A 1031 exchange lets an investor sell a rental property and reinvest the proceeds into another investment property while deferring the capital gains tax that would normally be due at closing. The tax is deferred, not eliminated, and the rules for qualifying are specific about timing, property type, and how the transaction is structured. For an owner who is selling a rental to buy a different property, missing one of these requirements can turn a tax-deferred sale into a fully taxable one. The rules below reflect the current federal tax code and 2026 filing figures, not older guidance that may no longer apply.
What Qualifies as Like-Kind Property
Under 26 U.S.C. Section 1031, both the property being sold and the property being purchased must be real property held for investment or for use in a trade or business. Since the 2017 Tax Cuts and Jobs Act, personal property such as vehicles, equipment, or business fixtures no longer qualifies for a 1031 exchange. Only real estate for real estate.
The properties do not need to be similar in type or use. A single-family rental can be exchanged for a duplex, a commercial building, or vacant land, as long as both sides of the trade are held for investment or business purposes rather than personal use. Property located outside the United States is specifically excluded and cannot be exchanged for property located inside the country.
The 45-Day and 180-Day Rules
Two deadlines control every 1031 exchange, and both run from the day the relinquished property closes.
| Deadline | Requirement | Statute |
| 45 days | Replacement property must be formally identified in writing | 26 U.S.C. 1031(a)(3)(A) |
| 180 days | The exchange must close, or the deadline for the seller’s tax return for that year, whichever comes first | 26 U.S.C. 1031(a)(3)(B) |
Neither deadline can be extended for ordinary business reasons. Missing the 45-day identification window disqualifies the entire exchange, even if the purchase later closes within 180 days.
Why a Qualified Intermediary Is Required
An owner cannot hold the sale proceeds personally at any point during the exchange, even briefly. Doing so is treated as taking constructive receipt of the funds, which disqualifies the exchange. Instead, a qualified intermediary holds the proceeds from the sale of the relinquished property and uses them to acquire the replacement property on the owner’s behalf. This is detailed in the IRS instructions for Form 8824, the form used to report a like-kind exchange to the IRS for the tax year in which it occurs.
What Counts as Boot
If an exchange includes cash, debt relief, or other non-like-kind property in addition to real estate, that extra value is called boot, and it is taxable in the year of the exchange. Boot commonly shows up in two ways: the owner receives leftover cash because the replacement property cost less than the relinquished property sold for, or the owner’s mortgage debt decreases without being replaced by new debt of at least equal value on the replacement property. To defer gain in full, the replacement property generally needs to be of equal or greater value and carry equal or greater debt than the property sold.
Related-Party Exchanges Have a Two-Year Rule
Exchanging property with a related party, such as a family member or a business the owner controls, is allowed, but Section 1031(f) adds a condition. If either party disposes of the property received in the exchange within two years of the last transfer, the original exchange loses its tax-deferred treatment retroactively, and both parties must report the gain as if the exchange had never qualified. Limited exceptions apply for death, involuntary conversions, and transactions that were not primarily structured to avoid tax.
Converting a 1031 Property Into a Primary Residence Later
Some owners eventually want to move into a property they originally acquired through a 1031 exchange. This is possible, but Section 121(d)(10) requires the property to be held for at least five years starting from the date it was acquired in the exchange before the owner can apply the home sale exclusion when they eventually sell it. This rule was added in 2004 specifically to prevent investors from exchanging into a property, moving in immediately, and claiming the primary residence exclusion after only two years of ownership. The property must also still meet the standard two-of-five-year residency test for the exclusion to apply.
Using a Vacation or Second Home in a 1031 Exchange
A vacation home can qualify for a 1031 exchange, but only if it is genuinely operated as a rental rather than kept mainly for personal use. IRS guidance in Revenue Procedure 2008-16, described in detail by the Journal of Accountancy’s Tax Adviser, sets out a safe harbor: the property must be rented at fair market rate for at least 14 days in each of the two 12-month periods before and after the exchange, and personal use during each of those periods must stay at or below the greater of 14 days or 10 percent of the days the property was actually rented. A property that does not meet these thresholds may still qualify, but it carries more risk of an IRS challenge on whether it was truly held for investment.
Is the 1031 Exchange Still Available in 2026
Yes. The One Big Beautiful Bill Act, signed in July 2025, made significant changes to federal tax law but did not repeal or cap Section 1031. A proposed $500,000 annual limit on 1031 gains discussed earlier in the legislative process did not make it into the final law, and the 2025 IRS Form 8824 instructions confirm the exchange rules described above remain unchanged for the current tax year.
What has changed for 2026 is the tax rate an owner faces if a sale is not exchanged and the gain is instead recognized. Based on 2026 federal capital gains brackets, sourced to IRS Revenue Procedure 2025-32:
| Rate | Single | Married Filing Jointly | Head of Household |
| 0% | Up to $49,450 | Up to $98,900 | Up to $66,200 |
| 15% | Up to $545,500 | Up to $613,700 | Up to $579,600 |
| 20% | Above $545,500 | Above $613,700 | Above $579,600 |
These brackets apply to the gain itself and do not include Montana state tax or the separate 3.8 percent net investment income tax that can apply at higher income levels. A 1031 exchange defers all of this, not just the federal capital gains portion.
Quick Reference
- Only real property held for investment or business use qualifies, not personal property or a primary residence
- Replacement property must be identified within 45 days and the purchase completed within 180 days
- A qualified intermediary must hold the funds; the owner cannot receive them directly
- Cash or debt relief received in the exchange is taxable as boot
- Related-party exchanges carry a 2-year holding requirement before either side can sell
- Moving into a 1031 property later requires 5 years of ownership before the home sale exclusion applies
- Section 1031 was not changed by the 2025 tax law and remains available in 2026
A 1031 exchange can be a useful tool for a rental property owner who wants to move into a different property or market without paying capital gains tax immediately, but the deadlines and documentation requirements leave little room for error. Speaking with a qualified intermediary and a tax professional before listing the relinquished property is the best way to confirm the exchange will hold up.
