1031 Like-Kind Exchange
Defer capital gains tax on investment real estate by rolling the proceeds into a like-kind property.
TL;DR
- Roll investment real estate into a like-kind property to defer
capitalGains. - Identify a replacement within
45daysand close within180days. - Any cash or debt relief you pocket, called
boot, is taxable.
How It Works
Defer, Don't EraseThe gain rolls into the new property, unpaid for now.
Tax carries to the next propertyInvestment OnlyBusiness or investment real estate qualifies, not homes.
No personal residencesLike-Kind Is BroadAlmost any US real estate swaps for any other.
Land, rental, commercial all countHold to EraseKeep exchanging until death for a full step-up.
Step-up can wipe the deferred gainThe Rules
Equal or UpBuy a property worth at least the net sale price.
Replacement value >= sale priceMatch the DebtKeep debt and equity at least as high to avoid boot.
New debt + equity >= oldQualified IntermediaryA third party must hold the proceeds between deals.
You never touch the moneySame TaxpayerThe new title must match the old owner's name.
Same name on bothThe Deadlines
45-Day IDName your replacement candidates in writing.
Within 45 days of the sale180-Day CloseFinish buying a listed property in time.
Within 180 days of the saleClocks Are StrictThe deadlines rarely bend, so plan ahead.
No extensions, few exceptionsYear-End TrapA late sale can push 180 days past your filing date.
File an extension to keep the windowWatch for Boot
Cash BootLeftover proceeds you keep are taxable.
Unreinvested cash = taxableMortgage BootA smaller new loan counts as taxable relief.
Debt drop = taxable bootCarryover BasisYour old basis follows into the new property.
Old basis + boot paidRecapture WaitsDeferred depreciation recapture rides along too.
Due when you finally cash outTips
- Line up a
qualifiedIntermediarybefore you close, since you can never touch the sale proceeds and still keep the deferral. - Exchange again and again and hold until death, so heirs get a
stepUpBasisthat can erase the deferred gain for good.
Warnings
- The
45dayand 180-day clocks start at the sale closing and cannot be extended outside rare disaster relief. - Buying a cheaper replacement or taking on less debt creates
mortgageBootthat is taxable even with no cash in hand.
In Practice
See how trading down in debt creates a taxable gain even with no cash received.
You sell a property for $800,000 with a $200,000 mortgage (so $600,000 equity) and buy a replacement for $750,000 with a $150,000 mortgage.
- To defer all gain, buy equal or up in price and debt.
- Price is fine, but debt dropped from $200,000 to $150,000.
- That $50,000 debt reduction is mortgage boot.
- The $50,000 is taxable even though you pocketed no cash.
You defer most of the gain but owe tax on $50,000 of boot.
Buy equal or up in both price and debt to defer the whole gain.
FAQ
You sell an investment property and reinvest the full proceeds into another like-kind property without recognizing the gain at sale. The tax is deferred, not erased; it carries into the new property and comes due only when you eventually sell without doing another exchange. Chain exchanges and hold until death, and a step-up in basis can wipe out the deferred gain.
Within 45 days of closing your sale, you must identify the replacement property in writing to your intermediary. Within 180 days of that same closing, you must close on the replacement. Both clocks run from the sale date, and missing either one disqualifies the whole exchange, making the full gain taxable that year.
Boot is any value you receive that is not like-kind real estate, and it is taxable up to the amount of your gain. Cash boot is leftover proceeds you keep. Mortgage boot arises when your new loan is smaller than the old one, so your debt dropped. To defer everything, buy equal or up in both price and debt.
Yes, through a reverse exchange. An exchange accommodation titleholder parks title to one property while you finish the deal, and the same 45-day and 180-day deadlines apply. Reverse exchanges cost more and need more upfront capital, since you close on the replacement before the sale proceeds arrive.