Section 1031 Like-Kind Exchange

How it works

Section 1031 lets you sell real property held for investment or business use and roll the gain into replacement real property instead of paying tax on the sale. A qualified intermediary holds the sale proceeds and applies them toward the new property, so you never touch the money. No gain is recognized at the sale, and your basis in the old property, along with the gain built into it, carries over into the replacement property. The tax is not forgiven. It is postponed.

That deferral reaches further than most people expect. It covers not just the appreciation on the property but the depreciation you have already claimed against it, the part that would otherwise come back as unrecaptured Section 1250 gain, taxed at a rate up to 25 percent on an outright sale. Section 1031 defers both pieces together. You keep depreciating the replacement property off that same low, carried-over basis, so this by itself does not shrink the eventual tax bill. It postpones the government's share of the gain instead of settling it at the closing table.

Section 1031(d) runs the basis math in one direction: what you take into the replacement property equals what you had in the relinquished property, increased by any gain you were forced to recognize and any additional money you put in, decreased by any cash or debt relief you received. A bigger, more expensive replacement property funded partly with new money carries a correspondingly higher basis on the new-money portion, but the core of it is still the old, low basis, following you forward.

The endgame

Practitioners have a name for the long version of this: swap till you drop. An investor can chain exchanges across a lifetime, deferring gain at every step, and then die still holding the last property in the chain. At that point the heirs take the property at its fair market value as of the date of death, and the entire deferred gain built up over every prior exchange disappears. It is never taxed to anyone. A strategy that only postpones tax while you keep exchanging can erase it entirely if you hold long enough.

What this is worth in Florida

Only the federal piece. Florida has no individual income tax, so a Florida resident selling investment real estate outright was never exposed to state tax on that gain in the first place. What Section 1031 defers here is entirely federal: the capital gains tax, the net investment income tax, and the tax on depreciation recapture. That federal deferral is the whole prize in Florida, because there is no state layer sitting underneath it to also worry about.

Who this applies to

The property side of this is more particular than most people assume, and the boundary moved in 2018.

Since the Tax Cuts and Jobs Act, Section 1031(a)(1) reaches real property only. Personal property, equipment, vehicles, collectibles, and other intangibles no longer qualify for like-kind exchange treatment at all, regardless of how they are used. Before 2018 a business could exchange machinery or a fleet of trucks the same way it exchanged real estate; that path is closed now.

• Held for investment or business use. Both properties have to be held for productive use in a trade or business, or for investment. Property held primarily for sale, dealer inventory, a spec house, a flip, is excluded outright under Section 1031(a)(2). A personal residence does not qualify either; that runs through a different part of the code entirely.
• Broad within real estate. Almost any United States real property is like-kind to almost any other. The phrase refers to the nature or character of the property, not its grade or quality, so raw land for an apartment building, a rental house for a strip center, a leasehold with thirty or more years left on it for a fee simple interest, and improved property for unimproved property all qualify as like-kind to each other.
• United States property only. Real property inside the United States is not like-kind to real property outside it under Section 1031(h); a Florida rental cannot be exchanged into property abroad on a deferred basis.
• Open on entity choice, closed on who has to act. Individuals, disregarded single-member LLCs, partnerships, S corporations, and trusts can all use Section 1031, but a partnership interest itself will not work; it is not real property under the current statute, no matter who holds it. And the same taxpayer who gives up the relinquished property has to be the one who receives the replacement property, which becomes its own problem when partners disagree about cashing out versus continuing to exchange.

What it requires

Most exchanges are not simultaneous: the relinquished property sells first, and the replacement is found and closed later. Two deadlines and one intermediary requirement carry almost all of the risk.

• A qualified intermediary has to hold the funds. You cannot have actual or constructive receipt of the sale proceeds at any point; even brief control of the money fails the exchange in its entirety, not just for the amount involved. The safe harbor exists because the intermediary, not you, closes both transactions and holds the cash in between.
• Not just anyone can serve as that intermediary. Someone who has acted as your agent, attorney, accountant, broker, or employee within the two years before the transfer is disqualified, and so is a related party. The CPA who prepares your return cannot be your intermediary.
• Forty-five days to identify replacement property. Section 1031(a)(3) starts the clock on the day you transfer the relinquished property. Identification has to be in writing, signed, and delivered to the intermediary before midnight of day forty-five, describing each property unambiguously. You have to fit within one of three limits: up to three properties of any value; any number of properties as long as their combined value does not exceed twice the value of what you sold; or, failing both of those, actually closing on at least ninety-five percent of the value of everything you identified.
• One hundred eighty days to close. The replacement property has to be received by the earlier of one hundred eighty days after the relinquished property transferred, or the due date, including extensions, of the return for the year of that transfer. A sale that closes late in the year can let an unextended return due date cut that window short before the 180 days would otherwise run out, which is why filing an extension matters then.
• Full deferral takes full reinvestment. To defer the entire gain, the replacement property generally has to be worth as much or more than what was sold, all of the net equity from the sale has to go back into it, and any debt paid off has to be replaced with new debt or new cash. Any shortfall, whether cash back or debt not replaced, is boot under Section 1031(b), taxed as gain up to that amount. Depreciation recapture is generally treated as coming out of that boot before the rest of the gain does.

The reporting side sits on Form 8824, filed with the return for the year the relinquished property transferred, even when the exchange is fully deferred and no tax is due. How the replacement property depreciates afterward, off that same carried-over basis, is covered in my Florida depreciation rules guide.

What you need to document

The paperwork on an exchange has to be assembled while the exchange is happening, not reconstructed afterward. The intermediary agreement, the assignment, and the identification are all dated documents that only exist if they were created on time.

The exchange agreement and assignment

The signed agreement with the qualified intermediary, and the assignment of the sale contract to the intermediary before the relinquished property closes. This is what establishes that you never had rights to the cash.

The 45-day identification

A dated, written, signed identification of the replacement property or properties, delivered to the intermediary before the deadline, with each property described unambiguously enough to leave no doubt what was identified.

Closing statements from both sides

Statements showing the intermediary held the funds continuously between the two closings, with no gap where the money passed through you or anyone else.

Form 8824 and the basis reconciliation

The filed form, plus a reconciliation showing how the carryover basis was computed and how any boot was identified and taxed.

Evidence of holding intent

Lease agreements, rental history, or similar records showing both the relinquished and replacement properties were actually held for investment or business use, not acquired to flip.

Where it goes wrong

Section 1031 is a statutory deferral, not a listed or reportable transaction, and it does not require disclosure as a tax shelter. What it is instead is heavily rule-bound, and it fails on technicalities far more often than it fails on substance. The rules are precise enough that there is rarely a gray area; either a requirement was met or it was not.

• Touching the money. Any actual or constructive receipt of the sale proceeds by you, or by someone disqualified from acting as intermediary, blows up the entire exchange, not just the portion involved.
• Using a disqualified intermediary. Your own attorney, CPA, broker, employee, or a related party cannot serve as the qualified intermediary, and using one voids the safe harbor.
• Missing a deadline. Both clocks start at the relinquished-property transfer, not at listing or at identification, and neither one moves for anything short of federally declared disaster relief.
• A defective identification. Late, oral, unsigned, ambiguous, or identifying more property than the three-property, two-hundred-percent, or ninety-five-percent rules allow.
• Property that was never eligible. Dealer inventory, a property held primarily for resale, or personal property picked up as part of the deal, fail for reasons that have nothing to do with timing or paperwork.
• Boot no one accounted for. Cash boot, net debt relief, and non-like-kind property received are all taxed up to the amount of the realized gain, and net mortgage relief counts even when no cash changes hands at all.

The related-party trap

Exchanging with a related party carries a two-year tripwire under Section 1031(f), covering family members and controlled entities. If either party disposes of the property received within two years of the exchange, the original deferral is undone retroactively and the gain is recognized in the year of that later disposition. The exceptions are narrow: death of either party, an involuntary conversion where the threat arose after the exchange, or a disposition where avoiding tax was not a principal purpose of either transaction. And the provision reaches beyond the plain two-year rule: it does not protect any exchange structured, even indirectly through an otherwise unrelated intermediary, to help a related party cash out around it.

The defense is the same paperwork already described above, kept as the exchange happens rather than reconstructed for an exam. Almost all of the exposure on this strategy comes from someone deciding, in the moment, that one piece of it does not matter this time.

A situation where this comes up

The version I see most often is a Florida investor trading up who assumes the exchange paperwork is something to sort out around the closing table. It is not. The intermediary has to be engaged and the sale contract assigned before the relinquished property closes, or there is no exchange to identify replacement property into. By the time someone calls me after that closing has already happened, the position is usually already lost.

The version that catches people who did everything else right is the calendar. A relinquished property that closes in November leaves plenty of calendar days until the 180-day mark, but the unextended due date of that year's return can arrive first and cut the window short before anyone notices. Filing an extension is a small step that exists for exactly this reason, and it gets skipped because nobody thinks of a pending exchange as a reason to extend a return that would otherwise be ready on time.