Advisor Quick Screen: Does This Client Qualify for a 1031 Exchange?

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 and intellectual property, which qualified before 2018, no longer do. Stocks, bonds and partnership interests never qualified. 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 with fewer than 30 years to run, when traded for a fee interest. A leasehold is real property, but only one with 30 or more years to run (renewal options generally count) is like-kind to a fee (Treas. Reg. §1.1031(a)-1(c)).

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.

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.

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?

Section 1031(f), enacted in 1989, applies when the client exchanges with a related person. If either the client or the related person disposes of the property received within 2 years of the last transfer in the exchange, the deferred gain is recognized as of that disposition. Buying replacement property from a related person through a QI is generally disallowed outright (Rev. Rul. 2002-83). 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 (whole or half blood).
• Corporations in which the client owns more than 50% of the value.
• Partnerships in which the client owns more than 50% of the capital or profits interest.
• 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: The client sells to a related person. It can work if both sides hold what they received for 2 years. Buying the replacement from a related person through a QI generally fails (Rev. Rul. 2002-83): treat that as red.
• Red: Both sale and purchase involve related parties. Consult a tax attorney on the two-year rule. The exchange can still work, but both parties must hold what they received for 2 years after the last transfer (§1031(f)), or the deferred gain comes due.

Question 5: Is the Timeline Too Tight?

The 1031 clock does not stop for weekends or holidays; only IRS disaster relief or combat-zone service can postpone it. 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.

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 an individual selling and a multi-member LLC buying. 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.

Eligible Is Not the Same as a Good Fit

The six questions tell you whether an exchange is possible. They do not tell you whether the client wants one. A few open questions cover that:

• Management. How much time does the property take now? Is it self-managed, and how does the client feel about that work?
• What comes next. If the property sold tomorrow, would the client buy more real estate or move into other assets? A 1031 defers tax only on proceeds that go into replacement real property.
• Cash needs. Will the client need cash during the exchange period or while holding the replacement? Cash taken out of an exchange is boot, taxable up to the gain.
• Concentration. How much of the client's net worth is in real estate? The answer bears on whether consolidating or diversifying fits better.
• Life stage. Is the client simplifying before retirement? Does the replacement fit that plan?

Let the answers shape the plan. They do not change the eligibility call above.

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?"