Reviewed by Robert Mendieta Jr., CCIM — Associate Broker · Commercial Division · DRE #01422904
Last updated: October 4, 2026 · More CRE guides
The 1031 exchange rules let an investor defer tax on the sale of business or investment real estate by exchanging it for like-kind real estate instead of cashing out. The deadlines are unforgiving, so this guide works from the primary sources, starting with 26 U.S.C. § 1031. New to the term? See our 1031 exchange definition.
Not tax or legal advice. Apex Real Estate Services is not a law, tax or accounting firm, is not a qualified intermediary, and never holds exchange funds. Talk to your CPA or tax attorney before you sell.
What Are the 1031 Exchange Rules?
Under the 1031 exchange rules, you trade business or investment real property for like-kind real property held the same way, identify the replacement within 45 days of selling, receive it by day 180 or your tax-return due date if earlier, leave the proceeds with a qualified intermediary, and recognize gain on any cash or other boot.
Those are the core 1031 exchange requirements. It is deferral, not forgiveness: your basis carries over, and the deferred gain is recognized when the replacement is later sold in a taxable transaction.
Key Takeaways
- Real property only. Since the Tax Cuts and Jobs Act, § 1031 no longer covers equipment, vehicles or other personal property.
- Two clocks, one start. The 45-day and 180-day periods both begin the day you transfer the relinquished property.
- Identify in writing. Up to three properties, or any number worth no more than 200 percent of what you sold.
- Never touch the money. A sale followed by a purchase is not an exchange.
- California keeps tracking. Swapping California property for out-of-state property triggers an annual Form FTB 3840.
What Is the 1031 Exchange Timeline? The 45-Day and 180-Day Rules
The 1031 exchange timeline has two deadlines that start together: identify replacement property by midnight on day 45, and receive it by midnight on day 180 or your tax-return due date (including extensions), whichever comes first. They run concurrently, so you get at most 180 days in total, not 45 plus 180.
| Deadline | Starts | Ends | Source |
|---|---|---|---|
| Identification period (45-day rule) | Date you transfer the relinquished property | Midnight on day 45 | § 1031(a)(3)(A); Treas. Reg. § 1.1031(k)-1(b)(2)(i) |
| Exchange period (180-day rule) | Same date | Midnight on day 180 or the return due date with extensions, if earlier | § 1031(a)(3)(B); Treas. Reg. § 1.1031(k)-1(b)(2)(ii) |
For a late-year sale, the return can come due before day 180; because the cap counts extensions, an extension can restore the full window. Confirm timing with your CPA.
Weekends and holidays do not move either date; the regulation sets midnight on day 45 and day 180. Ask your QI and CPA about federal disaster relief.
Naming the replacementHow Do the 1031 Exchange Identification Rules Work?
The 1031 exchange identification rules require a signed written document that unambiguously describes each replacement property, delivered before day 45 ends to the replacement seller or a non-disqualified party to the exchange, usually your qualified intermediary.
| Rule | Limit | When it fits | Risk |
|---|---|---|---|
| 3-property rule | Up to three properties, any value | One target plus two backups | Low, if you stop at three |
| 200-percent rule | Any number, if their combined value at day 45 is no more than 200 percent of the relinquished property’s value | Four or more options | Going over the cap breaks the rule |
| 95-percent rule | Any number and value, if you receive at least 95 percent of the total value identified | Fallback after over-identifying | Must close on nearly everything |
Over-identifying is the costly mistake: exceed the limits without meeting the 95-percent rule and you are treated as if you identified nothing. You can revoke an identification before day 45, but only in a signed writing; an oral revocation is invalid.
Hypothetical example: you sell a building for $2,000,000. The 200-percent rule lets you identify any number of properties worth a combined $4,000,000 or less. Identify four or more properties worth $5,000,000 instead, and you must acquire at least $4,750,000 of it (95 percent) or the identification fails.
What Counts as Like-Kind Property After 2017?
U.S. real property held for business or investment is generally like-kind to other U.S. real property held the same way, improved or unimproved.
The IRS calls properties like-kind if they are “of the same nature or character, even if they differ in grade or quality.” Treasury regulations define real property as land and improvements to land, unsevered natural products of the land, and the water and air space above it. The Tax Cuts and Jobs Act limited § 1031 to real property for exchanges completed after December 31, 2017, so machinery, equipment, vehicles, artwork and intangibles generally no longer qualify. Three limits apply to real estate, too:
- Property held primarily for sale, such as dealer or flip inventory.
- Real property outside the United States, which is not like-kind to U.S. property.
- A home used solely as your personal residence.
So a rental house held for investment can generally be exchanged into a leased industrial building or retail center. An owner-user building can qualify too, because the statute covers property held for productive use in a trade or business. For the financing side, see buying a warehouse with an SBA 504 loan.
Taxable leftoversWhat Is Boot, and How Does Debt Affect a 1031 Exchange?
Boot is cash or other property you receive that is not like-kind real property, and gain is recognized up to its value. A loss is not recognized.
Debt counts too. The IRS Instructions for Form 8824 count net liabilities assumed by the other party, meaning mortgage relief beyond the debt you take on, the cash you pay and the other property you give up. Paying off more debt than you replace can create taxable gain.
Hypothetical example: you have a $600,000 realized gain and take $150,000 of the proceeds as cash. Recognized gain is $150,000, and $450,000 stays deferred. If your old mortgage was $1,000,000 and the new one is $800,000 with no cash added, the $200,000 difference is net debt relief that counts with the boot.
“Buy equal or greater value and replace the debt” is planning shorthand, not a rule in the statute. Check it with your CPA.
Who holds the moneyWhy Do You Need a Qualified Intermediary?
Because a sale followed by a purchase is not an exchange, even if you meet every deadline. A qualified intermediary (QI) acquires and transfers both properties under a written exchange agreement that bars you from receiving, pledging or borrowing against the money until the exchange period ends.
The QI cannot be you or a disqualified person, and anyone who acted as your employee, attorney, accountant, investment banker, broker or real estate agent within the prior 2 years is disqualified. Exchange-related services, and routine title, escrow and trust services by title companies, escrow companies or financial institutions, are carved out. So whoever represented you in the sale cannot hold your exchange funds, and Apex never touches them. The IRS also warns that if the timing requirements fail because of the QI, the transaction won’t qualify as a deferred exchange.
The fine printWhat Other 1031 Exchange Requirements Trip Investors Up?
Four more 1031 exchange requirements belong on your checklist.
- Related parties. If either side disposes of the exchanged property within 2 years of the last transfer, the deferral can unwind; exceptions apply.
- Form 8824. File it for the year of the exchange, and for the 2 years after a related-party exchange.
- Reverse exchanges. To buy before you sell, an exchange accommodation titleholder (EAT) can hold title under Revenue Procedure 2000-37, as modified by Revenue Procedure 2004-51. Property you owned within 180 days before its transfer to the EAT doesn’t count.
- Same taxpayer. The entity that sells should generally be the entity that buys; confirm with your CPA.
What Are the 1031 Exchange Rules in California?
California adds reporting and withholding: Form FTB 3840 every year when California property is exchanged for out-of-state property, and Form 593 withholding limits at closing.
Under the 1031 exchange rules in California, this annual filing is the main addition. For taxable years beginning on or after January 1, 2014, taxpayers who exchange California property for like-kind property outside California must file Form FTB 3840 for the year of the exchange and each later year, generally until the California-sourced deferred gain is recognized. The gain keeps its California source, whenever it is recognized. If you skip the form and file no California return, the FTB may assess the deferred gain plus penalties and interest.
A deferred exchange is exempt from California real estate withholding at the initial transfer. But if you receive more than $1,500 in money or other property from the sale, the QI must withhold, and if the exchange fails, the intermediary must withhold 3 1/3% of the sales price.
Selling a California rental and buying in the Inland Empire?
FTB 3840 is the out-of-state form, and an exchange that keeps the replacement property in California, as the Inland Empire does, is not the case it covers. You still file federal Form 8824 and your normal California return. Confirm your own filing obligations with your CPA.
How Do You Plan a Replacement-Property Strategy Inside 45 Days?
Start sourcing before your sale closes, so by day 45 you are choosing among underwritten properties, not searching. Then name a primary target and backups within the 3-property or 200-percent rule.
- Underwrite, don’t just shortlist. Test NOI against price (see how to calculate cap rate) and read the lease as closely as the building, especially a triple net (NNN) lease. For how to evaluate NNN replacement property, see our guide to NNN investment.
- Name backups. Deals fall out in escrow; the 3-property rule allows a primary and two alternates.
- Consider structure. Buying a sale-leaseback gives you a leased building from day one. For the full comparison, see our guide to sale-leaseback vs. 1031 exchange.
Replacement-market depth · CoStar, Q3 2026
- Industrial: CoStar counted 453 Inland Empire industrial sale transactions totaling $4.4 billion over the 12 months to Q3 2026, at a 4.9% market cap rate.
- Retail: 677 transactions totaling $2.5 billion over the same period, at a 6.5% market cap rate.
A market cap rate is a market-level estimate, not the yield a given property will trade at. See the Inland Empire industrial market and Inland Empire retail market reports. For current Inland Empire cap rate levels by subtype, see our guide to Inland Empire industrial cap rates.
For a search in the region, our 1031 exchange advisory for Inland Empire replacement property covers sourcing and underwriting inside the 45-day window, alongside your QI and CPA. For what to verify on the replacement property, see our commercial real estate due diligence checklist.
Common questions1031 Exchange Rules: Frequently Asked Questions
What is the 45-day rule in a 1031 exchange?
You must identify replacement property in a signed writing by midnight on the 45th day after you transfer the property you sold. Property not identified by then cannot complete the exchange. The 45 days run inside the 180-day exchange period, not before it.
Can I 1031 exchange a rental house into commercial property?
Generally, yes. Real property held for investment is generally like-kind to other real property held for business or investment, improved or unimproved. A home used solely as your personal residence does not qualify.
How many replacement properties can I identify?
Up to three of any value, or any number worth no more than 200 percent of the property you sold. Identify more and you must acquire at least 95 percent of the total value identified, or you are treated as having identified nothing.
Can my real estate agent or broker hold the exchange money?
No. Anyone who acted as your real estate agent or broker, attorney or accountant within the prior 2 years is generally a disqualified person and cannot be your qualified intermediary. Apex never holds exchange funds.
Do I have to file anything with California if I exchange into property in another state?
Yes. California requires Form FTB 3840 for the year of the exchange and every later year until the California-sourced deferred gain is recognized. Skip it without filing a California return and the FTB may assess the deferred gain, plus penalties and interest.
What happens if I take some cash out of a 1031 exchange?
The cash is boot. Gain is recognized up to the cash and other property you receive, and the rest can stay deferred. In California, receiving more than $1,500 from the sale also requires the QI to withhold.
Line up replacement property before day 45
Tell us what you are selling. Robert Mendieta Jr., CCIM, with more than 20 years of commercial real estate experience, will help you source and underwrite replacement property while your QI and CPA handle the exchange.
Apex is not a qualified intermediary, law, tax or accounting firm, and never holds exchange funds.
Call Robert: (951) 977-3251Or request a free CRE consult below.
Sources (web pages accessed September 23, 2026): Legal Information Institute · 26 U.S. Code § 1031 and 26 CFR § 1.1031(k)-1 · current text. IRS · Like-kind exchanges: Real estate tax tips (irs.gov) · current page. IRS · Instructions for Form 8824 (2025) · updated April 30, 2026. California FTB · 2025 Instructions for Form FTB 3840 · tax year 2025. California FTB · 2026 Instructions for Form 593 (ftb.ca.gov) · tax year 2026. CoStar · Inland Empire Industrial and Retail Capital Markets Reports · Q3 2026, dated September 30, 2026 (licensed data).
Robert Mendieta Jr., CCIM · Associate Broker · Commercial Division · DRE #01422904 · Apex Real Estate Services · 3750 E. Florida Ave Suite A, Hemet, CA 92544 · (951) 977-3251 · robert@apex-res.com