Advisor FAQ Hub: 1031 Questions Professionals Get Every Week

Boot is anything the client receives in the exchange that is not like-kind to the relinquished property: cash, debt relief, or non-real-property assets. Under IRC 1031(b), receiving boot caps the recognized gain at the lesser of the realized gain or the boot received. Boot can also be negative - the client pays additional cash out of pocket - which adds to basis and can offset debt relief, without triggering current tax. A fully deferred exchange defers depreciation recapture along with the rest of the gain; recapture is recognized only to the extent gain is recognized. See the [Form 8824 walkthrough](/learn/form-8824-advisor-walkthrough) for basis calculations.

Constructive receipt happens when the client gains actual or constructive control of the sale proceeds during the exchange period. Under Treas. Reg. §1.1031(k)-1(g), the qualified intermediary safe harbor holds if a qualified intermediary keeps the proceeds in a segregated account, the client never receives or can access the funds, and the QI wires the money directly to the seller of the replacement property. The client cannot take a check, move the funds personally, or delay the transfer to the QI. This is the single biggest technical risk in a 1031 exchange. See the [advisor playbook](/learn/1031-for-advisors-playbook) for safeguards.

Section 1031(f), enacted in 1989, provides that if the taxpayer exchanges with a related person and either party disposes of the property it received within two years of the last transfer, the deferred gain is recognized as of that disposition. Related persons under §267(b) and §707(b)(1) include a spouse, ancestors, lineal descendants, siblings, and entities more than 50% owned. The two-year hold is a cliff: a sale on Day 730 disqualifies the exchange. Related-party deals are still possible, but they need careful planning and documentation. Consult counsel.

Since the TCJA, like-kind means any real property held for investment or for productive use in a trade or business. The statute dropped personal property from the definition in 2018. A client can exchange an office building for a multifamily apartment complex, or a commercial warehouse for farmland. Size, age, condition, and location need not match, and interstate exchanges are permitted. The only test is that both properties be real property held for investment or business use. See IRC 1031(a)(1) and Treas. Reg. 1.1031(a)-1.

A fully deferred exchange defers depreciation recapture along with the rest of the gain. Recapture is recognized only to the extent gain is recognized (boot), or where §1245 property is given up for less §1245 property, for example cost-segregated components (§1250(d)(4), §1245(b)(4)). Unrecaptured §1250 gain on real property is taxed at a maximum 25%, not at ordinary rates. Any recapture that is recognized is reported through Form 8824, Part III. The deferred gain carries into the replacement property through its basis. See the [Form 8824 walkthrough](/learn/form-8824-advisor-walkthrough).

Yes. Revenue Procedure 2000-37 provides an IRS safe harbor for reverse exchanges, where the client acquires the replacement property before the relinquished property is sold. An exchange accommodation titleholder (EAT, usually an affiliate of the QI) acquires the replacement property under a qualified exchange accommodation arrangement and holds it until the relinquished property sells, at which point the properties are exchanged. The client must identify the relinquished property within 45 days and complete the exchange within 180 days. Reverse exchanges fit when the replacement is available right away but the relinquished property has not yet sold, and they demand careful timing and QI expertise.

Rev. Proc. 2008-16 is a safe harbor for dwelling units that also see some personal use. The relinquished unit must be owned for the 24 months before the exchange and, in each of the two 12-month periods, rented at fair rent for 14 or more days with personal use within the greater of 14 days or 10% of the days rented. The replacement must meet the same test for the 24 months after. Outside the safe harbor, the client has to show investment intent on the facts. The ruling matters for clients converting vacation properties into rentals. See the [vacation-home guide](/learn/vacation-home-1031-exchange).

Yes. IRC 1031 has no geographic limit. A client can exchange California real property for property in New York, or in any other U.S. state (U.S. and foreign real property are not like-kind to each other, §1031(h)). It still has to clear the like-kind test - both properties real property held for investment or business use - and the 45/180-day timeline. Interstate exchanges carry no extra federal hurdles, but California tracks gain deferred into property in another state (with an annual Form FTB 3840), a few other states take a similar position, and state law and local recording rules vary, so confirm title and recording procedures with the title company in each state.

When a client dies, the property's basis steps up to its fair market value on the date of death. Under IRC 1014, heirs inherit at that stepped-up basis, so the deferred gain is permanently forgiven and never taxed - at least at the federal level, since state law varies. It is a large tax benefit and often the reason clients run several exchanges: hold the property until death and the gain can be deferred indefinitely. This is not a legal opinion, but it is settled tax law. Consult the client's estate attorney on state-law implications.

The 2017 TCJA limited 1031 to real property for exchanges after 2017, so personal property no longer qualifies. It did not change the related-party rule (IRC 1031(f), in place since 1989) or the 45/180-day timeline. The real-property-only rule is the biggest shift. Clients with equipment, vehicles, or collectibles can no longer defer tax through 1031. See the [quick-screen](/learn/1031-client-qualification-quick-screen) for screening questions.

Under Treas. Reg. §1.1031(k)-1(k), a disqualified person is anyone who, in the two years before the exchange, has acted as the client's advisor, attorney, accountant, agent, or employee, or has provided real estate transaction services to the client. The QI cannot be a disqualified person. In practice, the client cannot use her accountant, attorney, realtor, or broker as the QI. The QI must be an independent third party with no prior relationship to the client, which is the whole point: it preserves the QI's impartiality.

The QI holds the proceeds until they are paid to the seller of the replacement property at closing. There is no maximum holding period, but the QI must release the funds before the 180-day acquisition period ends. If the client has not identified and closed on a replacement by Day 180, the exchange fails, the QI releases the proceeds to the client, and the tax comes due. In practice the QI releases the money on the replacement property's closing date. A delay in wire instructions can trigger constructive receipt if the client ends up receiving the funds after Day 180.

No. If the QI releases funds to the client for any reason during the 45/180-day window, constructive receipt occurs and the exchange fails. That covers loans from the QI, advances, and early release of any portion of the proceeds. The QI cannot accommodate the request. Some clients ask whether they can borrow from the QI or a third-party lender to fund a down payment and repay the loan from the 1031 proceeds at closing; that is a gray area that can raise constructive receipt issues. Consult counsel if the client is short on cash during the exchange.

A Delaware Statutory Trust is a passive investment vehicle that holds real property. Under Revenue Ruling 2004-86, an interest in a DST is treated as an interest in real property and qualifies as like-kind to other real property, so investors can exchange into a DST without losing 1031 treatment. DSTs appeal to investors who want diversification or passive management. But they are heavily regulated, their tax treatment depends on structure, and some interests can raise liability concerns. Consult counsel on the specific structure before recommending a DST as a replacement property. See the [Rev. Rul. 2004-86 guide](/learn/dst-eligibility-revenue-ruling/) for more.

An investor who exchanges into a DST interest must meet all the usual 1031 rules: identify the DST interest within 45 days, close within 180, and carry over the adjusted basis from the relinquished property. The investor's pro-rata share of the DST's depreciation deduction flows through to the individual return, and the deferred gain is preserved in the DST interest. A DST that qualifies under Rev. Rul. 2004-86 is a grantor trust, so each investor reports a share of income and depreciation directly; an interest taxed as a partnership would not qualify as replacement property. The client still needs to understand the liability and tax-reporting implications. Consult the client's CPA on how it integrates with the annual return.

Once the client holds the DST interest, the exchange is complete. When the trust later sells its property, the investor's share of the gain is taxable unless the investor does a new 1031 exchange with that share of the proceeds. Review the offering documents for unwinding provisions and exit strategies before committing. In some cases an advisor lines up a backup replacement property so the client keeps a like-kind option if the DST fails. This runs beyond typical 1031 scope; consult counsel.

Treas. Reg. §1.1031(k)-1(c)(4) lets a client identify up to three replacement properties regardless of their value - the three-property rule. Identify three and close on any one of them, and the exchange is compliant, even if the three differ widely in value. Go past three and the list must stay within 200% of the relinquished property's value; only if it exceeds 200% must the client acquire 95% of everything identified. The safe harbor buys flexibility but rewards a short list, which is why most advisors identify one or two solid properties rather than three.

Identify more than three replacement properties and the exchange still works only if the client closes on properties worth at least 95% of the total fair market value of everything identified. Say the client identifies four properties worth $100k, $200k, $300k, and $400k, a $1M total; the client then has to close on at least $950k of that. The rule is there to discourage sprawling identification lists, and in practice most advisors keep the list to three or fewer to skip the 95% calculation.

The 45-day deadline does not bend for weekends or holidays. Day 45 is a calendar day, not a business day. If it lands on a Saturday, midnight Saturday is the deadline; if it lands on Christmas, midnight Christmas is the deadline. The main exception is IRS disaster relief: when a federally declared disaster covers the taxpayer, the property or a party the exchange depends on, an IRS notice under §7508A and Rev. Proc. 2018-58 can postpone both dates. Service in a combat zone also postpones them (§7508). To stay clear of the line and absorb any QI processing delay, plan to submit the identification letter by Day 40.

The identification must be in writing and signed by the client or a duly authorized representative. A formal identification letter on the QI's template is the safest approach; emails or informal lists are more vulnerable to challenge when the documentation is unclear or unsigned. Each property should carry its legal description and address. Use the QI's template to keep the identification compliant and unambiguous.

The client can identify a property before the purchase contract is signed - the identification is a statement of intent to acquire it. Still, there is no point identifying a property the client does not intend to pursue seriously. Identify one and then walk away, say after a failed inspection, and the client has burned one of three slots. Best practice is to identify only properties in active negotiation or already under contract.

December 31 is Day 0, which puts Day 45 at February 14 and Day 180 at June 29 of the following year (June 28 in a leap year). But the exchange period ends on the earlier of Day 180 or the due date of the return for the year of the sale (April 15 for an individual), so unless the client extends that return (Form 4868 or 7004), the exchange must close by then. The client reports the exchange on Form 8824 for the year of the sale, the year the relinquished property closes. Consult the CPA on any effect on estimated taxes or multi-year planning.

Yes. A partnership, including a multi-member LLC taxed as a partnership, can exchange property. The partnership is the taxpayer, and gain is deferred at the partnership level. Each partner carries a pro-rata share of the deferred gain as adjusted basis in the partnership interest, and the partnership's basis in the replacement property is a carryover basis: its cost minus the deferred gain. Partners can contribute more capital or shift their ownership percentages without breaking the partnership's 1031 treatment, as long as the partnership itself stays the taxpayer. Consult the partnership agreement and an attorney on the implications.

Keep the exchange agreement with the QI signed by all parties, the identification letter and every version of it, correspondence with the QI confirming receipt of proceeds and of the identification, the purchase and sale agreements for both the relinquished and replacement properties, the closing statements, preliminary and final title commitments, appraisals or BPOs, the preliminary tax projection, the timeline document shared with the team, Form 8824 once filed, and any correspondence with the client or team on qualification, timing, or technical issues. The file is evidence that the advisor managed the exchange diligently and within IRC 1031, and it supports the client if the IRS audits the return.

An advisor who fails to follow the 1031 rules, misses a deadline, or gives incorrect advice can face malpractice claims. The exposure is highest when the client loses the deferral through the advisor's negligence, such as blowing the Day 45 identification deadline. Carrying errors-and-omissions insurance, keeping compliance checklists, and escalating edge cases to specialists all help. So does disclaiming liability for tax outcomes and pointing clients to a CPA or attorney for tax and legal advice. A clear engagement letter that defines the scope - planning only, or timeline management too - limits exposure.

Yes. A client can complete a 1031 exchange, hold the replacement for investment, and exchange it again later. There is no cap on the number of exchanges and no required holding period between them. Investors use this to consolidate properties or move between markets. Each exchange has to clear the 1031 rules on its own, though: proper QI engagement, the 45/180-day timeline, and like-kind property. The deferred gain from earlier exchanges carries forward and compounds as adjusted basis in the replacement property.

Abandon the exchange before the Day 45 identification deadline and the client has simply sold the property, reporting the gain or loss with tax due in the year of the sale. If the exchange is initiated but fails - identification missed, or no closing by Day 180 - the client may have already paid QI and inspection fees without getting any deferral, and the deferral is gone. There is no do-over: a 1031 cannot be claimed retroactively if it was not properly structured. That is why early planning and timeline management matter so much. If the exchange fails after year-end, the gain may be reportable in the year the QI releases the funds (Treas. Reg. §1.1031(k)-1(j)(2)).

State law varies a lot. Some states, including California and New York, recognize IRC 1031 and defer state gain when the exchange is federally compliant. Others run their own 1031 rules or tax the exchange differently, and California, for one, tracks gain deferred into property in another state, as do a few others. Pennsylvania, long the exception, has followed 1031 for personal income tax since 2023. When the property sits in a state with unusual or unfamiliar treatment, consult the client's CPA or a state tax specialist. State income tax can erode a federal deferral if the state does not go along with it.

An exchange can be completed for a deceased client's estate if it was initiated before death and finished after. The executor or administrator can identify and close on the replacement within the standard 45/180-day timeline. The rules are complex and the timing is tight. If the client dies after relinquishing the property, the executor should contact the QI and CPA right away to weigh whether an exchange is still feasible or a taxable sale is more practical. Consult an estate attorney and the client's CPA if this comes up.

Start with the adjusted basis of the relinquished property, add cash paid and new debt assumed, subtract cash received and debt relieved, and add any gain recognized; the result is the adjusted basis in the replacement property (equivalently, the replacement's cost minus the deferred gain). For example: the relinquished property has a $200k adjusted basis, the replacement costs $300k, and the client pays $100k in cash, so the new basis is $200k + $100k = $300k. Had the client instead sold for $250k, kept $50k in cash and bought a $200k replacement, the $50k of boot would be taxed and the new basis would be $200k - $50k + $50k gain recognized = $200k. See the [Form 8824 walkthrough](/learn/form-8824-advisor-walkthrough) for detailed examples.

It turns on the same-taxpayer rule. If the relinquished property is held in the client's name alone, the replacement must be held in the client's name alone too. Taking title jointly with a spouse is a change in taxpayer, and the exchange may fail. If the relinquished property is already held jointly, the replacement must be held jointly. Some states and tax authorities have special rules for spousal ownership, so consult a tax attorney on the specific jurisdiction before proceeding.

Debt paid off at the sale is boot only to the extent it is not replaced by new debt on the replacement or by cash the client adds (Treas. Reg. §1.1031(d)-2). For example: the relinquished property carries $500k of mortgage debt and sells for $800k gross, so the QI receives $300k in net proceeds ($800k minus the $500k payoff). If the client buys an $800k replacement with the $300k and a $500k new loan, the new debt offsets the debt relief and there is no mortgage boot. If the client instead buys a $500k replacement with the $300k and a $200k loan, the $300k of debt not replaced is boot, and recognized gain is the lesser of the realized gain or that $300k. The client's adjusted basis in the replacement property carries over, adjusted for the boot. This is a complex calculation; coordinate with the CPA.