1031 Exchanges — A Small Landlord's Introduction

If you're selling one rental to buy another and want to skip the capital gains tax, the honest answer is: the IRS Section 1031 like-kind exchange lets you defer the tax indefinitely — but the rules are strict, the deadlines are firm, and you MUST use a Qualified Intermediary from the start. DIY 1031 exchanges usually fail.

Okoniq Property Hub keeps records on both properties in one place so the exchange paperwork trail is clean.

What is a 1031 exchange?

Under Section 1031, you can defer capital gains tax on the sale of business or investment real estate by using the proceeds to buy "like-kind" replacement property. Instead of paying ~15-20% federal capital gains + 25% depreciation recapture + state tax at sale, you roll the entire basis into the new property. Tax is deferred until you eventually sell the replacement (or forever, if the property is held until death and heirs get stepped-up basis).

Since 2018, 1031 exchanges apply ONLY to real estate. Personal property (equipment, vehicles) no longer qualifies.

What counts as "like-kind"?

For real estate, "like-kind" is broad:

• Rental house → apartment building ✓
• Vacant land → strip mall ✓
• Single-family rental → office building ✓
• Rental in California → rental in Florida ✓
• Primary residence → rental ✗ (can't be your home)
• Rental → primary residence ✗ (must be replaced with investment property)

Both properties must be held for productive use in trade, business, or investment. See the IRS Like-Kind Exchange page.

What are the deadlines?

Two brutally strict deadlines:

45 days from the sale of the relinquished property to formally identify the replacement property/properties in writing.

180 days from the sale to close on the replacement property.

Both start on the day the relinquished property closes and both must be met — no extensions except in federally-declared disasters. Miss either deadline and the exchange collapses; the sale becomes fully taxable.

You can identify up to 3 potential replacements (regardless of value) OR any number as long as total value is ≤ 200% of the relinquished property's sale price.

What's a Qualified Intermediary?

A Qualified Intermediary (QI) — sometimes called an accommodator — is an independent third party who holds the sale proceeds between the two closings. You cannot touch the money during the exchange; if you do, the exchange is invalidated.

Typical QI fees: $800–$2,500 depending on complexity. Choose a well-established QI (bonded, insured, uses segregated accounts) — QI failures have cost taxpayers millions when smaller QIs went bankrupt holding client funds.

What is "boot" and why does it matter?

Boot is any non-like-kind property or cash you receive in the exchange. Common sources:

• Cash boot — you received cash from the sale that didn't go into the replacement
• Mortgage boot — the replacement's mortgage is smaller than the relinquished's (net debt reduction)
• Property boot — you traded down or received other assets

Boot is taxable in the year of exchange, even though the rest of the gain is deferred. Common goal: acquire replacement property that's equal to or greater than the relinquished (both in value AND in debt) to avoid boot entirely.

When does 1031 make sense?

Almost always if you're:

• Trading up to a bigger rental
• Diversifying (one rental → several)
• Relocating investment property to a different market
• Consolidating multiple properties into one

Might not make sense if:

• You want to cash out (defeats the purpose)
• You're near retirement and can use the stepped-up basis approach instead
• You've owned so long that recapture wipes out most gain and simple sale is cleaner

Related: depreciation recapture at sale, stepped-up basis explained.

Keep both properties' records tight

A 1031 audit years later requires proof of the intent, timing, and use of both properties. Okoniq Property Hub stores closing documents, improvement receipts, and rental history per property — a decade of records that stays organized. Related: Schedule E deductions in 2026 and the Taxes & Accounting hub.

Frequently asked questions

Can I do a "reverse" 1031?

Yes — buy replacement first, then sell the relinquished within 180 days. But it's much more complex, more expensive, and requires a specialized QI. The relinquished property must still be sold within the deadline.

What if I want to move into the property later?

Perfectly legal, but you must first hold it as an investment/rental for a "reasonable" period (IRS guidance suggests 2 years minimum, though there's no hard rule). Then you can convert to personal use. To eventually use the Section 121 exclusion, additional 5-year hold rules apply.

Do I need to reinvest 100%?

To avoid boot, yes — the replacement property's value AND net debt must be ≥ the relinquished. Reinvesting less generates taxable boot.

Not tax advice. 1031 exchanges are technical and one mistake voids the whole transaction — always work with a Qualified Intermediary + a CPA experienced with 1031s. Okoniq Property Hub keeps the underlying property records organized. Get started free.