1031 Like-Kind Exchange Planning: Deferring Gains on Property Sales

Proper 1031 planning requires coordinating identification, qualified intermediaries, and strict timeline compliance to defer capital gains.

Like-kind requirements. Both the relinquished and replacement properties must be held for investment or business use -- not personal residences. "Like-kind" is broad for real estate: you can exchange an apartment building for raw land, or a commercial office for a rental duplex. The key is the purpose, not the property type.

The identification and closing deadlines. You have 45 days from selling the relinquished property to identify up to three potential replacement properties (or more under the 200% or 95% rules). You must close on a replacement within 180 days. These deadlines are statutory and cannot be extended for any reason.

Qualified intermediary requirement. You cannot touch the sale proceeds. A qualified intermediary holds the funds between sale and purchase. If you take constructive receipt of the money at any point, the exchange fails and the full gain becomes taxable.

Boot and partial exchanges. If the replacement property costs less than what you sold, the difference ("boot") is taxable. Receiving cash, debt relief, or non-like-kind property also creates boot.

Reverse exchanges and DST exits. In a reverse exchange, you acquire the replacement property before selling the old one. DSTs (Delaware Statutory Trusts) qualify as replacement property, letting you exit active management while preserving the tax deferral.

The pitfall: A failed exchange -- missed deadline, intermediary error, or boot you didn't anticipate -- triggers the full capital gains tax with no partial deferral. The stakes of execution errors are high.