Before engaging a QI or running tax projections, spend five minutes screening for the facts that disqualify a 1031: non-real property, personal use, a mismatch between seller and buyer, related-party complications, dealer status, and a timeline too tight for the 45- and 180-day deadlines. If any answer is a red light, stop and consult counsel or escalate to the client's CPA before going further.
Six Questions Before You Call a QI
Halfway through an annual review, a client mentions she is about to sell a rental property. That sentence is worth five minutes before you do anything else. A handful of facts decide whether a 1031 exchange is even possible, and finding a disqualifier now costs far less than finding it after you have engaged a qualified intermediary (QI), the neutral party who holds the sale proceeds so the client never touches the cash between selling and buying.
Six questions do most of the sorting, and running them takes no more than five minutes. Ask them before detailed planning or engaging a QI. If any answer comes back red, flag it and either consult counsel or escalate to the client's CPA before going further.
Question 1: Is It Real Property?
Start with the asset itself. Since the 2017 Tax Cuts and Jobs Act (TCJA), only real property qualifies for 1031 treatment. Equipment, vehicles, intellectual property, and securities, all once potentially eligible, no longer are. If the client is selling anything other than land, a building, real estate used in an operating business, or an interest in real property such as an easement, a 1031 does not apply.
Counts as real property:
- Land, improved or unimproved.
- Residential rental property (single-family, multifamily, and so on).
- Commercial real estate (office, retail, industrial, warehouse).
- Hospitality property held for investment (hotels, motels, short-term rentals).
- Agricultural property (farms, orchards, ranches).
- Real estate used in an operating business (restaurants, gas stations, convenience stores, dental offices).
- Easements and water rights, in some cases.
- Timeshare interests and fractional ownership in real property, in limited cases.
Does not count:
- Equipment, even bolted to the floor - café equipment, dental chairs, manufacturing lines. It is personal property.
- Vehicles and aircraft.
- Stocks, bonds, mutual funds, ETFs, and REITs, which are securities rather than real property.
- Cryptocurrency.
- Collectibles and art.
- Business inventory or goodwill.
- Leasehold interests, depending on lease term and jurisdiction; consult counsel.
The call:
- Green: A rental property, office building, farm, or real estate used in an operating business.
- Yellow: An easement or water rights. Consult counsel on state law.
- Red: Equipment, vehicles, securities, or any non-real-estate asset. A 1031 does not apply; do not proceed.
Question 2: Is It Held for Investment or Business Use?
A 1031 covers property held for investment or for productive use in a trade or business. Personal-use property does not qualify: a primary residence, a vacation home the owner uses, a second home kept for personal stays. The IRS looks past the label to how the property is actually used, so the client's real pattern of use and stated intent are what matter.
Use | Qualifies | Notes |
|---|---|---|
Long-term rental (tenant pays rent) | YES | The bread-and-butter 1031 case. |
Real estate used in the client's own business | YES | For example, a dental office building where the practice operates. |
Short-term rental (Airbnb, VRBO) | YES | If held for profit and actively managed as a business. |
Vacation home the owner uses personally | NO | Personal use fails the test, even if it is rented part of the year. |
Primary residence | NO | Does not qualify, even if titled in the client's name. |
Vacant land held for speculation | YES | Land held for future appreciation counts as investment property. |
Property being renovated for resale (a flip) | MAYBE | Depends on intent and holding period. See Question 6. |
Property in a partnership or LLC | YES | The entity is the taxpayer, and it qualifies if held for investment or business use. |
The call:
- Green: A long-term rental, real estate used in an operating business, or vacant land held for investment.
- Yellow: A short-term rental or formerly personal-use property. Confirm actual use with the client and document intent.
- Red: A primary residence or a vacation home used personally by the owner. Do not proceed.
Question 3: Does the Seller Match the Buyer?
This is the same-taxpayer rule. Whoever owns the relinquished property must be the one who takes title to the replacement. If the property is in Jane's name, Jane takes title to the replacement. If it is held in XYZ Rentals LLC, the replacement goes into XYZ Rentals LLC. The rule exists to stop an exchange from being used to shuffle ownership between people or entities tax-free.
Scenario | Green light? | Notes |
|---|---|---|
Individual sells, individual buys | YES | Same name on both sides. |
LLC sells, same LLC buys | YES | The LLC is the taxpayer on both sides; the member behind it does not matter for 1031. |
Partnership sells, same partnership buys | YES | The partnership is the taxpayer. Ownership percentages can shift as long as the partnership continues. |
Individual sells but wants the replacement in an LLC | NO | That is a change in taxpayer. An individual cannot exchange into an LLC, or the reverse. |
Partnership dissolves or reorganizes just before the sale | MAYBE | A red flag. Restructuring right before an exchange invites an IRS challenge to the same-taxpayer claim. Consult counsel. |
Single-member LLC (disregarded for tax) sells; same LLC buys | YES | The LLC is disregarded, so the owner is the taxpayer on both sides. |
Multi-member LLC sells; same LLC buys | YES | The LLC is the taxpayer. Members cannot change, but their percentages can. |
Trustee of a trust sells; trustee of the same trust buys | YES | The trust is the taxpayer. |
Trustee of Trust A sells; trustee of Trust B buys | NO | Different taxpayers. The exchange fails. |
The call:
- Green: The entity on the sale side is identical to the entity on the purchase side.
- Yellow: The client is weighing a restructuring or change of entity. Pause and consult an attorney; do not proceed until the structure is final.
- Red: Sale and purchase are in different names or entities. The same-taxpayer rule fails. Do not proceed without a formal legal opinion.
Question 4: Is a Related Party Involved?
The Tax Cuts and Jobs Act added a related-party rule to IRC 1031. If both the relinquished property and the replacement property change hands between related parties, and the related party disposes of the property within 2 years of the client's acquisition, the exchange can be disqualified retroactively and the tax comes due. The rule does not ban related-party exchanges. It adds a two-year cliff.
Related parties include:
- Spouses and lineal descendants (children, grandchildren, and so on).
- Ancestors (parents, grandparents, and so on).
- Siblings and their spouses.
- Corporations in which the client owns 50% or more.
- Partnerships in which the client owns 50% or more.
- Trusts of which the client is a beneficiary.
Red-flag patterns:
- Selling to a family member and buying from another family member.
- Selling to her children and buying from them in return.
- Swapping properties with a brother or sister.
- Acquiring property from a family partnership or family LLC.
The call:
- Green: No related party involved; the transaction is arm's length.
- Yellow: A related party on one side but not both. The client can proceed but should know the risk if a second, related transaction follows.
- Red: Both sale and purchase involve related parties. Consult a tax attorney on the two-year rule. The exchange can still work, but the related party must hold the replacement for at least 2 years or it fails.
Question 5: Is the Timeline Too Tight?
The 1031 clock is absolute. Once the sale closes, the client has 45 days to formally identify replacement property and 180 days to close on it, both counted from the sale. Miss either deadline and the exchange fails. Most failures come from starting late.
Timeline red flags:
- The property closes in fewer than 10 days and no QI is engaged.
- The property closes on day one and the client has identified no replacement property.
- The client wants to close on the replacement on day 178 or 179, leaving zero margin for error.
- The client is still negotiating a purchase contract on day 140, with only 40 days left.
The call:
- Green: Closing is 30 or more days out, a QI is engaged, and the client has identified 2-3 candidate properties.
- Yellow: Closing is 10-30 days out and no QI is engaged. Call immediately and confirm engagement.
- Red: Closing is in fewer than 10 days, or imminent, with no QI engaged. This is an emergency. Contact a QI now. Some can move fast, but there is no margin for error.
Question 6: Any Other Disqualifying Flags?
Even when the first five questions pass, a few facts can trigger IRS scrutiny: dealer status, recent personal use, suspicious timing, or an entity restructuring underway.
Red flag | What to do |
|---|---|
The client has bought and sold 5 or more properties in the last 3 years. | Consult a CPA on dealer status. The client may be a dealer rather than an investor. |
The client bought the property 6 months ago and is selling now. | Ask why. A flip or quick renovation means the holding period is too short. Consult a CPA. |
The property was the client's primary residence until a year ago. | Document the conversion to rental use. Consult a tax attorney if the conversion is recent (under 2 years). |
The client is restructuring the ownership entity right now. | Pause until the restructuring is complete and documented. Consult an attorney. |
The property is being sold as part of a divorce or estate settlement. | Consult an attorney on whether the settlement agreement affects 1031 treatment. |
The client is selling to pay off debt or raise cash for another purpose. | Not disqualifying, but clarify intent: is she deferring tax through a 1031, or taking cash out? If it's cash out, an exchange may not be what she wants. |
The property is in another country or is foreign-owned. | Foreign real property can qualify, but consult counsel on the state and federal tax implications. |
The call:
- Green: No red flags. Proceed.
- Yellow: One or more yellow flags (recent conversion, tight timeline, a related-party sale). Proceed but consult specialists as needed.
- Red: One or more red flags (likely dealer status, suspicious timing, ongoing restructuring). Do not proceed without a formal opinion from a CPA or tax attorney.
Reading the Overall Picture
Once the six questions are answered, step back and read the whole risk profile.
Green: the client qualifies
No material disqualifying facts. Move to planning, engage the QI, and manage the timeline.
Example: Jane has owned a 10-unit multifamily building in "Jane's Rental Properties LLC" for 8 years and wants to sell it and buy a commercial office building in the same LLC. The sale closes in 60 days. No related parties, no dealer-status concerns.
Yellow: likely, but unconfirmed
One or more yellow-flag facts need specialist review before you engage a QI. Hold off until you have clarity. Common cases:
- A short-term rental, where the question is investment use versus personal use. Consult the CPA on intent and actual use.
- A client who wants to change entity structure during the exchange. Consult an attorney on the same-taxpayer rule first.
- A holding period under 2 years. Consult a CPA on dealer-status risk.
- A closing 15 days out with no QI engaged. Call one immediately and confirm availability.
Do not commit to a full 1031 until that review is complete.
Red: stop and get a formal opinion
One or more disqualifying facts are present. Do not engage a QI or run detailed planning. Get a written opinion from the client's CPA or tax attorney first. Typical triggers:
- Non-real property such as equipment or securities. A 1031 does not apply.
- A primary residence, even one rented in the past. It is not investment property now.
- Sale and purchase in different entities, such as individual to LLC. The same-taxpayer rule fails.
- Related parties on both sides, with no attorney consulted on the two-year rule.
- A client who trades often enough to look like a dealer.
Keep the written opinion in hand before engaging a QI or committing to the strategy.
When to Refer to Specialists
Refer to a CPA or tax attorney for:
- Any dealer-status question.
- A holding period under 2 years.
- Related-party transactions, especially with both sides related.
- Recent conversion of a personal residence to rental use.
- Uncertainty about the property's productive-use status.
- Multi-state or international property.
Refer to an attorney for:
- Entity restructuring before or during the exchange.
- Title issues or liens on the relinquished property.
- Divorce or estate-settlement implications.
- Partnership or LLC operating-agreement restrictions.
Refer to the CPA, before and after closing, for:
- Basis calculations and depreciation schedules.
- Boot and gain calculations, boot being any cash or non-like-kind value the client walks away with, which is taxable.
- Deferred-gain tracking for future exchanges or for death.
- Form 8824 preparation and its integration with the tax return.
The Conversation with the Client
Once the screen is done, tell the client where things stand.
Green light: "Your property qualifies for a 1031 exchange. It is a tax-deferred strategy, and I recommend we move forward: engage a qualified intermediary and start building a replacement-property strategy. I will set up a meeting with your CPA and attorney to coordinate."
Yellow light: "Your property likely qualifies, but we need clarity on a few details first. I am going to talk with your CPA [or attorney] about [specific issue]. Once we have their input, we can move forward with confidence."
Red light: "Based on what you have shared, I have concerns about whether a 1031 will work for this property. Before we engage a qualified intermediary, I want a formal opinion from your tax advisor. This is not a dealbreaker, but we need to understand the tax implications before we commit. Can you send me your CPA's contact information?"
Use the green/yellow/red framework to tell the client where qualification stands. Green means proceed with planning and engage the QI. Yellow means pause and get specialist review first. Red means stop and obtain a formal opinion before committing.
Frequently asked questions
Does 1031 still apply to anything besides real estate?
No. The 2017 Tax Cuts and Jobs Act ended 1031 deferral for personal property, equipment, vehicles, and other non-real-estate assets, leaving only real property held for investment or a trade or business. Stocks, bonds, cryptocurrency, equipment, and collectibles are all taxable when sold. It was one of the most significant changes to 1031 in decades.
Do property flips ever qualify?
It depends on intent and holding period. If the client is in the business of buying and selling properties for a living (a dealer), the properties are held as inventory and do not qualify. But if the client bought intending to hold long-term for rent, later decided to renovate and sell, and is selling after a 2-plus-year hold, there is a stronger argument for 1031 treatment. Consult a CPA or tax attorney when the client's status is ambiguous.
Can an LLC do a 1031 exchange?
Yes. An LLC, partnership, S-corp, or other entity can do a 1031 exchange. The key rule is that the taxpayer on the sale side must be the same taxpayer on the purchase side: if the property is held in "XYZ Rentals LLC," the replacement must be too. A single-member LLC that is disregarded for tax purposes is treated as its owner for 1031 purposes, while a multi-member LLC is itself the taxpayer. Do not change entity structure during the exchange, because that can cause complications.
What if the client converted a personal residence to a rental recently?
The IRS allows 1031 treatment for former personal residences, but only if the property was converted to rental use and held that way for a meaningful period before the sale. If the client lived in the home for 10 years, converted it to a rental 6 months ago, and is selling now, the IRS may challenge the investment claim. The safe zone is 2-plus years as a rental before the sale. If the conversion is recent, consult a tax attorney.
How short is "too short" for a holding period?
IRC 1031 sets no minimum holding period, but the IRS may challenge a property held under 2 years on dealer-status grounds, arguing it was held for resale rather than investment. If the client acquired a property under 2 years ago and is selling now, ask why: a flip, or a change in circumstances such as a job loss, health issue, or market downturn? A flip puts 1031 treatment at risk. If circumstances changed, document the original investment intent and consult a CPA.
What should I do if the client is already under contract to sell?
Do not panic, but move fast. If the client is under contract and has not engaged a QI, do it now. Ideally the QI is engaged before the contract is signed, but many clients engage one after signing. The critical rule is that the QI must be in place before or at closing, never after. Call the QI immediately, confirm it can be ready for the closing date, and accelerate the qualification and planning work accordingly.