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 reduces deferred gain without triggering current tax. Depreciation recapture is taxed regardless of boot. 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 IRC 1031(c), the safe harbors hold 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.

IRC 1031(f), added by the TCJA, provides that if both the relinquished and replacement properties are related-party property and the related party disposes of its property within two years of the taxpayer's acquisition, the exchange is disqualified retroactively and the taxpayer owes the tax. Related parties include spouses, lineal descendants and ancestors, siblings, and entities the taxpayer owns 50% or more of. 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.

Depreciation recapture is always recaptured and taxed as ordinary income, even in a 1031 exchange where the rest of the gain is deferred. Under IRC 1031(c) and IRC 1245(a), the client reports recaptured depreciation on Form 8824 as recognized gain or loss. Section 1250 property, meaning real property, carries limited recapture under current law. The deferred gain - the amount above the recapture - carries into the replacement property as adjusted 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. A qualified exchange accommodation titleholder (QEAT, usually a QI) buys the replacement property and holds it until the relinquished property sells, at which point the properties are exchanged. The client must identify and close on the relinquished property 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 lets a client exchange a vacation home held for personal use for a like-kind investment property, and the reverse, without losing 1031 treatment. The safe harbor requires holding the vacation home for investment for at least 24 months before the exchange and the replacement for investment for at least 24 months after. Miss those holding periods and the property fails the 1031 test. 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 state or jurisdiction. 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 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 made three changes: it eliminated 1031 treatment for personal property, so only real property qualifies now; it added the related-party two-year hold rule under IRC 1031(f); and it left the like-kind and timeline rules alone. 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 IRC 1031(k)(1)(B) and Treas. Reg. 1.1031(k)-1(g)(4), 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 [DST section](/learn/1031-advisor-faq) 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. Structures differ, though - some DSTs are partnerships, some are not - so the client needs to understand the liability and tax-reporting implications. Consult the client's CPA on how it integrates with the annual return.

It is a complex question. If a DST is liquidated or unwound within two years of the client's acquisition, the client may face constructive receipt or gain-recognition issues, depending on the circumstances and the DST terms. 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.

IRC 1031(a)(3) 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 client must close on 95% of the total identified value. 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 is absolute; it does not bend for weekends, holidays, or extensions. 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 IRS has not granted extensions for natural disasters or emergencies. 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.

Day 1 is December 31, which puts Day 45 at February 14 and Day 180 at June 30 of the following year. The transaction spans two years, which is fine under the IRC, but it means the deferred gain straddles two tax years. 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 what it paid, meaning deferred gain plus any boot paid. 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.

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 a few - rare - do not recognize 1031 deferral at all. 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 any boot paid out of pocket (or debt incurred), and subtract any boot received (cash or debt relief); the result is the adjusted basis in the replacement property. 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 received $50k in boot, the new basis would be $200k - $50k = $150k. 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 relief counts as boot received and reduces the deferred gain. 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). For 1031 purposes the client is treated as receiving $500k of boot (the debt relief), even though only $300k in cash reaches the QI. Recognized gain is capped at the lesser of the realized gain or the boot received, here $500k. The client's adjusted basis in the replacement property carries over, adjusted for the boot. This is a complex calculation; coordinate with the CPA.