The core rules
- Both properties must be held for investment or business use, not as a personal residence
- A qualified intermediary holds the sale proceeds; touching the money can disqualify the exchange
- Replacement property must be identified within 45 days of the sale
- The purchase must close within 180 days of the sale (or the tax return due date, if earlier)
- To defer all the tax, buy property of equal or greater value and reinvest all the proceeds
At the closing table
The sale closes with proceeds wired to the qualified intermediary, not the seller, and the exchange documents are assigned. The replacement purchase closes with funds from the intermediary.
Downsides to weigh
Tight deadlines, intermediary fees, and deferral rather than forgiveness: the deferred gain carries into the new property. Get tax advice before the sale closes.
Common questions
What is the 2-year rule for 1031?
Exchanges between related parties generally require both to hold their properties for two years. Ask a tax advisor.
Can you eventually live in a 1031 exchange property?
Possibly, after holding it as an investment, but there are timing and use rules. Ask a tax advisor before converting it.