1031 exchanges: Rules, deadlines and benefits for investors

Q: Can I do a 1031 exchange on my primary residence?

No. Section 1031 applies only to property held for investment or productive use in a trade or business. A primary residence instead uses the Section 121 exclusion, which shelters up to $250,000 of gain for single filers and $500,000 for married couples filing jointly. A former rental converted to a residence has its own layered rules worth reviewing with a CPA.

Q: Does like-kind mean I have to buy the same type of property?

No. For real estate, like-kind is interpreted broadly. You can exchange a duplex for retail space, raw land for an apartment building, or several single-family rentals for one commercial property. Both sides must be real property held for investment in the United States. Personal property and foreign real estate no longer qualify.

Q: How many times can I use a 1031 exchange?

There is no limit. Investors routinely chain exchanges across decades, trading up in size and quality while deferring gain each time. The deferred tax follows through the basis of each new property. If the investor holds the final property until death, heirs typically receive a stepped-up basis, which is why the strategy is sometimes described as swap till you drop.

Written by Samantha SheltonNMLS 1647301Updated September 2026

Two real estate investors touring an apartment building while planning a 1031 exchange into a larger property

This article is general education about Section 1031, not tax or legal advice. Whether an exchange qualifies depends on your facts, entity structure and basis. Consult a qualified tax professional before you sign a purchase agreement, and take title and entity questions to a Michigan attorney.

A 1031 exchange lets you sell investment real estate and roll the full pre-tax proceeds into a replacement property, deferring the capital gains tax you would otherwise owe at closing. Two deadlines control it: 45 days from the day your sale closes to identify replacement property in writing, and 180 days to close, and that clock stops sooner if your return for the year of the sale comes due first.

Learn how 1031 exchanges work, including the 45-day and 180-day deadlines, what counts as like-kind real property, and how boot creates a tax bill on a deal you thought was deferred. Start with our real estate investing guide.

Key takeaways:

Two clocks, one start date: You get 45 days to identify replacement property in writing and 180 days to close, both running from the same day, the transfer of the property you gave up.
Deferred, not forgiven: Your old basis carries into the new property, so the gain rides along. On a $400,000 gain, an investor at the top rates could otherwise face a 20% capital gains rate, a maximum 25% rate on depreciation recapture and the 3.8% net investment income tax.
Real property held for investment: Only real property has qualified since 2018, and a dwelling you also use personally is safest inside the Revenue Procedure 2008-16 safe harbor, 24 months of ownership with at least 14 days of fair rental in each 12-month period. The safe harbor is one route to IRS assurance, not the only way to qualify.

What is a 1031 exchange, and what does it defer?

A 1031 exchange swaps real property held for business or investment use for other real property of like kind, and the gain you would have recognized on a straight sale is postponed instead of paid. You report it on Form 8824 for the year of the exchange. The IRS is blunt about it: gain deferred in a like-kind exchange “is tax-deferred, but it is not tax-free.”

The mechanism is basis. The basis of what you acquire is generally the basis of what you gave up, with adjustments, which preserves the deferred gain. One side effect the IRS flags: your depreciable basis is lower than in a taxable purchase, so the write-off shrinks even as the building grows, see real estate depreciation.

Here is what deferral is worth. Say you sell a Michigan rental for $650,000 after selling costs against a $250,000 adjusted basis, a $400,000 gain, $150,000 of it from depreciation you claimed. Sold outright, an investor at the top rates could face 20% on the appreciation, a maximum 25% rate on the unrecaptured Section 1250 gain, the 3.8% net investment income tax and Michigan’s 4.25% rate: roughly $119,700 leaving the deal.¹ Run your own version with a CPA.²

The broader deduction picture is in tax benefits of real estate investing and real estate tax benefits for investors; the fundamentals are in investing basics.

What are the 45-day and 180-day deadlines?

You must identify replacement property within 45 days after transferring the property you gave up, and receive it by the earlier of the 180th day after that transfer or the due date, including extensions, of your return for that tax year. Both start the same day: day 45 sits inside the 180.

Deadline	What has to happen	If you miss it
45-day identification	A signed written identification, clearly describing the property, delivered to someone involved in the exchange	Nothing is identified, so nothing can be received
180-day exchange period	You receive substantially the same property you identified	The gain is taxable for the year of the original sale

The return due date is the cutoff people miss. A sale closing November 15 has 180 days running into mid-May, but an individual return generally comes due April 15 about 151 days out, so file an extension. The IRS treats these limits as hard: no extension for hardship, except postponements after a federally declared disaster.

Three-property rule: Identify up to three replacement properties regardless of value. This is what most investors use, and why buyers line up backups before the sale closes.
200% rule: Identify any number of properties if their combined fair market value at the end of the identification period is no more than double the fair market value, on the date of transfer, of everything you gave up.
95% rule: Blow past both limits and the only identifications that count are properties received before day 45, plus those you receive worth at least 95% of the total identified.
Form matters: Identification must be signed, written and delivered to someone involved in the exchange (not you, not a disqualified person) using a legal description or street address.

What property qualifies as like-kind real property?

Only real property qualifies, and only if both sides are held for productive use in a business or for investment. The Tax Cuts and Jobs Act closed the door on everything else: for 2018 and later years, like-kind treatment applies only to real property, so equipment, vehicles, artwork, collectibles and intangible assets are out.

For real estate, like-kind is read broadly: properties qualify if they are of the same nature or character even when grade or quality differs, improved or unimproved, a duplex for retail space, raw land for an apartment building, several rentals for one commercial property.

Personal use is disqualifying: The rules do not apply to real property used for personal purposes, including a second or vacation home used personally.
Property held primarily for sale is excluded: That takes flips and dealer inventory off the table.
Geography is a hard line: U.S. real property and real property outside the United States are not of a like kind, and that has been in the statute for decades.
A rented dwelling has a safe harbor: Under Revenue Procedure 2008-16, the IRS will not challenge a dwelling unit owned at least 24 months around the exchange if, in each 12-month period, you rented it at fair rental for 14 days or more and kept personal use to no more than the greater of 14 days or 10% of days rented.

The rules that make a rental investment property are in IRS guidance on residential rental property; buying with exchange intent from the start is its own exercise, see buying a home as an investment property.

Why does the IRS require a qualified intermediary?

Because taking control of the proceeds before the exchange is complete can disqualify the entire transaction and make all the gain immediately taxable. The intermediary exists so the money never becomes yours, and constructive receipt by your agent counts as receipt by you. The written exchange agreement must expressly limit your right to receive, pledge or borrow against the funds it holds.

You cannot be your own facilitator: Neither can a disqualified person, your agent, or someone related to you or your agent under the tax code’s ownership tests with 10% substituted for 50%.
A two-year look-back catches your own team: Anyone who acted as your employee, attorney, accountant, investment banker or real estate agent within the two years ending on the first relinquished transfer is your agent. Routine title, escrow and 1031 work itself do not count.
Vet the intermediary, because nobody else will: The IRS has warned that intermediaries declaring bankruptcy have caused taxpayers to miss deadlines and lose the deferral. Ask about segregated escrow accounts, fidelity bonding and errors-and-omissions coverage.

What is boot, and how does mortgage boot create a tax bill?

Boot is anything you receive that is not like-kind property, and it makes gain taxable up to the money plus the fair market value of that property. The exchange still qualifies. It is simply partially taxable, and the taxable amount is the smaller of your realized gain or the boot figure, less exchange expenses you paid.

Cash boot is easy to spot. Mortgage boot ambushes people, because no money changes hands. If the other party assumes any of your liabilities, you are treated as receiving money in that amount, reduced, but not below zero, by liabilities you assume and cash you pay in.

Say you sell a Waterford duplex for $650,000 with a $250,000 mortgage paid off at closing, leaving about $400,000 with your intermediary. You buy a replacement fourplex for $550,000 using that $400,000 plus a new $150,000 loan. You never touched a dollar, but your debt fell by $100,000, and that net debt relief is boot, taxable to the extent of your realized gain.³ Buy at $650,000 or more carrying at least $250,000 of debt, or bring $100,000 of cash, and the boot disappears. That shortcut, buy equal or greater in value and replace the debt, is a rule of thumb, not the statute, and recognized gain can come back as ordinary income from depreciation recapture, so model boot with a tax professional.

Which type of 1031 exchange fits your deal?

Four structures cover almost every transaction, and the delayed exchange dominates. Reverse and improvement exchanges cost more and usually require you to fund the replacement before your sale proceeds exist.

Type	How it works	Best for	Added cost or risk
Delayed	You sell first, an intermediary holds the proceeds, and you identify within 45 days and close within 180	Most deals	All the deadline risk sits on sourcing property
Simultaneous	Both closings happen at once	Two-party swaps	A delay on either side collapses the timing
Reverse	An exchange accommodation titleholder parks the replacement while you sell the old property	Buyers who find the replacement first	Identify the relinquished property within 45 days of the parking; the combined parking period cannot exceed 180 days
Improvement	Exchange proceeds pay for construction before you take the property	Property that needs work to reach equal value	Work finished after you receive the property is treated as a taxable exchange of property for services

What are the related-party rules and other traps?

Exchange with a related person and, if either of you disposes of the property within two years of the last transfer, the nonrecognition disappears and the deferred gain is recognized. That clock stops running whenever the holder’s risk of loss is substantially diminished by a put, by someone else holding a right to acquire, or by a short sale.

Three exceptions, all narrow: The death of either related person, involuntary conversions, and dispositions where you establish to the IRS that neither the exchange nor the disposition had tax avoidance as a main purpose.
Moving into the replacement carries a five-year price: You cannot claim the Section 121 home sale exclusion if you acquired the home in a like-kind exchange and sold it within five years of that acquisition. The tests are in the IRS rules for gain on the sale of a home.
Be skeptical of the pitch: The IRS has warned about promoters who call these “tax-free” exchanges, market non-qualifying vacation homes, or tell clients to claim an exchange after taking the proceeds.

How do you line up financing inside 180 days?

Start the loan before the sale closes, because the 180 days has to absorb underwriting, appraisal and closing, not just finding the property. A buyer who starts shopping lenders on day 46 has already spent a quarter of the window. The loan amount is a tax variable too: because net debt relief is boot, the size of the new mortgage helps decide whether the exchange defers all your gain or part of it. Investment-property financing carries larger down payment and reserve expectations than owner-occupied financing, and terms vary between wholesale lenders. If the replacement is a small apartment building, see our guide to investing in multi-family properties. Pulling equity from a property you intend to keep instead? See how to refinance an investment property.

What Michigan investors should know

Michigan’s individual income tax return begins with the adjusted gross income from your federal Form 1040, so gain you do not recognize federally is not in Michigan’s starting number either.

The state rate is 4.25% for 2026: Michigan Treasury confirmed in April 2026 that the rate holds at 4.25%. On a $400,000 gain that is $17,000 of state tax riding with the federal bill.
Transfer tax is still due: An exchange does not exempt the conveyance. Michigan charges $3.75 per $500 of value in state transfer tax plus $0.55 per $500 at the county level in counties under 2,000,000 ($8.60 per $1,000, or $5,590 on a $650,000 sale) and the statute puts it on the seller.
The replacement property’s taxable value uncaps: Under the Michigan Constitution as amended by Proposal A of 1994, a transfer of ownership uncaps taxable value in the calendar year after the transfer, resetting it to state equalized value. Budget the higher bill, not the seller’s current one.

How Align finances investors

A rental has to work as an investment, not just as a house you happen to like. Samantha looks at the property's numbers before the loan's.

Align places DSCR loans, which qualify on the rent the property brings in rather than your tax returns, as well as conventional investment loans, through multiple wholesale lenders.

Review an investment property DSCR loans in Michigan

FAQ: 1031 exchanges

Here are answers to common questions about 1031 exchanges.

What happens if I miss the 45-day or 180-day deadline?

The exchange fails and the entire gain becomes taxable in the year of the original sale. The IRS treats these deadlines as absolute, with a narrow exception for postponements after federally declared disasters. That is why investors identify three candidates under the three-property rule and line up backups before closing. Our real estate investing guide covers that pipeline.

Can I do a 1031 exchange on my primary residence?

No. Section 1031 applies only to real property held for investment or business use, not property used for personal purposes such as your home. A primary residence uses the Section 121 exclusion instead, which shelters up to $250,000 of gain for single filers and $500,000 on a joint return if you meet the ownership and use tests. See capital gains tax exemptions.

Does like-kind mean I have to buy the same type of property?

No. For real estate, like-kind is read broadly: properties qualify if they share the same nature or character even when grade or quality differs, so a duplex can be exchanged for retail space or several rentals for one commercial building. Personal property stopped qualifying for 2018 and later years, and U.S. real property has never been like-kind to real property abroad. See investing in multi-family properties.

How many times can I use a 1031 exchange?

There is no statutory limit, and investors chain exchanges across decades. The deferred gain follows through the basis of each new property, so each replacement carries a lower depreciable basis than a taxable purchase. Property inherited from a decedent generally takes a basis equal to fair market value at the date of death, so work the estate side with a CPA and an attorney. See real estate depreciation.

The bottom line on 1031 exchanges

A 1031 exchange defers rather than erases tax, and it lives or dies on two dates: 45 days to identify replacement property in writing and 180 days to close, both running from the transfer of the property you gave up, with the 180 days cut short if your return comes due first. Use a qualified intermediary, never touch the proceeds, keep the deal to real property held for investment, and watch net debt relief. Mortgage boot is taxable even when no cash changes hands.

If you’re ready to finance a replacement property inside a 180-day window, talk to Align Lending. We’ll shop your scenario across our lender network and show you the pricing side by side before your identification period runs out. Call 248-506-5727 or start online today, and take the tax treatment to a CPA.

Footnotes:

1. Example figures are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws, and they are not tax advice. The $650,000 net sale price, $250,000 adjusted basis, $400,000 realized gain, $150,000 of unrecaptured Section 1250 gain and resulting $119,700 estimate are Align Lending calculations that assume the investor is in the highest applicable brackets, that the full gain is subject to the net investment income tax, and that no other state, local or entity-level tax applies. Actual tax depends on your basis, holding period, filing status, taxable income, entity structure and state of residence. Consult a qualified tax professional. Return to text.

2. This is general information, not tax or legal advice. Whether a transaction qualifies under Section 1031, how gain and basis are computed, how depreciation recapture is treated, and how state law applies all depend on your individual circumstances and can change. Consult a qualified tax professional about your situation and a Michigan attorney about title, entity and contract questions. Align Lending is a mortgage broker and is not a tax adviser, law firm, qualified intermediary, broker-dealer or investment adviser. Return to text.

3. Example figures are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. The $650,000 sale price, $250,000 mortgage payoff, $550,000 replacement purchase, $150,000 new loan and resulting $100,000 of net debt relief are Align Lending calculations shown to illustrate how liabilities are treated as money received. They exclude exchange expenses, closing costs, prorations and any non-like-kind property. Loan amounts and terms depend on your application, program guidelines and market conditions, and the tax result depends on your realized gain. Return to text.

Sources: statement that gain deferred in a like-kind exchange is tax-deferred but not tax-free, the 45-day identification requirement and its signed-and-delivered rule, the 180-day exchange period and the earlier tax-return due date, the rule that these limits cannot be extended for any circumstance or hardship except presidentially declared disasters, the prohibition on acting as your own facilitator or using an agent from the prior two years, the warning about intermediaries declaring bankruptcy, the reverse exchange parking period of no more than 180 days, carryover basis and reduced depreciable basis on the replacement property, reporting on Form 8824, and the caution about promoters marketing “tax-free” exchanges and non-qualifying vacation or second homes, Internal Revenue Service Fact Sheet FS-2008-18, Like-Kind Exchanges Under IRC Section 1031. Nonrecognition on the exchange of real property held for productive use in a trade or business or for investment, exclusion of real property held primarily for sale, the 45-day and 180-day statutory periods, recognition of gain up to the money and fair market value of other property received, the related-person rules and the 2-year disposition period, and the rule that United States and foreign real property are not of a like kind, 26 U.S.C. 1031(a), (b), (f) and (h). Application of like-kind treatment only to exchanges of real property for 2018 and later years, and treatment of net liabilities assumed by the other party as money received, Instructions for Form 8824, Like-Kind Exchanges. Like-kind defined as the same nature or character regardless of grade or quality, real properties generally like-kind whether improved or unimproved, U.S. real property not like-kind to real property outside the United States, and the January 1, 2018 effective date for excluding machinery, equipment, vehicles, artwork, collectibles, patents, other intellectual property and intangible business assets, Internal Revenue Service, Like-Kind Exchanges, Real Estate Tax Tips. Qualifying property limited to real property held for investment or productive use and not primarily for sale, exclusion of real property used for personal purposes, the three-property and 200-percent identification limits and the 95-percent fallback, the requirement that identification be a signed written document delivered to a person involved in the exchange other than you or a disqualified person, the receipt requirement running to the earlier of the 180th day or the return due date including extensions, the definition of a qualified intermediary and the required written exchange agreement, the definition of disqualified persons and the 2-year agent look-back, the partially nontaxable exchange rules and the assumption-of-liabilities rules, the 45-day and 180-day limits and the 180-day combined parking cap under a qualified exchange accommodation arrangement, the treatment of production completed after receipt as a taxable exchange of property for services, the start of the 2-year related-party holding period and the events that substantially diminish risk of loss, the three exceptions for death, involuntary conversion and absence of a tax-avoidance purpose, and the maximum individual capital gains rates of 0%, 15%, 20%, 25% and 28%, Internal Revenue Service Publication 544, Sales and Other Dispositions of Assets. Maximum 25% rate on unrecaptured Section 1250 gain, the 0%, 15% and 20% net capital gain rates, and the 3.8% Net Investment Income Tax, Internal Revenue Service Topic No. 409, Capital Gains and Losses. Section 121 exclusion of up to $250,000 of gain, or $500,000 on a joint return, and the 24-month ownership and use tests within the five years before the sale, Internal Revenue Service Topic No. 701, Sale of Your Home. Denial of the Section 121 exclusion where the home was acquired in a like-kind exchange and sold within 5 years of that acquisition, Internal Revenue Service Publication 523, Selling Your Home. Dwelling-unit safe harbor requiring ownership for at least 24 months and, in each of the two 12-month periods, rental at a fair rental for 14 days or more with personal use no greater than 14 days or 10 percent of the days rented, Revenue Procedure 2008-16, 2008-10 I.R.B. 547. Basis of property inherited from a decedent generally equal to fair market value at the date of death or on the alternate valuation date, Internal Revenue Service Publication 551, Basis of Assets. Postponement of the 45-day and 180-day periods for taxpayers affected by a federally declared disaster, Revenue Procedure 2018-58. Michigan individual income tax rate of 4.25% for the 2026 tax year, Michigan Department of Treasury taxpayer notice, April 15, 2026. Michigan individual income tax computation beginning with adjusted gross income from the federal Form 1040, Michigan Department of Treasury Form MI-1040. Michigan state real estate transfer tax of $3.75 per $500 of value, MCL 207.525, and seller liability, MCL 207.523; county real estate transfer tax of $0.55 per $500 in a county with a population under 2,000,000, MCL 207.504, and seller liability, MCL 207.502. Uncapping of taxable value in the calendar year following a transfer of ownership under the Michigan Constitution as amended by Proposal A of 1994, and the definition of transfer of ownership in Section 211.27a(6) of the General Property Tax Act, Michigan Department of Treasury, Changes in Ownership and Uncapping of Property.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice, and it is not an offer or solicitation to buy or sell any security. Tax rules, thresholds, rates and program requirements change and vary by property, entity and locality; confirm current figures and how they apply to you with a qualified tax professional, confirm contract, title and entity obligations with a Michigan attorney, and use a qualified intermediary for the exchange itself. Figures shown are illustrative, are not a rate quote or an offer of credit, and do not constitute an advertisement of credit terms. Align Lending is an independent Michigan mortgage broker, NMLS #2041154, and is not a tax adviser, law firm, qualified intermediary, broker-dealer, or investment adviser.