The statute behind a 1031 exchange is a single paragraph. The rules that govern how an exchange must be structured are not. Each of the seven requirements below has to be cleared for the deferral to hold, and a failure on any one of them disqualifies the entire transaction, making the full gain immediately taxable.

This article walks through all seven as they stand in 2026, with citations to the controlling statutes and Treasury regulations at each step. It is structured as a reference. Owners working toward a specific exchange should use it alongside a tax advisor and a qualified intermediary, not as a substitute for either.

Rule 1: Like-kind property

The foundation of any 1031 exchange is the like-kind property requirement. For real estate, the standard is notably broad. The IRS defines like-kind property as property of the same nature, character, or class. Quality or grade does not matter.

Under Treasury Regulation Section 1.1031(a)-1(b), virtually any U.S. real property held for investment or business use is like-kind to any other U.S. real property held for the same qualifying purpose. An apartment building is like-kind to a retail strip center. Vacant land is like-kind to a commercial office building. A single-family rental is like-kind to an industrial warehouse.

A few categories do not qualify. Primary residences and personal use property, inventory held by a dealer, stocks and bonds, partnership interests, and real property located outside the United States all fall outside Section 1031. Personal property of any kind, including equipment, vehicles, and artwork, lost eligibility with the Tax Cuts and Jobs Act of 2017.

Beneficial interests in a Delaware Statutory Trust are treated as direct interests in real property for Section 1031 purposes under IRS Revenue Ruling 2004-86. That ruling is the reason DSTs function as 1031-eligible replacement property. It is worth knowing in case the subject comes up, though the detail lives in the passive replacement options article.

Rule 2: Investment or business use only

The like-kind rule determines which property type qualifies. The investment or business use rule determines whether the property's purpose qualifies. Both the relinquished property being sold and the replacement property being acquired must be held for productive use in a trade or business or for investment. That is the direct statutory language.

The IRS is unambiguous on the exclusion. Property used primarily for personal use, such as a primary residence or a second or vacation home, does not qualify. The key word in the statute is “held.” The IRS looks at the taxpayer's intent at the time of the exchange, and a property's history of use matters when that intent is evaluated.

A vacation home rented at fair market value may qualify under the personal use safe harbor in Revenue Procedure 2008-16. Under that safe harbor, a dwelling unit is eligible for 1031 treatment if, for each of the two 12-month periods before the exchange, the property was rented at fair market value for 14 or more days and personal use did not exceed the greater of 14 days or 10 percent of the days rented. Similar limits apply to the replacement property after the exchange. Investors with mixed-use properties should verify their logs before assuming they qualify.

Rule 3: The 45-day identification period

Within 45 calendar days of closing on the relinquished property, the exchanger must identify potential replacement properties in writing and deliver the identification to the qualified intermediary. The 45-day clock does not pause for weekends, holidays, or illness. Treasury Regulation Section 1.1031(k)-1(c)(4) governs the written identification requirement.

An exchanger may identify replacement properties under one of three identification rules:

  • Three-property rule. Up to three potential replacement properties, regardless of their total value.
  • 200 percent rule.Any number of properties, as long as their aggregate fair market value does not exceed 200 percent of the relinquished property's sale price.
  • 95 percent rule. Any number of properties, with no dollar cap, provided the exchanger actually acquires at least 95 percent of the total identified value.

Most exchanges proceed under the three-property rule. The details of managing the 45-day window in practice, including how to line up candidates before the relinquished property closes, are covered in the deadlines article.

Rule 4: The 180-day exchange period

The replacement property must be acquired, and the exchange completed, within 180 calendar days of the closing on the relinquished property. There is a second, often overlooked deadline embedded in the rule. The exchange must also close by the due date of the taxpayer's federal income tax return for the year of the relinquished sale, whichever comes earlier.

An exchange that closes in late October or later can push the 180-day window past the April 15 filing deadline. To preserve the full 180 days in that case, the taxpayer must file for an extension. Missing either the 180-day deadline or the filing deadline disqualifies the exchange, and the gain becomes taxable in the year the relinquished property was sold.

Rule 5: Same taxpayer requirement

The taxpayer who sold the relinquished property must be the taxpayer who acquires the replacement property. A change in the taxpayer identity mid-exchange breaks the deferral. This matters for owners holding property in single-member LLCs, revocable trusts, or partnerships.

A single-member LLC treated as a disregarded entity for federal tax purposes can generally exchange in the individual owner's name without violating this rule. A partnership owns property at the entity level, and the partnership itself is the taxpayer for 1031 purposes. Individual partners cannot split off from a partnership mid-exchange to conduct their own 1031. Structures that attempt to do so, sometimes called “drop-and-swap,” carry real IRS scrutiny and should be discussed carefully with counsel before the sale closes.

Rule 6: Qualified Intermediary required

The exchanger cannot take actual or constructive receipt of the sale proceeds between the sale of the relinquished property and the purchase of the replacement. A qualified intermediary holds the proceeds and completes the reciprocal transfers. Treasury Regulation Section 1.1031(k)-1(g)(4) defines the QI's role and establishes the safe harbor that makes delayed exchanges work.

The QI is not a regulated entity in most states, which puts the burden on the exchanger to vet the firm. Practical diligence items include confirming segregated accounts for exchange proceeds, reviewing fidelity bonding and errors-and-omissions insurance, and asking about the firm's experience with the specific replacement structure under consideration. A QI experienced with DST closings may have limited familiarity with reverse exchanges, and vice versa.

Rule 7: Equal or greater value and full reinvestment

To fully defer tax, the exchanger must do two things. The aggregate value of the replacement property or properties must equal or exceed the sale price of the relinquished property, and all net proceeds from the sale must be reinvested. Debt on the replacement side must be equal to or greater than debt relieved on the relinquished side, or the difference must be made up in cash.

Any shortfall becomes taxable boot in the year of the exchange. Cash boot arises when net sale proceeds are not fully reinvested. Mortgage boot arises when the debt carried forward on the replacement side is less than the debt paid off on the relinquished side. An exchanger who takes on additional investment to offset mortgage boot can often avoid that recognition.

Boot is a frequent source of surprise in otherwise clean exchanges. The mechanics, including the distinction between cash and mortgage boot and when partial exchanges are a deliberate choice, are covered in the boot and partial exchange article.

Reporting the exchange

All 1031 exchanges must be reported to the IRS on Form 8824, Like-Kind Exchanges, filed with the federal income tax return for the year the relinquished property was sold. Form 8824 captures the property descriptions, the timeline, the fair market values, any boot received, and the basis of the replacement property.

Filing Form 8824 does not create an audit risk in itself. Missing or inconsistent filings, especially across state returns, do. Investors completing an exchange should make sure their CPA has visibility into the full transaction, including any identifications that did not close. A full record of the 45-day identification and the QI's closing statements should be retained.

Putting the rules together

The seven requirements are independent of each other, but they compound. An exchange that satisfies six of the seven fails completely. Most exchanges that run into trouble do so because the 45-day window closes before workable replacement candidates are lined up, or because the equal-or-greater-value test is violated in ways the exchanger did not anticipate. Both problems are addressable before the relinquished property is listed.

For owners considering an exchange, the practical takeaway is to engage the tax advisor and QI early. The statute is short. The execution is where care matters.