How Does a 1031 Exchange Work in 2026?

A 1031 exchange lets you sell investment or business real estate and defer federal capital gains and depreciation recapture tax by reinvesting the proceeds into other real property. A qualified intermediary holds the sale proceeds, you identify replacement property within 45 days, and you close within 180 days. If you reinvest all the net equity and replace the debt, the entire gain is deferred and carries into the new property's basis.

The simplest route is a standard delayed (forward) exchange: hire a qualified intermediary before the sale closes, sell, then buy replacement property within the 45-day and 180-day deadlines. Keep it easy by lining up candidate properties before you list, identifying early, and buying at least as much value as you sold. Investors who want no management often identify a DST interest as a primary or backup replacement because it can close in days.

A 1031 usually isn't worth it when the gain is small, when you're selling at a loss (a loss is only deductible in a taxable sale), when you need the cash, or when you'd overpay for a mediocre replacement just to beat a deadline. It can also lose to paying tax in a low-income year, offsetting the gain with other losses, or investing only the gain in an Opportunity Zone fund. Run the after-tax numbers both ways with your CPA.

There's no fixed threshold — it's worth doing when the tax you'd defer clearly exceeds the exchange costs and any compromise on the replacement property. Federal tax can reach 20% on long-term gain, 25% on unrecaptured depreciation, plus the 3.8% net investment income tax and state tax. Since a standard intermediary fee is usually modest, even gains in the tens of thousands of dollars can justify an exchange if you were buying more real estate anyway.

No. The tax code has no minimum gain, sale price, or property value for a 1031 exchange. Any real property held for investment or business use can qualify, even at break-even. The practical minimum is economic: if the deferred tax is smaller than the intermediary fee and extra closing costs, or the property is being sold at a loss, a regular taxable sale is often the better choice.

Hold if the property still meets your return, risk, and workload goals; exchange if you'd rather own something different and the tax would otherwise stop you from moving. A 1031 lets you reposition — into better locations, newer buildings, less management, or more cash flow — without losing 20–30% or more of your gain to taxes. The deciding question is whether the replacement is genuinely better after transaction costs, not just whether the tax can be deferred.

Choose the 1031 if you want to stay in real estate and keep compounding untaxed equity; pay the tax if you want liquidity, diversification, or out of property ownership altogether. The exchange keeps the full pre-tax equity working and can become permanent through the step-up in basis at death. Paying the tax buys flexibility: index funds have lower costs and no management, but you start with a smaller balance.

Use a 1031 if you want to keep owning real estate and pass it to heirs; consider a charitable remainder trust if you want lifetime income and plan to leave the remainder to charity. A CRT can sell appreciated property without immediate tax, pay you income for life or a term of up to 20 years, and provide a partial charitable deduction — but the principal goes to charity, not your heirs. An estate-planning attorney should model both.

Because Congress excluded them. Stocks, bonds, and other securities have been carved out of like-kind exchange treatment for decades, and the Tax Cuts and Jobs Act limited Section 1031 to real property for exchanges after 2017. Selling appreciated stock is a taxable event; the closest tools for securities are tax-loss harvesting, donating appreciated shares, or investing capital gains in a Qualified Opportunity Fund.

It means the seller intends to do a 1031 exchange and will ask the buyer to cooperate. In practice the buyer signs a short cooperation clause acknowledging the seller's contract is assigned to a qualified intermediary; it costs the buyer nothing and adds no liability. It can also signal the seller cares about closing timing so their 45-day and 180-day clocks line up with a replacement purchase.

Yes, it's a legitimate strategy often called "swap until you drop." Each exchange rolls the deferred gain forward into a larger asset, and if you hold the last property until death, heirs receive a stepped-up basis that eliminates the deferred tax. The risks are practical: rushing purchases to meet deadlines, taking on too much leverage, and concentrating wealth in a few properties. Exchange because the new asset is better, not just bigger.

Both properties must be real property held for investment or business use, not a home or a flip. The same taxpayer must sell and buy, a qualified intermediary must hold the proceeds so you never touch them, replacements must be identified in writing within 45 days, and closing must happen within 180 days. To defer all tax, buy equal or greater value, reinvest all the cash, and replace the debt, then report it on Form 8824.

Section 1031 is U.S. federal tax law covering U.S. real estate. Foreign owners of U.S. property can use it, but U.S. property can't be exchanged for foreign property. Other countries have their own, narrower rules. The UK, for example, offers rollover relief mainly for assets used in a trading business, which generally excludes ordinary rental property. If you own property abroad, get advice in both countries before selling.

No. The exchange must be set up with a qualified intermediary before the relinquished property closes, and the proceeds must go to the intermediary — never to you. Once you've received or controlled the cash, you have constructive receipt and the gain is taxable, whether you sold last week or six months ago. If the sale was recent, an Opportunity Zone investment of the gain within 180 days may still be an option to discuss with a CPA.

No, unless you already closed on replacement property within the 45 days — property received in that window counts as identified. The 45-day deadline is strict, has no extension except federally declared disaster relief, and includes weekends and holidays. If nothing was identified, the intermediary can release your funds after day 45 and the sale is reported as taxable; if the sale was late in the year, the gain may fall into the next tax year.

Generally no — the 45-day and 180-day deadlines can only be extended under IRS relief for federally declared disasters or similar events, typically by up to 120 days. Note the 180-day period also ends at your tax return due date if that's sooner, so extend your return when needed. There is no separate penalty for a failed exchange; the sale simply becomes taxable, and normal interest and penalties apply only if you underpay that tax.

Not always. Under the Treasury regulations, the intermediary can only release funds at set points: after day 45 if you identified nothing, after you've acquired everything you identified, or at the end of the 180-day period. If you identified properties but can't buy any, your money usually stays with the intermediary until day 180, unless a qualifying contingency beyond your control occurs after the identification period. Your exchange agreement spells out the release terms.

No. You have 180 days from the sale to close on replacement property, and the proceeds must sit with the qualified intermediary the whole time. If you take the cash or wait longer, the gain is taxable. If you'd rather wait out the market, the honest trade-off is paying the tax, or investing just the capital gain in an Opportunity Zone fund, which has its own 180-day investment window.

The tax code sets no minimum holding period; what matters is that you held the property for investment or business use. Many advisors suggest holding at least a year, ideally spanning two tax years, before selling and after buying, because quick flips look like property held for sale. Specific rules apply in certain cases: two years for related-party exchanges, 24 months for the vacation-home safe harbor, and five years before claiming the home-sale exclusion on exchanged property.

You can use one of three rules. The three-property rule lets you identify up to three properties of any value. The 200% rule allows any number of properties if their combined value is no more than twice what you sold. The 95% rule allows any number and value, but you must actually acquire at least 95% of the total value identified. Most investors use the three-property rule with backups.

Yes, but only during the 45-day identification period. You can revoke an identification and name new properties by giving the qualified intermediary a signed written notice before midnight on day 45. After that, the list is locked: you can buy only from what you identified, and if none of those properties close, the exchange fails and the gain becomes taxable.

What matters is that you actually receive the replacement property, meaning the closing occurs and ownership transfers to you, by day 180 or the due date of your tax return, including extensions, if that is earlier. File an extension if your sale closed late in the year. Recording is evidence of that transfer, and a deed delivered at a day-180 closing and recorded shortly after is generally treated as on time. Don't plan around it: schedule closing several days early so a recording delay can't sink the exchange.

Start before you list. Tour candidate properties and talk to a commercial broker about off-market deals while your sale is under contract, and negotiate a longer closing so the 45-day clock starts later. Identify backups using the three-property or 200% rule, and consider a DST interest as a fallback because it can close in days. If the right property appears first, a reverse exchange lets you buy before you sell.

Yes. For 1031 purposes, all U.S. real property held for investment or business use is like-kind, so raw land, farmland, rentals, and commercial buildings can be exchanged for one another. Rental property into farmland, vacant land into an apartment building, or land into land all work. The exception is land held as inventory — lots a developer subdivides and sells — which is held for sale and doesn't qualify.

Yes, as long as the replacement is held for rental or investment, not personal use. Real property is like-kind regardless of type, so an apartment building, a two-family home, a single-family rental, and a short-term vacation rental are interchangeable. Keep personal use within IRS limits, rent at market rates, and document the investment intent — a property you mostly use yourself won't qualify.

Yes, if you buy the completed house to rent or hold for investment. A new-construction home bought from a builder is ordinary real property and qualifies like any other replacement. If it's still under construction at closing, only the portion completed when you take title counts toward your exchange value, unless an improvement exchange is structured through an exchange accommodation titleholder.

Only the real estate portion. Since 2018, Section 1031 covers real property only, so goodwill, equipment, inventory, and the stock or membership interests of a company don't qualify. If a business includes its building, you can exchange into the real estate and pay for the operating business with other funds. Allocate the purchase price carefully, and buy the real estate as an asset rather than through an entity purchase.

Sometimes. A life estate is an interest in real property, but in Rev. Rul. 72-601 the IRS ruled that a life estate with a life expectancy of less than 30 years is not like-kind to a remainder interest, mirroring the rule that only leases of 30 years or more match fee ownership. Rev. Rul. 78-4 did allow a remainder-for-remainder swap. Life-estate exchanges are uncommon and fact-specific, so have a tax attorney review the structure first.

Probably not. A house you build in order to sell is treated as property held for sale — inventory — which is excluded from Section 1031 even if the land was a long-held rental. If you rebuild and rent the new house for a meaningful period, it can become investment property again and qualify for a later exchange. Your intent at the time of sale, supported by your actions, decides it.

Only if you'll hold it as investment or business property. If you rent it as your home and plan to keep living there, it's a personal residence and doesn't qualify. If your business leases the space — say, an office or warehouse — buying that building and leasing it to your operating company can qualify, because it's held for use in a trade or business. Keep the lease at market rent.

Yes. Any real property in the United States is like-kind to any other U.S. real property, so you can sell in one state and buy in another. Watch state tax: some states, including California, Oregon, Massachusetts, and Montana, track the deferred gain and tax it when you eventually sell the out-of-state replacement, and some require withholding at closing from nonresident sellers unless you file for an exemption. U.S. and foreign real estate are not like-kind.

Usually it's nonresident withholding, not a rejection of the exchange. Many states, Maryland among them, withhold tax at closing when a nonresident sells property in the state, and the 1031 exemption has to be requested in advance — Maryland's exemption application must be filed at least 21 days before closing. Withheld tax is a prepayment you can recover on the state return if the exchange qualifies. Other states claw back deferred gain when you later sell out of state.

Almost any U.S. real estate held for investment or business use qualifies: rentals, land, office, retail, industrial, farmland, triple-net properties, DST and TIC interests, and leaseholds with 30 or more years remaining. Your primary home, property bought to flip, LLC or partnership interests, stocks and REIT shares, and foreign real estate don't qualify. Since 2018, equipment, vehicles, and other personal property are also excluded.

Yes, partly. The rented unit is investment property and can be exchanged under Section 1031, while the unit you live in is your residence and may qualify for the Section 121 home-sale exclusion of up to $250,000, or $500,000 if married filing jointly. You allocate the sale price, basis, and gain between the two portions. Combining both breaks on one sale is allowed under IRS guidance.

Yes, but only the rental portion counts as replacement property. If you buy a fourplex and live in one unit, roughly a quarter of the value is your residence and the rest is investment property. To fully defer, the investment portion alone must equal or exceed the value you sold and absorb all the exchange equity; exchange money applied to your own unit is treated as taxable boot.

Yes. Once you move out and genuinely rent the home at market rates, it becomes investment property; many advisors suggest renting at least a year or two before exchanging. If you sell within three years of moving out, you may qualify for both the Section 121 exclusion on part of the gain and 1031 deferral on the rest, since you lived there two of the last five years. Depreciation taken while renting must be carried into the exchange.

Yes, eventually, but rent it first. Moving in right away, or after only a few months, undermines the investment intent the exchange requires. Most advisors suggest renting at market rates for at least two years, mirroring the IRS 24-month vacation-home safe harbor, before converting it to your residence. Once you move in, the deferred gain stays with the property and is taxed when you sell, subject to the home-sale rules.

Not completely. A property acquired in a 1031 exchange must be owned for five years before the Section 121 exclusion applies, and the exclusion is reduced in proportion to post-2008 periods when the home was a rental rather than your residence. Depreciation recapture is never excluded, and the exclusion is capped at $250,000 per person. Converting can cut the tax, but it won't erase years of rolled-over gain.

Yes, if it's primarily an investment. Under the IRS safe harbor in Rev. Proc. 2008-16, you must own the property for 24 months after the exchange, rent it at fair market rent for at least 14 days in each of those two 12-month periods, and keep personal use within the greater of 14 days or 10% of rented days. Doing so lets you defer gain while trading into a better-performing vacation rental.

In each 12-month period of the 24-month safe harbor, personal use can't exceed the greater of 14 days or 10% of the days rented at fair market rent. Personal use includes days used by you, family members (unless they pay fair rent and use it as their main home), anyone under a reciprocal arrangement, and anyone paying below-market rent. Days spent mainly on repairs and maintenance don't count as personal use.

No. Every 1031 exchange, forward or reverse, requires the replacement property to be held for investment or business use. A home you buy to live in doesn't qualify, no matter how the transaction is structured. You could buy a property, rent it at market rates for a meaningful period, and convert it later, but the intent at acquisition must genuinely be investment.

Yes, but the difference is taxable. Trading down creates boot: any cash you keep, and any reduction in debt not offset by added cash, is taxed up to the amount of your gain, typically as depreciation recapture first and then capital gain. The rest of the gain stays deferred. To defer everything, buy replacement property of equal or greater value and reinvest all net proceeds.

The unspent amount is taxable boot. The intermediary returns leftover funds once the exchange ends — after you acquire all identified properties or at day 180 — and that cash is taxed up to your total gain in the year received. The rest of the exchange still qualifies. To avoid leftovers, size the replacement purchase above your net proceeds or identify a small DST interest to absorb the remainder.

You can finance it. A full deferral requires reinvesting all of your net exchange proceeds and buying property of equal or greater value; the rest can come from a new mortgage. Using the proceeds as a down payment and borrowing the balance is the typical structure. What you can't do is put in less cash than you received and borrow more to make up the difference — the cash you hold back is boot.

Not by itself. Improvements built after you take title don't count toward the replacement value, so buying a cheaper property and renovating later leaves boot. To count renovation costs, use an improvement exchange: an exchange accommodation titleholder holds title while work is done, and only improvements completed and paid for within 180 days count. A construction loan can fund the work, but timing and structure decide what qualifies.

No. Exchange funds can only pay off the debt on the property being sold and acquisition costs for the replacement. Using them to pay down a mortgage on your home or another property is treated as receiving cash, which is taxable boot. Paying a seller or lender at the replacement closing is fine because that's part of buying the replacement.

No. Exchange proceeds must stay with the qualified intermediary until they buy replacement property, and you can't borrow, pledge, or direct them for other uses. Lending them to your company would give you control over the funds, which is constructive receipt and can disqualify the whole exchange. If the business needs capital, fund it from other money or from a refinance of the replacement property after closing.

Yes. A note you give the seller is treated like any other debt on the replacement and counts toward replacing the debt paid off on your sale. You still need to put all your net exchange proceeds into the purchase and buy equal or greater value. Document the note at market terms and have your intermediary and attorney review the closing statement.

Yes, but the note needs planning. A promissory note you receive from the buyer is boot unless it's handled inside the exchange — typically by issuing it to the qualified intermediary and then either selling it, having the buyer pay it off before day 180, or replacing it with your own cash at the replacement closing. Otherwise the note portion is taxable, though it may qualify for installment reporting.

The main way is to defer it with a 1031 exchange, which carries recapture into the replacement property along with the capital gain; holding until death then eliminates it through the step-up in basis. Unrecaptured Section 1250 gain is taxed at a maximum 25% federal rate. Other tools include offsetting with losses, selling in a low-income year, or an installment sale. If you used cost segregation, personal-property recapture can be ordinary income.

They stay suspended. Passive losses are released in full only when you dispose of your entire interest in a fully taxable transaction, and a tax-deferred exchange isn't one. The losses carry over and can offset passive income from the replacement property or other passive activities, including any gain recognized as boot. They are freed when you later sell the replacement in a taxable sale.

Normal transaction costs, such as broker commissions, qualified intermediary fees, title and escrow fees, recording fees, transfer taxes, and closing attorney fees, can generally be paid from exchange funds without boot. Costs unrelated to the exchange, like property tax and rent prorations, security deposits, insurance, repairs, and loan fees or points, are typically taxable if paid with exchange money. Bring outside cash to closing for those.

Yes, through a reverse exchange under Rev. Proc. 2000-37. An exchange accommodation titleholder takes title to the new property and parks it for up to 180 days while you sell; you must identify the property you'll sell within 45 days. Reverse exchanges are useful in tight markets but require the cash or financing to buy first and cost more than a standard delayed exchange.

Because the accommodation titleholder owns the parked property, it is technically the borrower. Typically you lend the titleholder cash for the purchase, a lender makes a loan to the titleholder that you guarantee, or both. When your old property sells, the intermediary uses the proceeds to repay your loan and complete the exchange. Not all lenders will lend to a titleholder, so line up financing before signing the purchase contract.

Yes, considerably. A standard delayed exchange usually costs one intermediary fee, while a reverse exchange adds a titleholder fee, a special-purpose entity to hold title, extra legal work, and often higher lender costs and transfer taxes from an additional deed. Reverse exchanges frequently run several times the cost of a delayed exchange, so they make sense when losing the replacement property would cost more.

Generally no. Improvements to property you already own don't count as replacement property, and IRS guidance bars parking your own property with an accommodation titleholder to build on it. Using exchange funds that way is taxable boot. Advanced structures — such as a leasehold improvement exchange through a related entity — exist but are complex and need a tax attorney. Improving newly acquired replacement property within 180 days is a separate, allowed technique.

You need an intermediary for a delayed exchange. The safe-harbor rules require a qualified intermediary to hold the sale proceeds, and you, your attorney, accountant, real estate agent, or employee from the past two years can't serve in that role. Touching the money even briefly can blow the exchange. You can prepare Form 8824 yourself, but a CPA familiar with exchanges is worth it for basis, boot, and depreciation calculations.

Different title companies are routine — each closing can use its own. Using two qualified intermediaries for one exchange is unusual but possible if the intermediaries transfer funds directly to each other so the money never passes through your hands. Most investors use one intermediary per exchange for simplicity; if you sell several properties, each sale can run as a separate exchange with its own intermediary.

Under the IRS safe harbor, once an exchange accommodation titleholder takes title to your new property, you have 45 days to identify which property you will sell and 180 days to close that sale and complete the exchange. If the old property doesn't sell in time, the exchange fails. Have the old property priced and ready to list before parking the new one.

Look for experience and protection of your money. Ask whether funds are held in a segregated qualified escrow or trust account, whether withdrawals need your written authorization, what fidelity bond and errors-and-omissions coverage it carries, and who earns the interest. Most states don't license intermediaries, so check references, years in business, and professional credentials. Fees run from several hundred to a few thousand dollars.

IRS rules disqualify anyone who has acted as your agent in the two years before the sale, including your attorney, accountant, real estate broker or agent, investment banker, or employee, plus close relatives and entities you are related to. Exceptions apply to people who only provided exchange services or routine title, escrow, or banking services. That's why a qualified intermediary is a separate, independent firm.

The same taxpayer that sells must buy. A single-member LLC is disregarded for tax purposes, so either the LLC or its owner can acquire the replacement. A multi-member LLC taxed as a partnership must complete the exchange itself; individual members can't exchange their own share or go separate ways with their portion of the proceeds. Members who want different outcomes usually plan a restructuring well before the sale.

Not directly. The partnership is the taxpayer, so the partnership must buy the replacement. To go your own way, partners use a drop-and-swap: the partnership distributes tenancy-in-common interests to partners before the sale, and each partner exchanges separately. The IRS can challenge drop-and-swaps done right before a sale as lacking investment intent, so do it as early as possible and with a tax attorney.

Yes, at the entity level. The syndication's LLC or partnership can sell its property and buy a replacement in a 1031 exchange if the sponsor chooses to. Individual investors can't exchange their membership units, because partnership interests aren't real property. Some sponsors offer a drop-and-swap or a DST exit so investors can choose; check the operating agreement before investing.

Generally yes, if you buy the replacement from an unrelated seller and sell to your son at fair market value. The related-party rules mainly target acquiring replacement property from a relative or swapping directly with one, where both parties must then hold for two years. Because the IRS scrutinizes related-party transactions, document fair value, use a qualified intermediary, and have a tax advisor review the deal.

Yes, if you charge fair market rent under a written lease. Renting to relatives at market rent is treated as rental use, but a discount or rent-free use counts as personal use and can undermine the investment purpose the exchange requires. Keep records of comparable rents and collect rent consistently.

Yes. A tenancy-in-common interest is a direct ownership interest in real estate, so it qualifies as replacement property, including in sponsored TIC offerings. Co-owning through an LLC or partnership does not qualify, because those are entity interests. TIC owners typically must agree unanimously on major decisions, which can create deadlock; that's one reason DSTs have largely replaced TICs for passive investors.

Usually not. Buying from a related party, such as a family member or an entity you own more than half of, is generally disqualified when the related seller walks away with cash, because the group has effectively cashed out tax-free. It can work if the related seller is also doing its own 1031 exchange. Selling to a related party is easier, but both sides must hold for two years.

The usual answers are a Delaware Statutory Trust (DST), a triple-net leased property, or both. A DST gives fractional ownership of professionally managed property with no landlord duties, while a single-tenant NNN property puts most expenses and maintenance on the tenant but leaves you with lease and tenant risk. A 721 exchange into a REIT's operating partnership is another, more permanent exit. Compare fees, liquidity, and control before choosing.

A DST interest counts as real property under Rev. Rul. 2004-86, so it fully defers capital gains and depreciation recapture. It also provides pro-rata nonrecourse debt to help replace mortgage debt, passes through depreciation on your share, and can be bought in precise amounts to avoid leftover boot. When the DST sells, you can exchange again, and heirs receive a stepped-up basis at death.

Start with the sponsor's full-cycle track record — how many DSTs it has sold and what investors actually received — then read the private placement memorandum. Look at the leverage and loan maturity, reserves, tenant credit and lease terms, total fees, and whether projected distributions are supported by actual property cash flow. DSTs are securities sold to accredited investors; projections aren't guarantees.

Most DSTs plan to hold five to ten years, but the sponsor decides when to sell and holds can run longer. At sale, your share of proceeds can go to a qualified intermediary for another 1031 exchange, be taken in cash and taxed, or, in some offerings, roll into a REIT through a 721 exchange. Rising interest rates in recent years led some DSTs to cut distributions or extend holds, so full-cycle results vary widely.

The main risks are illiquidity, lack of control, and leverage. You generally can't sell early, vote on decisions, or put in more capital, and the trustee can't refinance or renegotiate leases in ways that would break DST status. If a loan matures in a bad market or a major tenant leaves, distributions can stop. A sponsor that doesn't follow Rev. Rul. 2004-86 limits also creates a tax risk.

Often they don't, but they reduce your return. Up-front loads — selling commissions, offering costs, and sponsor fees — can reduce invested equity by several percent before ongoing fees, so compare the after-fee return to paying tax and investing elsewhere. To reduce commissions, ask about share classes sold through fee-based advisors with no selling commission, and get every fee disclosed in writing.

For a 1031, a DST is usually the only option of the two: DST interests are treated as real property, while syndication interests are LLC or partnership units that don't qualify. Syndications can offer value-add upside and flexibility to refinance, but that only matters for taxable money. If you're exchanging, a DST, a TIC interest, or direct property is the eligible route.

Not directly. REIT shares and REIT funds are securities, which aren't eligible for a 1031. The common path is a 721 exchange: you exchange into a DST, and the REIT's operating partnership later acquires it for operating partnership units; or you contribute property directly to an UPREIT. This ends your ability to do future 1031 exchanges, and converting units to shares is taxable.

A 1031 usually wins if you want to stay in real estate and reinvest all proceeds; an Opportunity Zone fund fits if you want to invest only the gain, diversify, or defer non-real-estate gains. A 1031 defers indefinitely, including recapture. Under the 2025 law, new-round QOF investments from 2027 get five-year deferral, a 10% basis step-up (30% for rural funds), and tax-free appreciation after 10 years.

Most DSTs carry a nonrecourse loan arranged by the sponsor, and your share of that debt counts toward replacing the mortgage you paid off on the sale. You aren't personally liable and don't qualify for the loan. You can mix leveraged and debt-free DSTs to hit your target. The trust can't refinance or take new loans later, so the original financing has to last until the property sells.

No, despite the shared initials. A Delaware statutory trust is real estate co-ownership the IRS accepts as 1031 replacement property. A deferred sales trust isn't a 1031 at all: you sell to a trust in exchange for an installment note and pay tax as payments come in. The IRS hasn't blessed the structure and has challenged similar arrangements, and fees can be high, so get independent tax advice.

Not into a typical fund. Interests in LLCs, limited partnerships, and non-traded REITs are securities, not real property, so they don't qualify. Eligible passive options are DST and tenancy-in-common interests. Some investors later contribute a DST interest to a REIT's operating partnership in a Section 721 exchange, but that is a separate step, not a 1031. Some online platforms offer DST deals, which qualify because the DST, not the platform, is the replacement property.

Options include investing just the gain in an Opportunity Zone fund, an installment sale to spread the gain over years, a charitable remainder trust, and using suspended passive losses or capital losses to offset it. Selling in a low-income year can lower the rate, and moving into a former rental may allow a partial home-sale exclusion. Holding until death gives heirs a stepped-up basis.

It passes to the recipient. A gift carries over your adjusted basis, so the deferred gain from prior exchanges moves to the person receiving it and is taxed when they sell. Gifting right after an exchange can also suggest you never intended to hold the property for investment, which risks the exchange itself. Gifts above the annual exclusion count against the $15 million per-person lifetime exemption for 2026.

The core strategy is to hold exchanged property until death, because heirs receive a stepped-up basis that wipes out all deferred gain and depreciation recapture. Holding title in a revocable living trust or LLC can simplify transfer. California owners should note that Proposition 19 generally reassesses rental property passed to children, and California tracks gain deferred into out-of-state property. Coordinate with an estate-planning attorney.

The deferred gain disappears. Inherited property gets a stepped-up basis equal to its fair market value at death, so prior 1031 deferrals and depreciation recapture are eliminated. The mortgage stays with the property and isn't taxable income to the heirs. For one-to-four-unit residential loans, federal law generally keeps lenders from calling the loan on a transfer to a relative at death; commercial loans depend on their terms. Heirs restart depreciation on the new basis.

Yes. An heir who inherits property gets a stepped-up basis, so there's usually little gain to defer if they sell soon. If they hold the property for investment and it appreciates further, they can later do a 1031 exchange to defer that new gain. What counts is the heir's own use: if they rent it or hold it for investment, it can qualify as relinquished property.

All the deferred gain comes due. Because the replacement carried over the basis of the property you exchanged, the taxable gain includes the gain deferred in earlier exchanges plus any new appreciation, and all depreciation from every property in the chain is recaptured at up to 25%. Your options are to pay the tax, do another 1031, or hold until death so heirs get a stepped-up basis.

Usually because recognized gain — or an entry error — is flowing through from Form 8824. Line 11 of Schedule D picks up gain from Form 8824, which should only be the recognized portion such as boot. If the full gain appears, check that the exchange was entered as like-kind rather than as a sale, that replacement property value and liabilities are entered, and that the sale isn't also reported on Form 4797.

Report the exchange on one Form 8824, describing the relinquished and replacement properties and combining their values, liabilities, and cash. Attach a statement listing each property's fair market value and how the carryover basis is allocated across replacement properties based on value. If you completed more than one separate exchange in a year, the IRS allows a summary Form 8824 with an attached statement for each.

Report it in the year you sold the relinquished property, even if the replacement closed the next year. If your return is due before the exchange is complete, file an extension so the 180-day period isn't cut short. If the exchange fails and you don't receive the cash until the next year, the gain may be reportable in that later year under the installment rules.