How a 1031 Exchange Works: Timeline, Rules, and Example

Sell, identify, close: three steps and two hard deadlines. Here is the complete delayed-exchange process from listing to replacement deed.

Phase 1: before the sale

Engage a qualified intermediary (QI) before closing. The QI is a neutral third party who holds the sale proceeds under an exchange agreement; the regulations disqualify anyone who is your agent (attorney, accountant, broker) or a related party. The exchange agreement must be signed before the relinquished property closes. List and market the property normally; the exchange structure is invisible to the buyer.

Phase 2: the 45-day identification period

Within 45 calendar days of the relinquished closing, you must identify replacement property in a signed writing delivered to the QI or another qualified party. The identification must unambiguously describe the property (street address or legal description). Weekends and holidays count; there are no extensions except for federally declared disasters affecting the taxpayer.

Three identification rules limit what you can name: the 3-property rule (up to 3 properties of any value), the 200% rule (any number of properties whose total value does not exceed 200% of the relinquished property's value), or the 95% rule (any number, but you must close on 95% of the identified value). Most exchangers use the 3-property rule for simplicity.

Phase 3: the 180-day exchange period

You must close on the replacement property within 180 calendar days of the relinquished closing, or by the due date of your tax return for the year of the sale (including extensions), whichever is earlier. The 45 days are inside the 180, not in addition. The QI wires the proceeds directly to the closing; you never receive the funds.

The full-deferral formula

To defer 100 percent of the gain: buy replacement property worth at least the relinquished sale price, take on at least as much debt, and put all the net proceeds into the replacement. Every dollar of cash you keep or debt you shed is boot, taxable up to your realized gain. Adding cash out of pocket to buy up in value is fine and creates no tax.

Worked example

Sell a rental for $500,000, pay $30,000 in selling costs, adjusted basis $320,000: realized gain $150,000. Identify two replacements on day 30, close on a $520,000 property on day 120 with a new $200,000 mortgage replacing the old $200,000 mortgage, no cash taken. Boot is zero, so the entire $150,000 gain is deferred, including the depreciation recapture embedded in it. The replacement's depreciable basis is $320,000, and the depreciation clock continues from the original history.

Common ways exchanges fail

Exchanges fail for preventable reasons. The exchanger touches the proceeds, even briefly, which is constructive receipt and kills the exchange. The identification is late or vague, missing the 45-day deadline or describing the property ambiguously. The exchanger buys less value than sold without realizing the difference is boot, and is surprised by the tax bill. Or the exchanger skips the QI for a simultaneous closing that turns out not to be simultaneous. Every one of these is avoided by engaging the QI before the sale and calendaring both deadlines on day one.

Reporting the exchange

Report the exchange on Form 8824 (Like-Kind Exchanges) with the tax return for the year the relinquished property was sold, even though no tax is due on the deferred gain. The form captures the realized gain, boot received, recognized gain, and the basis of the replacement property, which becomes your depreciation starting point. Keep the exchange agreement, identification notices with delivery proof, and both closing statements with your tax records permanently; the deferred gain can surface decades later when the replacement property is finally sold for cash.

Sources: IRC Section 1031; Treasury Reg. 1.1031(k)-1. Data current as of October 2026. Not tax or legal advice.

Frequently asked questions

What are the 1031 exchange deadlines?

Identify replacement property within 45 calendar days of the relinquished closing and close within 180 calendar days (or your tax return due date, if earlier).

What is a qualified intermediary?

A neutral third party who holds the sale proceeds under an exchange agreement. It cannot be you, your agent, or a related party, and must be engaged before closing.

Can I touch the sale proceeds in a 1031 exchange?

No. Receiving the cash, even briefly, disqualifies the exchange. The qualified intermediary holds all proceeds until the replacement closing.

How do I defer all of my gain?

Buy replacement property worth at least as much as you sold, replace all debt, and take no cash. Any boot is taxable up to your realized gain.

Is depreciation recapture deferred in a 1031 exchange?

Yes. Both the capital gain and the depreciation recapture carry into the replacement property's basis and are recognized only on a later taxable sale.