USA: how a section 1031 like-kind exchange and its deadlines work

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Kooky

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An investor in the United States who sells a rental building at a profit normally reports that profit to the Internal Revenue Service for the year of the sale. One provision of the federal Internal Revenue Code offers another route. Under section 1031, an owner who trades real property held for business or investment for other real property of the same kind generally recognises no gain and no loss at the time of the trade, according to the IRS. The gain does not vanish. It is carried into the next property and waits there.

The idea is simple and the practice is strict. An owner will not always find someone who wants to swap buildings on the same day, so an exchange can run over several months, and two clocks then start the moment the first property changes hands: 45 days to name the replacement, and 180 days at most to receive it. This guide follows the IRS's own material, mainly the instructions for Form 8824 for 2025, the agency's page of real estate tax tips on like-kind exchanges and Publication 523 for 2025. It covers what qualifies, how the two deadlines are counted, how cash and mortgages turn part of a deferred gain into a taxed one, and how the exchange is reported. It deals with federal income tax only; state tax rules are a separate matter that the pages read here do not cover.

IRS, Instructions for Form 8824 (2025), lines 5, 6 and 7 to 11. Each period runs from a different starting point, explained below.

What a like-kind exchange is

The IRS describes a like-kind exchange as the exchange of real property used in a business or held as an investment solely for other business or investment real property of the same type. When the conditions are met, section 1031 means the owner generally does not have to recognise a gain or a loss on the trade. The agency adds that these exchanges have long been permitted under the Internal Revenue Code.

Three ideas sit inside that definition, and each one can disqualify a deal.

The first is the purpose for which the property is held. Both the property given up and the property received must be used in a trade or business or held for investment. A building bought to be resold is on the wrong side of that line: the instructions for Form 8824 say that section 1031 does not apply to real property held primarily for sale, and cite section 1031(a)(2).

The second is the word "solely". An owner who receives something other than like-kind real property, such as cash, has not exchanged solely for like-kind property. The trade can still qualify in part, but the IRS says the owner must then recognise gain up to the value of the money and other property received. A loss, by contrast, cannot be recognised.

The third is deferral. The form that reports the exchange computes three things, in the IRS's description of its purpose: the gain that is deferred, the gain that is recognised when cash or other property is involved, and the basis of the property received. Basis is the tax cost of a property, the figure a later gain is measured against. Because the new property takes over the old tax cost, the untaxed gain travels with it.

Which property qualifies

Since 1 January 2018, section 1031 applies to real property only. The IRS page explains that exchanges of machinery, equipment, vehicles, artwork, collectibles, patents, other intellectual property and intangible business assets generally stopped qualifying on that date. A transition rule kept the old treatment for an owner who had disposed of the property given up, or received the replacement, on or before 31 December 2017.

Within real property, "like kind" is a wide notion. Properties are like kind, in the wording of the instructions, if they are of the same nature or character, even if they differ in grade or quality. Real properties are generally like kind whether they are improved or unimproved, which is why the test is not about matching a flat with a flat. The IRS's own example is the obvious case, an apartment building traded for another apartment building, but the rule itself does not require the two properties to look alike.

The definition of real property comes from a Treasury regulation, section 1.1031(a)-3, as the instructions summarise it: land and improvements to land, unsevered natural products of land, and water and air space above land. A structure permanently fixed to land may count, as may the structural components built into it. Some intangible rights are treated as real property too, for instance when state or local law classifies them that way or when their value comes from real property and cannot be separated from it; the instructions give an easement as an example.

Two entries deserve a closer look. Location matters: real property in the United States and real property outside it are not like kind, so an owner cannot defer the gain on a domestic building by taking a foreign one in return. And the list of financial assets has narrow exceptions. Stock in a cooperative housing corporation is treated as real property, as are certain shares in mutual ditch, reservoir or irrigation companies. Certificates of trust and beneficial interests are excluded, and a partnership interest is in general not eligible.

The deferred exchange and the intermediary

The instructions call an exchange "deferred" when the replacement property is received after the property given up has been transferred. This form raises a practical problem: if the owner sells and simply holds the sale money until a new property is found, the owner has made a sale followed by a purchase, not an exchange.

The answer the IRS recognises is the qualified intermediary, often shortened to QI. Where an intermediary of this kind is used, the instructions say, the transfer of the old property and the receipt of the new one are treated as a like-kind exchange. The instructions describe this as one of several safe harbours and refer to IRS Publication 544 for the others.

Not everyone can fill the role. Related parties and the owner's own agents are "disqualified persons" and cannot serve as the qualified intermediary, according to the instructions, which point to chapter 1 of Publication 544 for the detail. Who counts as an agent for this purpose is defined there and was not read for this guide.

The intermediary's reliability carries real weight. If the timing conditions are missed because of the intermediary, the instructions state that the transaction may not qualify as a like-kind exchange and the gain may be taxable in the year the old property was transferred. A separate relief exists for one situation: where the intermediary defaults because of bankruptcy or receivership and the owner meets certain requirements, the gain may be reported in the year or years in which payments are actually received, under Revenue Procedure 2010-14.

An exchange of real property often brings some movable items with it. The instructions deal with this in the intermediary rules: personal property that is incidental to the replacement real property is disregarded for certain purposes if its aggregate fair market value does not exceed 15 per cent of the aggregate fair market value of the replacement real property. As a worked example with assumed figures, a replacement building worth US$1,000,000 could come with incidental items worth up to US$150,000 under that test, since 15 per cent of US$1,000,000 is US$150,000.

There is also a route for the owner who finds the replacement first. Under a qualified exchange accommodation arrangement, a third party called an exchange accommodation titleholder holds a property and may be treated as its beneficial owner for federal income tax purposes, so that the property later transferred to the investor may be treated as received in an exchange. The instructions cite Revenue Procedure 2000-37, as modified by Revenue Procedure 2004-51, and note one limit: the treatment is not available for property the investor owned within the 180 days before it was transferred to the titleholder.

The 45-day identification deadline

The first clock is short. Line 5 of Form 8824 asks for the date on which the replacement property was identified in writing, and the instructions set out what a valid identification is. The property must be designated in writing. It must be described clearly, by a legal description, a street address or a distinguishable name. And the document must be sent or signed no later than 45 days after the date the owner transferred the property given up.

Each element does a job. A spoken understanding with a broker is not a written designation. "A warehouse in Texas" is not a clear description, while a street address is. The count runs from the transfer of the old property, not from the day the sale contract was signed or the day the search began.

One case removes the paperwork question altogether. An owner who actually receives the replacement property before the 45-day period ends is treated as having met the identification requirement, the instructions say, and enters the date of receipt on line 5.

The Form 8824 instructions stop there. They do not say how many properties an owner may name, and that question is answered in Treasury regulation section 1.1031(k)-1, which was not read for this guide; the limits on the number and value of identified properties are therefore left out here rather than quoted from memory.

The 180-day deadline and the tax return date

The second clock has two possible end dates. Line 6 asks for the date the owner received the like-kind property, and the instructions say it must be received by the earlier of two dates: the 180th day after the transfer of the property given up, or the due date, including extensions, of the owner's tax return for the year in which that property was transferred.

Both clocks start on the same day. The 180 days are not added after the 45: the identification period is the first part of the receipt period.

A worked example shows the effect. The assumptions are these: an investor files on a calendar year, the return for 2025 is due on 15 April 2026, and no extension is in place. The due date and any extension depend on the taxpayer, so these dates are illustrative only.

If the old property is transferred on 1 July 2025, day 45 falls on 15 August 2025 and day 180 on 28 December 2025. Both come before the assumed return date, so the full 180 days are available.

If the old property is transferred on 1 December 2025, day 45 falls on 15 January 2026 and day 180 on 30 May 2026. The assumed return date of 15 April 2026 is only 135 days after the transfer. On these assumptions the receipt period ends on 15 April 2026, 45 days sooner than the 180-day count suggests, unless the due date of the return has been extended. The rule's own wording, "including extensions", is what makes an extended due date relevant.

When either deadline is missed, the consequence follows from the definition: the conditions of a deferred exchange are not met, and the gain on the old property is generally taxable for the year of its transfer. The instructions say this expressly for a failure caused by the intermediary. They do not mention any extension of the two periods for disasters, and none is described here.

Cash, debt and the gain taxed now

Property taken in an exchange is rarely worth exactly what was given up, and mortgages rarely match. The difference is settled in money or in debt, and the trade calls that difference "boot". The rule in the instructions is that gain is recognised to the extent of the money and other non-like-kind property received, while a loss is not recognised.

Line 15 of the form gathers the boot: cash received, the fair market value of other property received that is not like kind, and the net liabilities assumed by the other party. The total is reduced by exchange expenses, though not below zero. Debt counts because an owner whose mortgage is taken over by the other side has been relieved of an obligation, which is treated like receiving money. Only the net figure counts, so a mortgage taken on in return offsets a mortgage given away.

The instructions illustrate this with two owners they call Taylor and Finley. Taylor's building has a fair market value of US$220,000, an adjusted basis of US$100,000 and a mortgage of US$80,000. Finley's building has a fair market value of US$250,000, an adjusted basis of US$175,000 and a mortgage of US$150,000. They swap buildings, each assumes the other's mortgage, and Taylor also receives US$40,000 in cash.

The US$70,000 on line 18 is the difference between the US$150,000 mortgage Taylor took on and the US$80,000 mortgage Taylor was relieved of. Taylor has a real economic gain of US$120,000 but is taxed in the year of the exchange on US$40,000, the cash.

Finley received no cash and still has boot. Taylor assumed US$150,000 of Finley's debt, while Finley assumed US$80,000 of debt and paid US$40,000 in cash, US$120,000 in all. The net relief of US$30,000 is Finley's line 15. Finley's gain realised is US$75,000, the US$250,000 received in total less the US$175,000 basis, and US$30,000 of it is recognised. The lesson of the IRS example is that an owner who trades down in debt can owe tax without touching a dollar.

Basis and depreciation: deferral is not forgiveness

The basis of the property received is computed on line 25: the amount on line 18, plus the gain recognised on line 23, minus the boot on line 15. For Taylor that is US$170,000 plus US$40,000 minus US$40,000, which gives US$170,000.

Set that against the value of the building Taylor now owns, US$250,000. The gap is US$80,000, exactly the gain deferred. If the building were later sold in an ordinary taxable sale for that same US$250,000, with nothing else changed, the gain measured against the US$170,000 basis would be the US$80,000 that the exchange postponed. This is the mechanism behind the word "deferred". The same holds on the other side: Finley's new basis is US$175,000 plus US$30,000 minus US$30,000, or US$175,000, on a building worth US$220,000, which leaves the US$45,000 Finley deferred.

Depreciation adds a layer. Tax law can treat part of a gain as ordinary income where it reflects depreciation claimed earlier, a mechanism known as recapture, under sections 1245 and 1250 of the Code. The form reports that amount on line 21, and it is counted within the recognised gain before any other gain. In the IRS example, part of Taylor's building is section 1245 property on which US$35,000 of depreciation was taken. Of Taylor's US$40,000 of recognised gain, US$35,000 goes on line 21 as ordinary income and the remaining US$5,000 on line 22. The total recognised stays at US$40,000 and the deferred gain at US$80,000.

Recapture that is not taxed in the exchange does not disappear either. In the same example the instructions note that US$5,000 of Finley's potential section 1250 recapture carries over to the building received, so that this amount of gain on a later sale would be ordinary income. How much depreciation a given building has generated is a question of its own, outside the pages read for this guide.

Exchanges with related parties

Section 1031(f) adds a holding period when the two sides are related. Related parties, in the instructions' list, include a spouse, child, grandchild, parent, grandparent, brother or sister, together with related corporations, S corporations, partnerships, trusts, estates and tax-exempt organisations.

The rule is this. If either party disposes of the property it received before two years have passed since the last transfer that was part of the exchange, the deferred gain or loss from line 24 must generally be reported for the year of that disposition. The exchange is not undone retroactively; the postponed gain is brought forward.

Three exceptions appear on line 11 of the form: a disposition after the death of either related party, an involuntary conversion whose threat arose after the exchange, and a case in which the owner can establish that neither the exchange nor the disposition had tax avoidance as a principal purpose, which requires an explanation attached to the form. The instructions also warn that the two-year period stops running during any time when the holder's risk of loss on the property is substantially reduced.

Going through a third party does not avoid the rule. The instructions treat as indirect related-party exchanges those made through a qualified intermediary or an exchange accommodation titleholder, and those made by a disregarded entity such as a single-member limited liability company owned by the taxpayer or a related party. A transaction structured to get round the related-party rules is not a like-kind exchange at all, they say, and is reported as a sale.

The paperwork lasts as long as the holding period. An owner who exchanged with a related party files Form 8824 again for each of the two years following the year of the exchange.

When a home is involved

A property used solely as the owner's personal residence is outside section 1031. Publication 523 puts it in a few words: a main home is not available for exchange, because the exchange must involve real property held for business use or investment.

Mixed histories are where the two regimes meet. The home-sale exclusion sits in section 121 of the Code; Publication 523 for 2025 gives it as US$250,000, increased to US$500,000 for a married couple filing jointly. The Form 8824 instructions say that if the owner owned and used the property given up as a main home for periods adding up to at least two years in the five-year period ending on the date of the exchange, section 121 may exclude part or all of the gain, and the property does not need to be the principal residence on the exchange date. Where both sections apply, Publication 523 says the section 121 exclusion is applied first to the realised gain, an order set by Revenue Procedure 2005-14. On the form, the exclusion is entered on line 19 and added to the basis of the property received on line 25.

For a property that was partly a residence and partly a business or investment asset, the instructions tell the owner to work through two copies of the form as worksheets, one for each part.

The rule also runs the other way. An investor who takes a property in a like-kind exchange and later moves into it faces a five-year wait: under section 121(d)(10), as Publication 523 explains, the exclusion cannot be claimed if the home is sold within five years of the date it was acquired in the exchange. The publication adds that the replacement property cannot be converted to a main home immediately after the exchange.

How the exchange is reported

Form 8824, Like-Kind Exchanges, is filed with the tax return for the year in which the owner transferred property in the exchange. That holds even when the replacement arrives in the following calendar year, which is one reason the return's due date appears in the receipt deadline.

Lines 1 and 2 describe the property given up and the property received, with the address and type of each, and the country if a property lies outside the United States. Lines 5 and 6 carry the two dates this guide has followed. The gain recognised then moves to another part of the return: Schedule D, Form 4797 or, where instalment treatment applies, Form 6252.

An owner with several exchanges in one year may file a single summary form with a statement for each exchange attached. An exchange involving more than one group of like-kind properties follows Treasury regulation section 1.1031(j)-1: the owner skips lines 12 to 18, attaches a statement showing the computation and enters the results on lines 19 to 25.

What these pages leave open

The IRS material read here is a set of form instructions, not the full body of rules, and several questions an investor will meet are answered elsewhere.

• The limits on how many replacement properties may be identified, and up to what value, are in Treasury regulation section 1.1031(k)-1.
• The treatment of a holiday home that is also rented, and of an interest in a Delaware statutory trust, is not addressed in the instructions.
• Any extension of the 45-day and 180-day periods after a federally declared disaster is not addressed in them either.
• State income tax treatment of an exchange is outside these federal pages.

One recent change sits next to section 1031 without being part of it. The instructions for 2025 record that a federal law enacted in 2025 added section 1062 to the Code, which lets a taxpayer elect to defer the tax on gain from the sale or exchange of qualified farmland to a qualified farmer, for tax years beginning after 4 July 2025. It is a separate election.

A like-kind exchange moves the tax bill to a later sale. The two deadlines decide whether that move happens at all.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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