decide outcomes
Like-kind is broad — with hard edges
All investment real property is like-kind to all other investment real property: an apartment building into a Wawa ground lease, farmland into a pharmacy, a rental condo into raw land. The edges: your primary residence is out, property held for resale is out, and personal property — including stocks and securities — has been out since 2018.
The clock is absolute
Two deadlines, calendar days, no extensions: identify replacement candidates in writing by day 45 after your sale closes, and complete the purchase by day 180 (or your tax-return due date, if sooner — extend the return for a Q4 sale). Run your actual dates through the deadline calculator and put alarms on both.
Identification is a formality with teeth
By day 45 your qualified intermediary must hold a signed designation naming the candidates — typically under the three-property rule (any three, any value) or the 200% rule (any number, up to twice your sale price combined). You can only close on identified properties, and the list is frozen after day 45. Build backups on purpose: a primary that dies on day 60 with an empty list is a dead exchange.
Equal-or-greater, and mind the boot
Full deferral requires replacing both value and debt: buy at or above your net sale price, and either carry equal-or-greater debt or offset the difference with fresh cash. Shortfalls become taxable boot against your gain. Partial exchanges are legal and sometimes smart — paying tax on a slice while deferring the rest — but they should be chosen, never discovered at filing time.
Same taxpayer, straight paperwork
The taxpayer who sells must be the taxpayer who buys — entity changes mid-exchange invite trouble, and partnership splits (the "drop and swap") need planning well before listing. The purchase contract should carry a 1031 cooperation clause, your QI papers the rest, and the all-in cost of the structure — QI fees, minor closing adds — is trivial against the tax deferred.
State overlay
Federal rules are uniform. Most states conform; Pennsylvania joined that group in 2023. California still wants Form 3840 clawback reporting when you exchange out of state. Your QI runs the federal plumbing; your CPA should confirm both the state you leave and the one you enter.
What qualifies — and what does not
Both sides of the exchange must be real property held for investment or business use. Rentals, commercial buildings, NNN assets, farmland, and mineral or cell-tower interests that state law treats as realty are in. Your home, a flip, dealer inventory, and anything that is not real property are out. Intent is judged by behavior: rental history, tax treatment, holding period — not by a hope that the asset will appreciate.
Like-kind breadth that people underuse
Improved-to-unimproved is fine. Residential-to-commercial is fine. A 30-year-plus leasehold can be like-kind to a fee interest; a shorter leasehold is not. Tenant-in-common shares qualify as direct realty; partnership interests never do — the wrapper defeats the asset. REIT shares and funds are securities even when real estate sits inside them. Fixtures and equipment riding along in a restaurant or car-wash sale need a price allocation so exchange funds do not pay for personal property.
Primary residence and the Section 121 overlap
A home is not 1031 property. Section 121 already excludes $250K of gain ($500K married) if you owned and used it as a primary residence for two of the last five years — no QI, no deadlines. The planning lives at the border. Convert a home into a genuine rental and it can become exchange-eligible, while 121 remains available for up to three years after you move out; Rev. Proc. 2005-14 lets you stack the exclusion and defer the remainder. The reverse — exchange into a rental, later move in — wants two years of real rental use (Rev. Proc. 2008-16) before conversion, and the exclusion then prorates against nonqualified-use years.
Second homes and vacation property
Not automatically in or out. The same 2008-16 safe harbor wants 14+ days of fair-market rental in each of the two years before the exchange (and after, on the replacement), with personal use capped at the greater of 14 days or 10% of rental days. Documented, that ends the argument. A token listing over a season of family use does not.
Raw land, new construction, and land you already own
Vacant land held for investment is like-kind to improved property. Building with exchange dollars is a different problem: improvements must exist by day 180, which is why construction exchanges use an accommodation titleholder. Developer pre-sales of new QSR and c-store pads are usually the cleaner path — you contract during construction and close after lease commencement, as an ordinary purchase.
You cannot exchange into dirt you already hold, and paying contractors on your own parcel is treated as receiving cash. The narrow rescue is a long-term ground lease to an accommodation titleholder that builds during the parking period, so you acquire a leasehold-plus-improvements you did not previously own. Most files do better exchanging into income property and financing the family-land build separately.
Stocks, mutual funds, and anything that is not realty
Cleanly no. Section 1031 excluded securities from the start; 2018 removed the rest of personal property. Anyone selling a "stock 1031" is selling something else. Stock sellers who still want real-asset income pay tax once, buy passive NNN, and then stay inside the exchange system. Opportunity-zone funds are the other door for securities gains — covered with the other alternatives below.
Foreign property and inherited property
U.S. realty is like-kind only to U.S. realty; foreign only to foreign (§1031(h)). A Costa Rica villa does not defer into a Texas dollar store. Territorial edges (USVI, Guam, Northern Marianas, Puerto Rico) are technical — confirm with counsel. Foreign-to-foreign exchanges are valid on the U.S. side; the local jurisdiction often taxes them anyway.
Inherited property often does not need an exchange at all. The step-up resets basis to date-of-death value, so a sale soon after death may recognize almost no gain. Time rebuilds gain; heirs who keep operating the asset as an investment can exchange later. Sequence the estate paperwork — date-of-death appraisal, any §754 election, co-heir title — before listing.
The 45/180 clock, Q4 sales, and the rare extension
Identification in writing by midnight of day 45 after the relinquished closing; acquisition by day 180 or your tax-return due date, whichever lands first. Calendar days. No weekend grace. The only extensions that ever move those dates are federally declared disaster notices covering your specific location and window. Plan as if day 45 does not move.
Fourth-quarter sales shrink the 180. Regulations cut the replacement period at the due date (with extensions) of the return for the sale year. A mid-November closing does not get May — it gets April 15 unless you file Form 4868 (or the entity equivalent). Practitioner habit: every Q4 file gets a January note that says do not file before the exchange closes, because an early return truncates the window the same way a missing extension does.
A delayed (forward) exchange is the default: sell first, QI holds proceeds, you shop under the two clocks. Start the search before the sale closes. Buyers who begin shopping on day 10 identify leftovers.
Boot, basis, and depreciation recapture
Three flavors of boot
Cash boot: proceeds you do not reinvest, or a cheaper replacement. Sell at $1.5M, buy at $1.35M, and $150K is taxable even if you never saw a check. Mortgage boot: retire $700K of debt and take only $500K on the purchase — $200K of debt relief is taxed like cash. Offset it with fresh equity dollar-for-dollar. Transactional boot: repair credits taken in cash, prorations netted to you, personal property bundled into the deal. Have the QI read both settlement statements before they finalize.
Boot is recognized gain up to total gain — recapture rates first (25%), then capital-gains rates, plus state tax and possibly NIIT. It does not unwind the rest of the exchange. Deliberate boot (a partial exchange) is a choice; accidental boot is an April surprise.
Basis that has to survive decades
Old basis carries forward, reduced by money you kept and increased by extra cash you put in and gain you recognized. Depreciation on the carried amount generally continues; the buy-up increment starts a new schedule. Land never depreciates, so the land/improvement split at the replacement closing is a negotiable number with a long tail. Keep every Form 8824 workpaper. When one sale funds several replacements, allocate basis by value the year it happens.
Recapture rides along
Depreciation taken on the old property does not vanish. It waits at 25% until a taxable sale — or until death erases it with the step-up. That is why exchangers keep chaining. Recapture is deferred with the rest of the gain; it is not forgiven by the exchange itself.
Reverse, partial, drop-and-swap, and construction
Reverse: buy first when the deal will not wait
You cannot own both properties at once, so an exchange accommodation titleholder parks one of them — usually the new purchase — under Revenue Procedure 2000-37. Identify what you will relinquish within 45 days of the EAT taking title; finish the sale within 180. Fees run roughly $4,500–$12,000+ versus $750–$1,500 for a standard deferred exchange, plus carrying costs and specialized financing. Worth it for irreplaceable paper (a rare Chick-fil-A ground lease with a two-week fuse). Not worth it for a generic listing.
Partial: take cash on purpose
Whatever you do not reinvest is boot, taxable up to gain. Sell at $1.6M with $700K of gain, buy at $1.3M, and $300K is recognized now; $400K rides. Tell the QI the cash-out plan in writing before the first closing. The alternative is a full exchange, a seasoning interval, then a cash-out refinance — loan proceeds are not income. Immediate exchange-then-refi patterns invite scrutiny; your CPA sets the gap.
Drop-and-swap: partners who want different exits
Partnership interests cannot be exchanged. Real estate held as tenants-in-common can. Before sale, the partnership distributes TIC interests so each former partner owns realty directly; two can exchange and one can take cash. Season the drop — a year-plus is comfortable; days-before-closing looks held-for-sale. California's FTB questionnaires these files. Raise the exit question years before any listing.
Build-to-suit versus buying a developer's pad
Construction inside the exchange (EAT holds the site, your funds build, you take land-plus-work by day 180) buys control at the cost of fees and a hard completion ceiling. Buying a developer's finished, lease-commenced pad is just a purchase. Nine files in ten want the second route.
What a 1031 costs, and what the buyer on the other side sees
Standard QI fees are small against the tax deferred. Reverse and construction structures add accommodation entities and insurance. If you are buying from a 1031 seller, their deadline is your leverage — and a cooperation clause costs you nothing. If you are the seller, put the addendum in the listing contract so the buyer cannot later refuse to cooperate with the QI.
DST, TIC, 721, opportunity zones, and 1035
These are cousins, not substitutes. Use them when the job is different from "buy a whole NNN property with exchange dollars."
Delaware Statutory Trusts
A sponsor wraps institutional real estate and sells beneficial interests, often at $100K minimums. Revenue Ruling 2004-86 treats a properly restricted DST interest as direct ownership for 1031 purposes. Closings take days. Pre-packaged debt satisfies replacement. Three honest jobs: backup identification on day 45, remainder placement after a slightly cheaper primary, and decision-free passivity. Fees commonly consume 8–12% of capital across the hold. You do not vote on sale timing. Liquidity waits for the sponsor exit, typically a 5–10 year horizon. We use DSTs for those three jobs; we do not treat them as the default first answer.
Tenants-in-common
Each holder owns an undivided fractional interest in the realty — exchangeable, unlike a partnership share. Rev. Proc. 2002-22 sketches the safe profile: 35 or fewer owners, unanimous consent on major acts, pro-rata economics, no partnership branding. TICs keep real veto rights and the coordination risk that comes with them. DST debt is pre-packaged; TIC lenders underwrite every co-owner. Organic uses: drop-and-swap exits, family co-ownership of a larger NNN asset, several exchangers converging on one building.
Section 721 (UPREIT)
Contribute property — or a DST interest at trust exit — to a REIT operating partnership for OP units. No QI, no clocks. Units track REIT economics and typically convert 1:1 into shares. Conversion, or the REIT selling the contributed asset, recognizes the deferred gain. OP units never 1031 again. 721 is a last chapter: aging holders who want diversification without a taxable sale, DST investors at exit, estates that prefer unit liquidity. Owners who want to stay owners stay in 1031.
Opportunity zones versus 1031
1031 takes only real-property gains rolled through a QI, and requires rolling price, equity, and debt for full deferral. Opportunity zones take capital gains from anything — stocks, a business, crypto, real estate — invested within 180 days of recognition, and only the gain needs to go in. OZ deferral ends at fund exit or a statutory recognition date; the prize is tax-free fund appreciation after a 10-year hold. 1031 deferral is indefinite and can die with the owner. One is a building you chose; the other is a fund allocation. Large files often use both — 1031 for the real estate sale, OZ for the same year's stock gains.
Section 1035 is a different street
1035 defers gain when swapping life insurance, endowments, or annuities carrier-to-carrier. No QI, no 45/180. Annuity-into-rental and real-estate-into-annuity are not exchanges. Run the two systems in parallel; there is no bridge that avoids tax at the border.
Why exchange money buys NNN
Watch what exchangers actually do and a pattern repeats: sell the management-heavy asset, buy the corporate lease. The logic is mechanical. NNN inventory exists nationwide at every price point, so identification lists can be built quickly and credibly inside 45 days. Closings are standardized — lease review, estoppel, title — and reliably fit inside 180. Debt replacement is straightforward because lenders quote net lease paper daily. And the endpoint matches the demographic reality of most exchangers: after twenty years of tenants and toilets, a zero-landlord-duty lease backed by Dollar General or 7-Eleven is the retirement the apartment building was for.
One-into-many deserves special mention: the 200% rule lets a single large sale split into two or three NNN closings — different tenants, different states, staggered lease maturities. It's the cheapest diversification available to a private landlord, and it's executed entirely through identification strategy. The acquisition process is the same process we run on every exchange file.
How exchanges actually fail — and the counter-moves
Almost never on the law; almost always on the calendar and the list. The seller who starts shopping on day 10 identifies whatever was left over. The seller who identified one property watches it fall out of contract on day 60 with a frozen list and a dead exchange. The counter-moves are equally unglamorous: criteria circulating before your sale closes, a primary under contract inside three weeks, and backups identified in writing even though you're sure you won't need them. That cadence is the actual product of buyer representation for exchange clients — the rules are free, the execution is what fails.