Section 1031 Like-Kind Exchanges for Commercial Real Estate

By Hank FasthoffJuly 5, 2026

Section 1031 can postpone recognition of gain when you exchange qualifying business or investment real property for other qualifying real property. The transaction has to operate as an exchange under the Internal Revenue Code rather than as a sale followed by an unrestricted purchase.

Tax consequences depend on adjusted basis, depreciation, liabilities, exchange expenses, property received, and the identity of the taxpayer who completes the exchange. A purchase price comparison alone can't determine how much gain the exchange defers.

Real Property Held for Business or Investment

Since 2018, Section 1031 has applied only to real property. The IRS guidance on like-kind exchanges confirms that machinery, vehicles, artwork, intellectual property, and other personal or intangible assets generally fall outside the current rule.

Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property held primarily for sale and property used solely for personal purposes don't qualify. Your intent and the surrounding facts control, so a label such as investment property can't cure conduct showing that the property was inventory or acquired for immediate resale.

Like kind refers to the nature or character of the real property rather than its grade or quality. Improved and unimproved real estate can qualify, as can different commercial property types. United States real property and foreign real property aren't like kind to each other.

A Deferred Exchange Requires an Exchange Structure

A common deferred exchange begins when you transfer the relinquished property and later receive replacement property. IRS Publication 544 explains that the transaction must be an exchange of property for property. Actual or constructive receipt of the sale proceeds can turn the transaction into a sale even if you later buy another property.

The qualified intermediary arrangement provides one regulatory safe harbor. That intermediary enters into a written exchange agreement, facilitates the transfer of the relinquished property, acquires the replacement property under the regulatory rules, and transfers it to you. The exchange documents and closing instructions must be in place before the relinquished property closes because an intermediary can't repair your prior receipt or control of the proceeds.

The agreement also has to restrict your right to receive, pledge, borrow, or obtain the benefit of the exchange funds during the protected period. Qualified escrow accounts and qualified trusts provide other safe harbors when their requirements are satisfied.

The 45-Day and 180-Day Periods

Replacement property must be identified within 45 days after you transfer the relinquished property. The identification must be written, signed, and delivered to a permitted recipient involved in the exchange. A street address, legal description, or distinguishable property name ordinarily identifies the property with the required specificity.

Replacement property must be received by the earlier of 180 days after the transfer or the due date of your federal income tax return for the transfer year, including extensions. The 45 days run inside the 180-day period rather than before it. The Form 8824 instructions state both deadlines and the return due date limitation.

These are calendar periods, so transaction documents should treat weekends and holidays as ordinary days unless published federal relief says otherwise. Revenue Procedure 2018-58, which superseded Revenue Procedure 2007-56, permits postponements for qualifying exchanges affected by a federally declared disaster when the IRS issues applicable relief. Market conditions, financing delays, or difficulty finding property provide no general extension.

Identifying More Than One Property

The identification rules provide three alternatives. Under the three-property rule, you may identify no more than three properties without regard to their combined value. Under the 200% rule, you may identify more than three if their total fair market value doesn't exceed 200% of the aggregate fair market value of the relinquished property.

The 95% exception can preserve an exchange after an identification exceeds both limits, but only if you receive identified properties worth at least 95% of the total identified value by the end of the exchange period. The regulation sets its own timing rules for measuring value. Treating that exception as a routine identification strategy leaves almost no tolerance for a failed acquisition.

You can revoke an identification during the 45-day period, and the revocation must follow the same written delivery rules. Property received before the identification period expires is treated as identified, but that shortcut doesn't extend the exchange deadline.

Selecting a Qualified Intermediary

A qualified intermediary can't be you or another disqualified person. A person who acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker during the preceding two years is generally treated as your agent and therefore disqualified.

The agent rule doesn't count services related to exchanges intended to qualify under Section 1031, and it also excludes routine financial, title insurance, escrow, or trust services described in the regulation. Disqualification therefore turns on the two-year agency rule and its exceptions rather than professional title alone.

The tax rules on qualification don't cover the intermediary's financial strength or custody practices. You should review how funds are held, who can authorize transfers, what insurance or bonding applies, and what happens after fraud, insolvency, or a failed closing. An intermediary default can destroy the exchange, and Revenue Procedure 2010-14 provides only a limited safe harbor for reporting gain when the intermediary defaults in bankruptcy or receivership proceedings.

Cash, Other Property, and Liabilities

Money or non-like-kind property received in the exchange can produce recognized gain. The taxable amount is generally limited to the lesser of the realized gain or the money and fair market value of non-like-kind property received after applicable adjustments. Receiving $500,000 outside the qualifying exchange therefore doesn't automatically produce $500,000 of taxable gain when the realized gain is smaller.

Liabilities net against each other in the calculation, because debt from which you are relieved may be treated as money received, while liabilities you assume and qualifying cash you contribute can offset that amount under the applicable rules. Some advisers use equal replacement debt as a practical target, while the actual calculation nets the liabilities under the regulations.

Full deferral usually requires the taxpayer to receive only qualifying real property and avoid net cash or other nonqualifying value. The final analysis should use the adjusted basis, amount realized, liabilities, exchange expenses, and every asset transferred or received.

Basis After the Exchange

Section 1031 postpones gain by preserving it in the replacement property's basis. Publication 544 states that the replacement property's basis is generally the basis of the relinquished property, with adjustments for money paid or received, liabilities, exchange costs, non-like-kind property, and gain recognized.

Partial exchanges and financed property require a complete basis calculation. Your tax model should calculate the realized gain, recognized gain, and replacement basis separately. That basis then affects depreciation and the gain or loss on a later disposition.

Property acquired from a decedent may receive a basis determined under Section 1014, often fair market value at death. The result depends on ownership, estate inclusion, and the statute's exceptions. Repeated exchanges can postpone gain during life, while the basis consequences at death depend on the facts and the law then in effect.

Reverse Exchanges

A reverse exchange applies when replacement property becomes available before the relinquished property transfers, a sequence the ordinary rules for deferred exchanges don't cover by themselves. Revenue Procedure 2000-37 as modified by Revenue Procedure 2004-51 provides a safe harbor through a qualified exchange accommodation arrangement.

Under that safe harbor, an exchange accommodation titleholder holds qualified indicia of ownership and is treated as the beneficial owner for federal income tax purposes. The parties must enter the required written agreement within five business days after qualified indicia of ownership transfer to the titleholder. You generally identify the relinquished property within 45 days, complete the required transfer within 180 days, and keep the combined parking period within 180 days.

The safe harbor also excludes property you owned during the 180 days before its transfer to the accommodation titleholder. Financing, guarantees, management, and construction arrangements therefore require coordination with the parking structure rather than an assumption that any titleholder will suffice.

Improvement Exchanges

Replacement property can be under construction when identified. The completed improvements that exist when you receive the property can count toward the exchange if the identification and receipt rules are satisfied and the property received is substantially the same property identified.

Work completed after you receive the property doesn't qualify as replacement real property in the exchange. Only the land and qualifying improvements in place when the property transfers to you count as replacement real property, while later construction falls outside the exchange. Completion of every planned improvement by day 180 isn't required, but unfinished work contributes no exchange value once you hold the property.

An accommodation titleholder commonly holds the project during construction. The construction contract, draw process, lender documents, and transfer timing must fit the exchange structure because unused exchange funds and unfinished work can increase the recognized gain.

Related Parties

Section 1031 contains special rules for direct and indirect exchanges involving related parties. The Form 8824 instructions explain that the rules can apply to an exchange conducted through an intermediary and to replacement property formerly owned by a related party.

An exchange structured to avoid those rules can lose nonrecognition treatment. Certain related-party exchanges also require Form 8824 filings for the two years following the exchange, and a disposition within two years can trigger the deferred gain unless an exception applies.

Preparing Before the Sale

You should involve the qualified intermediary, tax adviser, and transaction lawyer before you transfer the relinquished property. The purchase and sale agreements, assignments, closing instructions, entity ownership, financing, identification process, and control of funds must describe the same exchange.

Diligence on replacement property should begin before the first closing because the 45-day period allows little time to resolve title, environmental, financing, zoning, and physical condition issues. Your identification strategy should leave enough flexibility to close on qualifying property without violating the three-property, 200%, or 95% rules.

Every exchange must be reported on Form 8824 for the year in which the relinquished property transfers. The return should reflect the actual transaction, including recognized gain, related parties, liabilities, non-like-kind property, and the replacement property's basis.

A Section 1031 exchange can postpone substantial gain, but it never operates through the reinvestment label alone. The taxpayer, property, documents, deadlines, funds, liabilities, and reporting all have to support the same qualifying exchange.