1031 Exchange Rules for 2026: How It Works and the Catch

How a 1031 exchange works

IRC 1031(a) says no gain or loss is recognized when real property held for productive use in a trade or business or for investment is exchanged solely for like-kind real property to be held the same way. Like-kind is broad: land for an apartment building, a warehouse for a Delaware statutory trust interest, a rental house for a ground lease of 30 years or more. Property held primarily for sale (a flipper's or developer's inventory) does not qualify.

Most exchanges are delayed exchanges:

1. You hire a qualified intermediary (QI) before closing and assign the sale contract to it.
2. The buyer's money goes to the QI, never to you. Touching it ends the exchange.
3. By midnight of day 45 you identify replacement property in writing (Treas. Reg. 1.1031(k)-1(c)).
4. By day 180, or the due date of your return including extensions if that is earlier, you close on the replacement.
5. Your old basis carries over to the new property (IRC 1031(d)), and you report the exchange on Form 8824.

The 2026 rules checklist

• No change from the One Big Beautiful Bill Act. Section 1031 was left as it was after the 2017 law limited it to real property.
• Calendar days. 45 and 180 days run from the day you transfer the old property, and weekends and holidays do not extend them. Only a federally declared disaster can postpone them (Rev. Proc. 2018-58).
• Return due date trap. For a 2026 sale, day 180 passes April 15, 2027 for any closing after October 17, 2026. File an extension or the exchange period ends on April 15.
• Identification limits. Up to three properties of any value; or any number if their total value is no more than 200% of what you sold; or more than that only if you actually acquire 95% of the value identified. Over-identify and you are treated as having identified nothing.
• Equal or up. To defer everything, buy at least as much value as you sold, reinvest all net equity, and replace paid-off debt with new debt or added cash. Anything else is boot.
• Related parties. If you exchange with a related person and either of you disposes of the property within two years, the deferral is undone (IRC 1031(f)).
• The QI must be independent. Your agent within the prior two years (your attorney, accountant, real estate broker or employee) cannot serve, with limited exceptions.
• Special exchanges. Reverse exchanges (buy first) under Rev. Proc. 2000-37, as modified by Rev. Proc. 2004-51; improvement exchanges; vacation homes under the Rev. Proc. 2008-16 safe harbor; homes that were both residence and rental under Rev. Proc. 2005-14; Delaware statutory trust interests under Rev. Rul. 2004-86.

Who it fits, and who it does not

Fits: investors who want to stay invested in real estate; owners trading a management-heavy building for a net-leased one or a Delaware statutory trust interest; owners who plan to hold until death, when heirs generally take a stepped-up basis and the deferred gain is never taxed (IRC 1014); estates under the $15,000,000 per person exclusion for 2026 face no estate tax on top.

Does not fit: sellers who want out of real estate or need the cash; sellers in a hot market who would overpay to meet a deadline; dealers and developers; owners of a business whose value is mostly goodwill and equipment (not real property); sellers of a primary residence (use the IRC 121 exclusion instead).

Worked example: what an exchange defers

Assumptions (illustration only): married couple filing jointly, Texas residents, $100,000 of other ordinary income. They sell a rental for $2,000,000 with a $700,000 adjusted basis, after $500,000 of straight-line depreciation and no cost segregation. Gain $1,300,000: $500,000 unrecaptured Section 1250 gain and $800,000 long-term capital gain. 2026 federal law; Big Sale Tax engine.

The deferred tax stays invested and earning for as long as you hold, and disappears if the property is held until death and receives a step-up. To compare an exchange with an installment sale on your own numbers, use the estimator or the 1031 vs installment sale comparison.

IRS stance and audit risk

Section 1031 is long-settled law and the IRS explains it plainly on its like-kind exchange page. Audits focus on facts, not the concept:

• Held for investment. Property bought to flip, or relinquished property recently converted from a residence, invites a challenge. There is no statutory holding period; intent and facts decide.
• Receipt of funds. Any right to the money held by the QI breaks the exchange; the QI agreement must restrict it.
• Deadlines and identification are strictly enforced.
• Boot reporting. Debt relief, cash at closing and non-transactional costs paid from exchange funds are taxable boot.
• Cost segregation. Section 1245 recapture on cost-segregated components is avoided only if you acquire enough replacement Section 1245 property (IRC 1245(b)(4)).
• States. California tracks gain deferred into out-of-state replacement property and requires an annual information return (FTB 3840), then taxes the California gain when you sell.

Costs and fees

• Qualified intermediary fee, plus any fees for reverse or improvement exchanges, which cost more.
• Closing costs on two transactions, including new loan costs on the replacement.
• Delaware statutory trust interests carry sponsor loads and ongoing fees inside the offering.
• The hidden cost: paying too much, or buying the wrong property, to beat a deadline.
• Carryover basis means lower depreciation on the replacement than a fresh purchase would give.

How it compares with a Section 453 installment sale

The two can work together. If part of the proceeds will not be reinvested, the buyer can pay that part with a note and the boot is taxed under the installment method. That has to be set up before closing; if the exchange later fails, see the failed 1031 analysis.

Frequently asked questions