Personal Finance & Estate › Income, gift, estate & real-estate taxes › Real-estate tax rules (depreciation, 1031, property tax)
1031 like-kind exchange
Real property only since 2018· Tax rule
Law or rule (2026)Set by statute, regulation or the agency; numbers change yearly.
Swap one investment or business property for another and defer the capital-gains and recapture tax on the sale.
See it on the Personal Finance & Estate map →How it works
Sell, and a qualified intermediary holds the cash; touching it kills the exchange. Identify replacements within 45 days and close within 180, with no extensions except declared disasters. To defer everything, buy equal or greater value and replace the debt; leftover cash or debt relief ('boot') is taxed. US real property held for investment or business qualifies; homes don't. Deferred gain carries into the new property's lower basis. California tracks out-of-state replacements and taxes its share later.
Why it matters for you
It lets owners trade up, consolidate or relocate without losing a third or more of the gain to tax. Line up a CPA and intermediary before listing.
Think of it like
Like rolling equity into the next deal: the tax bill rides along in a lower basis instead of being paid.
Rules, limits and sources (2026)
Created by the Revenue Act of 1921; the 1979 Starker case and a 1984 law allowed delayed exchanges; the 2017 law limited it to real property; California requires annual Form FTB 3840.
Watch out for
Proposals to cap deferral, such as a $500,000 limit in 2021, recur; economists debate whether it helps markets or mainly benefits wealthy owners.
Inside this (1)
Connections (5)
▸1031 like-kind exchange is a deferral tool in Real-estate tax rules (depreciation, 1031, property tax)Law or rule (2026)
How they connect
Within real-estate tax rules, the 1031 is the main way to sell without paying now: gain and recapture roll into the next property instead of being taxed. It works only for property held for investment or business, and it ties together depreciation, basis and the step-up at death.
When it applies
Available since 1921; limited to real property by the 2017 tax law, effective 2018, and left intact by the 2025 law.
The rule
IRC Sec. 1031 and Treasury regulations define like-kind real property; IRS Form 8824 reports each exchange.
Watch out for
Economists disagree on how much 1031s raise property turnover and prices versus simply deferring tax revenue.
▸1031 like-kind exchange can defer gains until Step-up in basis at deathStandard practice
How they connect
Each 1031 rolls the old, low basis into the next property, so deferred gain and recapture pile up. If the owner holds the last property until death, the step-up resets basis to market value and the deferred tax is never paid. Planners call it 'swap till you drop'.
When it applies
Combines two rules dating from 1921; widely used by California property families across decades of exchanges.
How sure?
IRC Secs. 1031(d) (carryover basis) and 1014 (step-up); IRS Form 8824 tracks the deferred gain.
Watch out for
Congress has proposed taxing gains at death or capping 1031 deferral, as in 2021; neither passed, but the strategy depends on both surviving.
▸Home-sale exclusion ($250k / $500k, Sec. 121) can combine with 1031 like-kind exchangeDepends on you
How they connect
A property used both as a home and a rental can use both rules. Example: live in it two years, rent it out, then sell within three years of moving out; Section 121 excludes up to $500,000 joint and a 1031 defers the rest. The reverse order has a trap: a home acquired by 1031 must be held five years.
When it applies
IRS Revenue Procedure 2005-14 explained combining them; the five-year rule came from a 2004 law.
How sure?
Rev. Proc. 2005-14 with IRC Secs. 121(d)(10) and 1031; its worked examples show the math.
Watch out for
Nonqualified-use rules and depreciation recapture make the math tricky, and results depend heavily on dates and facts. Ask your CPA.
▸Real-estate wire fraud & deed (title) theft can target the large wires in 1031 like-kind exchangeWatch out
How they connect
A 1031 exchange moves sale proceeds by wire to a qualified intermediary, then to the replacement closing, under 45- and 180-day deadlines. Large sums, several parties and time pressure attract email hijackers. A diverted wire can also break the exchange and trigger the deferred tax.
When it applies
At the sale and replacement closings; intermediaries themselves have also failed, as in the 2007 1031 Tax Group collapse and LandAmerica's 2008 bankruptcy.
How sure?
FBI business-email-compromise warnings name real-estate closings; Edward Okun was sentenced to 100 years in 2009 for taking about $130 million of exchange funds.
Watch out for
No data separate 1031 wire losses from other closings; ask any intermediary about fidelity bonds, segregated accounts and wire-verification steps.
▸DSTs & 721 UPREIT exchanges (passive 1031 exits) are hands-off exits built on 1031 like-kind exchangeDepends on you
How they connect
DST interests count as real property, so 1031 proceeds can buy them, deferring gain while trading management for passive income. Many DSTs later roll into a REIT's operating partnership under Section 721, continuing deferral. Trade-off: once in UPREIT units, further 1031s are impossible, and converting units to REIT shares is taxable.
When it applies
The IRS approved DSTs in Revenue Ruling 2004-86; DST-to-UPREIT programs grew through the 2010s and 2020s.
How sure?
Rev. Rul. 2004-86 and IRC Secs. 1031 and 721; sponsor offering documents disclose fees, risks and exit terms.
Watch out for
Whether DST-to-721 roll-ups are fairly priced for investors, and how fees affect returns, is debated; independent performance data are thin.