How to Use a 1031 ExchangeWhen Selling and Buying Property
A Section 1031 exchange lets you defer capital gains tax when you sell an investment property and reinvest the proceeds into a replacement property. Done right, it preserves your buying power. Done wrong, it can cost you the deferral.
Saman Khanian
Author & Mortgage Professional
Sell one, buy another
Defer the gain — if you follow the rules
Sell, Reinvest, Defer — Within Strict Deadlines
Under Section 1031 of the tax code, you can defer capital gains tax when you sell a property held for business or investment and reinvest the proceeds into a like-kind replacement property.
The two deadlines decide everything: identify replacement property within 45 days of closing the sale, and acquire it within 180 days. Miss either, and the exchange generally fails — along with the tax deferral.
Identification deadline
45 days
Written identification of candidate properties
Acquisition deadline
180 days
Replacement property must close and transfer
What it defers
Capital gains tax
Not permanently eliminated — deferred
What a 1031 Exchange Really Is
Three core ideas explain almost everything about how exchanges work. Get these right and the rest is process.
Trade one investment property for another — and keep the capital working.
It is a deferral, not a loophole
A 1031 exchange postpones the capital gains tax — it does not erase it. The deferred gain carries over into the basis of the replacement property and is taxed later, when you finally sell without another exchange.
Your money must never touch you
You cannot hold the sale proceeds — even briefly, even in your own bank account. The funds must go directly from the closing to a qualified intermediary.
Investment property only
Both the property sold and the property acquired must be held for productive use in a trade or business or for investment. A personal residence is not eligible.
Exchanging into a new property? We can help with the purchase or replacement financing.
Apply NowWhat Counts as “Like-Kind”?
Since the 2017 tax law change, real property exchanges only real property. Beyond that, “like-kind” is broader than most people assume — but it does have limits.
Common and generally acceptable
Same asset class rules apply across geography
Both held for investment
A second home is not investment property
Primary residence is excluded
Partnership interests have special rules
Always confirm eligibility with a qualified intermediary and your tax advisor. Special rules apply to partnership interests and mixed-use property.
The 45- and 180-Day Timeline
The deadlines are strict, start on the day your sale closes, and are generally not extended — even if a weekend, holiday, or closing delay gets in the way.
Sale closes
Day 0Your relinquished property sells. The proceeds go to the qualified intermediary — not to you. The 45-day clock starts.
Identify replacement property
Day 1–45You submit a written identification to the QI. You can name up to three properties, or more if their combined value does not exceed the sold price.
Close on the replacement
Day 46–180You must actually acquire the identified property within the 180 days. Identified but not closed does not count — the transfer must complete.
Hard stop
Day 180The exchange period ends. If you have not closed, the deferral fails and the proceeds come back to you as a taxable sale.
The 3-property rule: you may identify up to three properties regardless of value. Alternatively, you may identify more than three if their combined value does not exceed 200% of the sold property's value. You may also close on fewer properties than you identified.
How to Run the Exchange
Six steps from planning to closing. Most of them need to be in motion before the sale even closes.
Plan before you list
Decide on the exchange before you sign a sales contract. Talk to your tax advisor and line up a qualified intermediary early.
Engage a qualified intermediary
The QI is a neutral party who receives the sale proceeds and holds them until the replacement closes. You cannot use your agent, attorney, or accountant.
Close the sale with the exchange clause
Your contract must reference the exchange, and the QI must be documented as the recipient of the proceeds.
Identify candidates by day 45
Submit a written identification to the QI: up to three properties, or a larger list meeting the value test.
Arrange replacement financing
An exchange does not supply a down payment automatically — you often borrow against the new property. Start the loan early so it closes inside 180 days.
Close and document
The QI releases funds for the replacement purchase. File the exchange carefully with your tax return using Form 8824.
Financing your replacement property? Let us review it before the 180-day clock gets tight.
The Qualified Intermediary
The qualified intermediary (QI) is the single most important relationship in an exchange. They receive your sale proceeds, hold them safely, and release them only to close on the replacement property.
You cannot act as your own QI, and you cannot use anyone who has represented you in the last two years — including your real estate agent, attorney, or accountant. The QI must be a truly independent party.
The “actual receipt” trap: if you take control of the funds at any point — even for a day — the exchange is generally disqualified. Funds must flow through the QI, never through you.
How the money moves
Your sale closes
Buyer's funds go directly to the QI.
QI holds the proceeds
Safely, until the replacement closes.
You identify within 45 days
Written notice to the QI.
QI funds the purchase
Released directly to the closing of your new property.
Boot: What You Still Might Owe
A perfect exchange defers everything. Any value that leaves the exchange — called “boot” — is generally taxable.
Cash you take out
If you receive any cash from the sale rather than investing it fully, that amount is generally taxable.
Debt you reduce
If the new property carries less debt than the old one, the difference counts as taxable boot — even if you never see cash.
Non-qualifying assets
Taking furniture, equipment, or other personal property out of the replacement can also create boot.
Illustrative example
Sold property
$600,000
Replacement
$550,000
Boot (taxable)
$50,000
Here the replacement costs less than the sold property, so the difference is subject to tax in the year of the exchange. To defer everything, invest all the equity and keep debt at least as high as it was.
Illustrative only. Your tax advisor calculates the actual gain, basis, and boot.
Financing the Replacement Property
The exchange is a tax strategy — it is not a mortgage program. If your new property costs more than your old debt and equity combined, you will need a loan. Start it early, because it must close inside 180 days.
DSCR loan
Qualifies on the rental income of the property, not your personal income. Popular for exchanges into rental and multi-unit properties.
Conventional investor loan
Standard option for 1–4 unit rentals under agency limits, with documented income and reserves.
Bank statement / non-QM
For self-employed investors and others whose income is harder to document under standard rules.
Jumbo and portfolio
Higher-priced replacement properties above conforming limits, or complex multi-unit deals.
Timing tip: a purchase loan typically takes 25–45 days to close. If you identify late, you can run out of runway. Get pre-qualified for the replacement loan before day 45 so you know your true budget when you're identifying properties.
Pre-qualify for your replacement loan before you identify.
Apply NowCommon Mistakes That Break an Exchange
Most failed exchanges fail for one of these reasons — and each is avoidable with planning.
Letting the proceeds touch your account
The single most common and most costly error. Once you receive the funds, the exchange is generally dead.
Starting the exchange after the sale closes
The QI must be in place with the exchange documents signed before the relinquished property closes.
Identifying vague or unworkable property
“Somewhere in Texas” is not an identification. Name specific properties with precise addresses.
Forgetting the 180-day window includes weekends
There is no extension for weekends or holidays. Plan closings with a comfortable buffer.
Not accounting for boot
Replacing with less value or less debt leaves a taxable portion, even when you never see cash.
Skipping the tax advisor
This page is general information. Your basis, gain, and strategy depend on your own return.
1031 Exchange Questions, Answered
What is a 1031 exchange in simple terms?
A way to defer capital gains tax when you sell an investment property and reinvest the proceeds into another like-kind investment property within set deadlines — 45 days to identify and 180 days to close.
Can I use a 1031 exchange on my primary residence?
No. A Section 1031 exchange applies to property held for business or investment use. Your personal residence is handled under different rules, such as the Section 121 exclusion for homes you have lived in.
What is the 45-day rule?
You must identify replacement property in writing to your qualified intermediary within 45 days after your sale closes. You can name up to three properties, or more if their combined value is within 200% of the sold property's value.
Can I take some cash out during a 1031 exchange?
You can, but any cash you keep — or any reduction in debt — is generally considered boot and is taxable. To defer the full gain, reinvest all the equity and keep your debt at least as high as it was.
Do I need a qualified intermediary?
In practice, yes. You cannot hold the proceeds yourself, and the QI must be independent — not your agent, attorney, or accountant. The QI receives the sale funds and releases them for the replacement purchase.
Does a 1031 exchange offer reverse-like flexibility to change my mind?
Not really. Once identified within 45 days, you are limited to that list. You may close on fewer properties than you identified, but you cannot identify new ones after day 45.
Is a 1031 exchange permanent tax relief?
No — it is a deferral. The gain rolls into the replacement property's basis and is eventually taxed when you sell without another exchange. Estates may receive a step-up in basis at death, but that is a separate tax matter.
Can I finance the replacement property with a mortgage?
Yes, and many investors do. DSCR, conventional investor loans, non-QM, and jumbo products are all options. Because the loan must close inside the 180-day window, get pre-qualified early.
What happens if I miss a deadline?
The exchange generally fails. The proceeds are returned to you and treated as a taxable sale, with the capital gain recognized in that year. There is usually no extension.
Saman Khanian
Saman Khanian is the CEO of Equitable Lending, a Los Angeles mortgage lender serving homeowners and investors across California. He writes about investment property financing, DSCR and Non-QM loans, and tax-deferred real estate strategy — with an emphasis on planning the loan around the deadlines that make or break a deal.
View Full ProfileDisclosure: This article is for informational purposes only and does not constitute tax, legal, or financial advice, nor a loan commitment or rate quote. Section 1031 eligibility, deadlines, and tax treatment depend on your specific situation and should be reviewed with a qualified tax advisor, attorney, and qualified intermediary. All figures are illustrative examples. All loans are subject to credit approval and underwriting. Equitable Lending is a licensed mortgage lender — NMLS #1124483, DRE #01941713. See our Licensing Information page and speak with a licensed loan officer about your situation.
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