By Income Tax Service Editorial — Reviewed by Diyan Yap, EA (IRS Enrolled Agent) — Updated August 10, 2026
Quick answer: A 1031 exchange defers capital gains tax and depreciation recapture when you swap investment real estate for other investment real estate. You must identify replacement property in writing within 45 days and close within 180 days of the sale, both measured from the same closing date, and a Qualified Intermediary must hold the money — you may never touch the proceeds.
Key facts:
- Since 2018, only real property held for investment or business use qualifies — equipment and other personal property no longer do
- Nearly any U.S. real estate is like-kind to any other U.S. real estate
- 45-day identification window, in writing, to a Qualified Intermediary
- 180-day closing window — both clocks run concurrently from the relinquished-property closing date
- Neither deadline extends for weekends, holidays, or emergencies
- Full deferral requires reinvesting all net proceeds into replacement property of equal or greater value
The exchange is powerful and unforgiving in equal measure. Nothing about it is discretionary: the rules are date-driven, and a missed date turns a deferral into a taxable sale.
What qualifies for a 1031 exchange in 2026?
Only real property held for investment or business use. The 2018 change narrowed §1031 to real estate, so exchanges of equipment, vehicles, machinery, artwork, and other personal property no longer qualify.
Within real estate, the like-kind test is far looser than most people expect. Nearly any U.S. real estate is like-kind to any other U.S. real estate: raw land for an apartment building, a retail strip for a rental house, a warehouse for farmland. The asset class doesn’t have to match — the use does.
What doesn’t qualify is property held primarily for resale. A flip bought to sell is inventory, not investment property, and a personal residence isn’t investment property either — that sale is governed by the home sale exclusion instead.
How do the 45-day and 180-day deadlines work?
Both clocks start on the day the relinquished property closes, and they run at the same time — the 180 days do not begin after the 45 days end.
| Milestone | Deadline | What must happen |
|---|---|---|
| Day 0 | Relinquished-property closing | Proceeds go to the Qualified Intermediary, not to you |
| Day 45 | Identification deadline | Replacement property identified in writing to the intermediary |
| Day 180 | Exchange deadline | Purchase of identified replacement property completed |
Three things trip people up. First, identification must be written and delivered to the intermediary — a mental shortlist or a text to your agent is not identification. Second, the 180-day window includes the 45-day window; you do not get 225 days. Third, neither deadline moves for weekends, holidays, a financing delay, a failed inspection, or a personal emergency.
Because the timeline is fixed, experienced investors line up replacement candidates before listing the property they intend to sell. Starting the search on day 1 is how exchanges fail.
Why do you need a Qualified Intermediary?
Because if you receive the sale proceeds, the exchange is over. A Qualified Intermediary is an independent party that holds the funds between closings and transfers them into the replacement purchase. The investor may never take possession of the money, not even briefly and not even in a separate account under their own control.
That single rule shapes the logistics: the intermediary must be engaged before the relinquished property closes. There is no way to fix this after the fact — a sale that already put cash in your bank account cannot be retroactively converted into an exchange.
Full deferral also requires putting all of it back to work. Reinvest all net proceeds into replacement property of equal or greater value; anything you keep — cash, or debt relief not replaced with new debt — is generally taxable “boot” to the extent of gain, even when the rest of the exchange is clean.
What happens to depreciation recapture in an exchange? (worked example)
A 1031 exchange defers depreciation recapture along with the rest of the gain — it does not erase it. The recapture liability rides along into the replacement property’s basis and surfaces whenever you finally sell without exchanging.
Priya sells a rental property in 2026:
- Sale price: $700,000; adjusted basis after depreciation: $300,000
- Total gain: $400,000, of which $120,000 is prior depreciation subject to a maximum 25% recapture rate and the remaining $280,000 is long-term capital gain
- Closing date: February 10, 2026 → identification deadline March 27, 2026, closing deadline August 9, 2026
- She reinvests the full net proceeds into a replacement property of greater value through a Qualified Intermediary: the entire $400,000 of gain, recapture included, is deferred
- If she instead keeps $50,000 at closing, that cash is generally taxable boot even though the rest of the exchange qualifies
The mechanics of what she deferred are worth understanding before the exit: see our depreciation recapture guide for how the 25% cap and ordinary-income recapture actually apply.
What should you do now?
- Engage a Qualified Intermediary before you close — not after, not during, and not “as soon as we find a buyer.”
- Build your replacement shortlist first. Treat 45 days as the real constraint on the whole plan.
- Calendar both dates in writing the day the relinquished property closes, and work backward from them.
- Plan to reinvest everything, including replacing debt, if full deferral is the goal.
- Coordinate with depreciation strategy. If a cost segregation study accelerated deductions on the old property, the deferred recapture is larger than owners expect.
- Get it reviewed before signing. A credentialed tax professional (like an IRS Enrolled Agent) can confirm the property qualifies and the structure holds before the clock starts, when changes are still possible.
FAQ
Can I do a 1031 exchange on my primary residence?
No. Section 1031 applies to property held for investment or business use. A primary residence sale is handled under the separate home-sale exclusion rules.
Do the 45-day and 180-day periods run one after the other?
No. Both start on the relinquished-property closing date and run at the same time, so the 180-day window includes the 45-day identification period.
Can a deadline be extended for a weekend or an emergency?
Generally no. The identification and closing deadlines are not extended for weekends, holidays, or personal emergencies.
Can I hold the sale proceeds myself between closings?
No. A Qualified Intermediary must hold the exchange funds. Receiving the proceeds directly disqualifies the exchange.
Does a 1031 exchange eliminate depreciation recapture?
No — it defers recapture along with the rest of the gain. The liability carries into the replacement property and surfaces on a future non-exchange sale.
Can I exchange land for a rental building?
Yes. Nearly any U.S. real estate is like-kind to any other U.S. real estate as long as both sides are held for investment or business use.
Sources
- IRS: Like-kind exchanges and real estate tax tips
- IRS Topic 409: Capital gains and losses
- IRS Publication 946: How to depreciate property
This article is for educational purposes only and is not tax, legal, or financial advice. Tax rules change and individual situations vary — consult a qualified tax professional about your specific circumstances.