Does an exchange eliminate the tax or only postpone it?

It postpones it. The deferred gain carries over into the basis of the replacement property, so it resurfaces whenever that property is sold without another exchange, and the exchange itself is reported to the IRS on Form 8824 for the year of the sale. Owners who exchange repeatedly may never trigger the gain during life, and how the property is treated in an estate is a separate question for a CPA. On its own, a like-kind exchange is deferral, not forgiveness.

Can I move into a property I acquired through an exchange?

Only with caution and time. The replacement property must be acquired with the intent to hold it for investment or for productive use in a trade or business, so converting it to a personal residence soon after closing undercuts that intent and can unwind the exchange. Intent is judged on the facts: how long the property was held, whether it was genuinely rented, and how it was reported. Discuss any planned change of use with your CPA before the change, not after it.

What happens if I receive some cash in the deal?

Cash or other non-like-kind property received in the deal, called boot, is taxable to the extent of the realized gain. The rest of the gain stays deferred, so taking some cash gives partial deferral rather than none. To defer the entire gain, the general requirement is to reinvest all the net proceeds and carry debt on the replacement property at least equal to the debt relieved on the property given up. Any boot is reported with the exchange on Form 8824.

Deferring gain when you sell investment real estate

A like-kind exchange defers the gain when you sell investment or business real property and reinvest the proceeds in other like-kind real property through a qualified intermediary. You have forty-five days from the sale to identify replacement property and one hundred eighty days to close on it. Meeting both deadlines and never touching the proceeds keeps the deferral intact.

Stable law

Requires capital outlay

There is no separate funding requirement beyond reinvesting the sale proceeds, but the transaction carries professional cost: a qualified intermediary charges a fee to hold the funds and document the exchange, and a CPA confirms the property qualifies and reports the deferral correctly. The intermediary must be engaged before the sale closes, because once you have received the proceeds the exchange can no longer be structured. The forty-five-day and one hundred eighty-day clocks both start at the sale, so planning has to precede the closing, not follow it.

Key points

A like-kind exchange under section 1031 defers, but does not erase, gain on investment or business real property reinvested in other like-kind real property.
The clock starts at the sale closing: forty-five days to identify replacement property in writing, and one hundred eighty days to close on it.
A qualified intermediary must receive the sale proceeds, because actual or constructive receipt by the seller turns the exchange into a taxable sale.
Since the 2017 law only real property qualifies; equipment, vehicles, and other personal property no longer receive like-kind exchange treatment.
A primary residence, any personal-use property, and property held for resale such as dealer inventory or a fix-and-flip cannot be exchanged.

What is it?

Selling appreciated real estate normally triggers tax on the gain in the year of sale. A like-kind exchange lets you defer that gain by rolling the proceeds from one investment or business property into another of like kind. The gain is not erased; it carries over into the basis of the replacement property and is deferred until you sell without exchanging again.

The mechanics are strict and time-driven. The proceeds from the sale must go to a qualified intermediary rather than to you, and the intermediary uses them to acquire the replacement property. From the date you close the sale, you have forty-five days to identify candidate replacement properties in writing and one hundred eighty days to complete the purchase. These day-counts are hard; missing either one defeats the exchange.

Since the 2017 law, only real property qualifies. Exchanges of equipment, vehicles, and other personal property no longer receive this treatment. The property given up and the property received must both be real property held for investment or productive use in a trade or business, and the definition of like-kind real estate is broad — raw land can be exchanged for an apartment building, for instance.

The discipline that makes an exchange work is never taking control of the cash. If you receive the proceeds, even briefly, the transaction is a sale rather than an exchange. That is why the qualified intermediary is central: they hold the funds and stand between the two closings so the deferral survives.

Statutory basis

Who does it apply to?

Owners of investment or business real estate sitting on substantial appreciation who intend to stay invested in real estate.

Investors trading up, consolidating, or relocating a real estate holding without wanting to pay tax on the gain mid-stream.

Owners who can commit to the timeline and are ready to engage a qualified intermediary before the sale closes.

Who does it not work for?

A primary residence or any property held for personal use, which is not investment or business property.
Property held primarily for resale, such as dealer inventory or a fix-and-flip, which does not qualify.
An exchange that misses the forty-five-day identification window or the one hundred eighty-day completion window.
A seller who takes actual receipt of the proceeds instead of routing them through a qualified intermediary.
An attempted exchange of personal property or equipment, which no longer qualifies since the 2017 law.

What does the IRS look at?

Whether the property given up and the property received were both held for investment or business use rather than personal use or resale.
Whether a qualified intermediary held the proceeds so that the seller never had actual or constructive receipt.
Whether the replacement property was identified in writing within the forty-five-day window.
Whether the purchase closed within the one hundred eighty-day window.
Whether any cash or non-like-kind property received was correctly reported as taxable to the extent of gain.

What does it cost to fund, and when does the window close?

Related strategies

Common questions

Does an exchange eliminate the tax or only postpone it?: It postpones it. The deferred gain carries over into the basis of the replacement property, so it resurfaces whenever that property is sold without another exchange, and the exchange itself is reported to the IRS on Form 8824 for the year of the sale. Owners who exchange repeatedly may never trigger the gain during life, and how the property is treated in an estate is a separate question for a CPA. On its own, a like-kind exchange is deferral, not forgiveness.
Can I move into a property I acquired through an exchange?: Only with caution and time. The replacement property must be acquired with the intent to hold it for investment or for productive use in a trade or business, so converting it to a personal residence soon after closing undercuts that intent and can unwind the exchange. Intent is judged on the facts: how long the property was held, whether it was genuinely rented, and how it was reported. Discuss any planned change of use with your CPA before the change, not after it.
What happens if I receive some cash in the deal?: Cash or other non-like-kind property received in the deal, called boot, is taxable to the extent of the realized gain. The rest of the gain stays deferred, so taking some cash gives partial deferral rather than none. To defer the entire gain, the general requirement is to reinvest all the net proceeds and carry debt on the replacement property at least equal to the debt relieved on the property given up. Any boot is reported with the exchange on Form 8824.

Mena Hemaia, CPA, CIA

Chief Executive Officer, Accountack — West Palm Beach, Florida

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