What is a 1031 exchange, and should you actually do one?

An educational overview, not advice. Read the disclosures. They matter.

What is a 1031 exchange, in one paragraph?

A 1031 exchange lets you sell an investment property and put the proceeds into another investment property without paying the capital gains tax in the year you sell. The name comes from Section 1031 of the tax code. Since the 2017 tax law it applies to real property only, so exchanging a rental for equipment or shares does not qualify. (Source: IRC Section 1031(a)(1), as amended by Pub. L. 115-97 effective for exchanges completed after 2017-12-31.)

The tax does not go away. Your new property inherits the old property's basis, so the gain you did not pay is carried forward and comes due when you eventually sell for cash. (Source: IRC Section 1031(d), basis carryover.)

That distinction is the whole subject. A 1031 is a deferral, and deferral is a loan from the government with no interest and no fixed repayment date. It is genuinely valuable. It is not forgiveness, and anyone who describes it as "avoiding" the tax is selling you something.

Should you do one at all?

Often, no. Here are the four cases where a 1031 is the wrong answer, and we are putting them before the mechanics on purpose.

Your gain is small. The tax you are deferring has to be worth the cost and the constraints. Running an exchange means fees, deadlines, and a narrowed set of properties you are allowed to buy. If the arithmetic says you owe very little, you are paying real money to defer a small number.

You inherited the property recently. When you inherit, your basis generally resets to the property's value on the date of death, which can erase most or all of the gain that built up during the previous owner's lifetime. (Source: IRC Section 1014(a)(1).) A 1031 then defers a tax you may not owe. We wrote a whole piece on that case: I inherited a California rental I don't want.

You do not actually want another property. An exchange requires you to buy replacement real estate on a clock. If your reason for selling is that you are tired of being a landlord, exchanging into a different building solves the tax problem by preserving the problem you were trying to leave.

The timing does not fit your life. The deadlines below are hard. If you are selling because you need the money for something specific and dated, a failed exchange is worse than a clean sale, because you get the tax bill anyway and you have paid the fees.

We charge an advisory fee and earn no commission on where your money goes, which is why this section is at the top rather than buried at the bottom.

Why most 1031 explainers are written for someone else

The typical article assumes a reader who bought a building decades ago, has an enormous built-in gain, and wants to keep owning real estate for the rest of their life. For that person the answer is easy and the article barely needs to think.

Most people asking "what is a 1031 exchange" are not that person. They are somewhere in the middle: a gain worth taking seriously but not life-changing, some genuine ambivalence about staying in real estate, and a real deadline somewhere in their life that nobody has asked about. The mechanics below matter because they decide whether an exchange is even possible for you, not just whether it is a good idea.

What has to be true before anything else: you cannot touch the money

This is the rule that ends more exchanges than any other, and it happens at closing, before anyone has thought about replacement property.

If you actually or constructively receive the proceeds from the sale before you receive the replacement property, the transaction is a sale and not an exchange. (Source: Treas. Reg. Section 1.1031(k)-1(f)(1): "the transaction will constitute a sale and not a deferred exchange.") Money landing in your bank account for a single afternoon is enough. There is no rescue afterwards.

The standard fix is a qualified intermediary, a third party who holds the proceeds and buys the replacement property on your behalf. The regulation treats the intermediary as not being your agent, which is what keeps the money out of your hands for tax purposes. (Source: Treas. Reg. Section 1.1031(k)-1(g)(4)(i).) The assignment has to be in place and the parties notified in writing on or before the transfer. (Source: Treas. Reg. Section 1.1031(k)-1(g)(4)(v).)

In plain terms: line up the intermediary before escrow closes, not after. Afterwards is too late, and "too late" here means the entire tax bill.

How long do I have to identify a replacement property?

Forty-five days. The identification period begins the day you transfer the relinquished property and ends at midnight on the 45th day. (Source: Treas. Reg. Section 1.1031(k)-1(b)(2)(i).)

Weekends and holidays are included. There is no extension for a slow market, a failed inspection, or a seller who changes their mind.

How many properties can I identify?

Either of two rules, and you pick whichever suits you.

The 3-property rule. Up to three properties, at any value. (Source: Treas. Reg. Section 1.1031(k)-1(c)(4)(i)(A).)

The 200-percent rule. Any number of properties, as long as their combined fair market value does not exceed 200 percent of what you sold. (Source: Treas. Reg. Section 1.1031(k)-1(c)(4)(i)(B).)

There is a third path that works as a rescue rather than a plan. If you blow past both limits, the exchange can still stand if you actually receive at least 95 percent of the total value you identified. (Source: Treas. Reg. Section 1.1031(k)-1(c)(4)(ii), the 95-percent rule.) Do not design around it. It requires you to close on very nearly everything you named, which is the opposite of keeping your options open.

Is the deadline really 180 days?

Usually, and this is the trap almost nobody mentions.

The outer limit is the earlier of two dates: 180 days after the transfer, or the due date of your tax return for the year the transfer happened. (Source: IRC Section 1031(a)(3)(B).)

So a sale in late October gives you 180 days on paper, and your return is due in April. The return date arrives first, and your exchange window is quietly shorter than you were told.

The fix is in the statute itself. The provision reads "the due date (determined with regard to extension)," so filing an extension preserves the full 180 days. (Source: IRC Section 1031(a)(3)(B)(ii).) If you sell in the last quarter of the year, this is a conversation to have with your CPA before you close, not in April.

Who is allowed to hold my money?

Not you, and not anyone the tax code calls a disqualified person. That category includes your agent, and the regulation defines agent broadly: anyone who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two years ending on the date you transfer the first relinquished property. (Source: Treas. Reg. Section 1.1031(k)-1(k)(2).)

The instinct when you are handing over the entire proceeds of a property sale is to use the professional you already trust. That instinct is the one the rule blocks.

There are two real exceptions, and one of them surprises people. Work your professional did for you specifically on 1031 exchanges does not count against them, and neither do routine financial, title insurance, escrow or trust services from a financial institution, title company or escrow company. (Source: Treas. Reg. Section 1.1031(k)-1(k)(2)(i) and (k)(2)(ii).)

So the accountant who prepared your returns for the last two years cannot be your intermediary. A firm whose only prior work for you was handling a previous exchange can be. The regulation's own example works through exactly this distinction, which tells you it is a question people get wrong often enough to need illustrating.

The blunt version of this warning, "you cannot use your own professionals," is close enough to true to be useful and wrong often enough to check.

What happens if I take some cash out?

You pay tax on what you took, and not on the rest.

Cash or other non-like-kind property received in an exchange is called boot. Gain is recognized, "but in an amount not in excess of the sum of such money and the fair market value of such other property." (Source: IRC Section 1031(b).)

That ceiling matters more than the rule. Taking some money off the table does not blow up the exchange or make the whole gain taxable. It makes the amount you took taxable. A partial exchange is a legitimate plan, and it is often the honest answer for someone who wants to stay invested but genuinely needs some liquidity.

Debt counts too, and that is where partial exchanges surprise people. We covered the financing side separately in did financing kill your deal?.

What if I don't want to be a landlord any more?

A Delaware Statutory Trust is a way to hold a fractional interest in institutional real estate without operating anything, and it can serve as replacement property in a 1031 exchange. That is why it comes up for people whose real objection is to the job rather than to the asset.

What it costs, stated plainly. DSTs are illiquid, with no public market and no simple exit if you change your mind. They are generally sold as private placements to accredited investors, so not everyone qualifies. You give up control completely: you do not choose tenants, you do not decide when to sell, and you do not set the business plan.

The honest downside. A DST solves the landlord problem by handing the decisions to somebody else, permanently. For a reader whose gain is small, it locks capital up for years to defer a tax that may not have justified the trade.

What does California add?

Two things worth knowing before you sell.

The state does not have a preferential capital gains rate. California taxes capital gain as ordinary income, at rates up to 13.3 percent, which is why the California number on a sale is often larger than people expect. (Source: California rate treatment, verified in the PO-3 fact-check log.)

California does not forget a deferred California gain. If you exchange into a property outside the state, the Franchise Tax Board still requires annual reporting on Form 3840, and it taxes that gain when you eventually sell, even if you have moved away by then. (Source: FTB 2025 Form 3840 Instructions; verified 2026-05-26.)

You can see what a sale actually costs, with your own numbers, using our California tax calculator.

Frequently asked

Does a 1031 exchange eliminate the tax? No. It defers it. Your replacement property carries the old basis forward, so the gain is recognized on a later taxable sale. (Source: IRC Section 1031(d).)

Can I exchange a rental for a house I want to live in? The property has to be held for investment or business use. A property you move into does not fit that description, and the facts of how you actually use it matter more than what you call it.

Can I do a 1031 on a property I just inherited? You can, if it continues as investment property. The better question is whether you should, because the step-up may have already removed most of the gain you would be deferring.

What happens if I miss the 45-day deadline? The exchange fails and the sale is taxable in the year you sold. There is no hardship extension for an ordinary missed deadline.

Do I need a 1031 to be a real estate investor? No. Plenty of good outcomes involve selling, paying the tax, and doing something else with the money. That answer earns us nothing, and it is right often enough that we lead with it.

Can I use the 95-percent rule as a backup plan? Treat it as a rescue rather than a strategy. It requires you to close on nearly everything you identified, which removes the flexibility that identifying many properties was supposed to buy you.

Estate Planning disclosure. Material prepared herein has been created for informational purposes only and should not be considered investment, tax, or legal advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy.

Estate planning involves complex legal and tax considerations that vary significantly based on individual circumstances and the laws of the applicable jurisdiction. Federal and state estate, gift, and generation-skipping transfer tax laws under the Internal Revenue Code (IRC) and applicable state statutes are subject to change, including scheduled sunset provisions that may alter exemption amounts and tax rates. The strategies discussed may not be suitable for all individuals, and their effectiveness depends on factors unique to each person's situation. Savvy Advisors Inc. does not provide legal advice or prepare legal documents. It is the responsibility of individuals to verify their own circumstances. Investors should consult their own qualified estate planning attorney, tax professional, and financial advisor before implementing any estate planning strategy.

Important Disclosure Regarding Delaware Statutory Trust (DST) Investments

Delaware Statutory Trust ("DST") investments are generally offered through private placement offerings and are intended only for investors who satisfy the eligibility requirements established by the issuer and applicable securities laws. In many cases, DST offerings are available only to investors who qualify as accredited investors.

DST investments are not suitable for all investors. They are generally illiquid, are not listed on a public exchange, and involve investment risks, including the possible loss of principal. Investment objectives, risks, fees, expenses, tax considerations, and offering terms vary by investment and should be carefully reviewed before investing.

Nothing in this material constitutes an offer to sell or a solicitation of an offer to buy any specific DST investment. Any offer may be made only by means of the applicable private placement memorandum and other offering documents. Investors should carefully review these materials and consult with their legal, tax, and financial advisors to determine whether a DST investment is appropriate in light of their individual circumstances.

1031 Exchange Disclosure: DST investments are often used as replacement property in connection with Section 1031 like-kind exchanges. Investors should consult with their qualified tax advisor regarding the tax consequences and eligibility requirements associated with a 1031 exchange. Neither this material nor the adviser provides legal or tax advice.

How to judge us, and anyone else

You are about to hand someone a decision worth a meaningful share of your net worth. Ask these four questions of us and of everyone else you talk to.

How are you paid? We are fee-based. We charge an advisory fee for the analysis and the plan, and we earn no commission on DST placements, so we are not paid more when you pick one door over another.

Are you a fiduciary? Yes. Advisory services run through Savvy Advisors, an SEC-registered investment adviser, which carries a legal duty to act in your interest rather than to recommend something merely suitable.

Do you specialize in this? More than a decade working specifically on 1031 and DST transactions, in California, where the state layer changes the arithmetic.

Will you tell me not to do it? This page is the test. The section titled "should you do one at all" is the second thing on the page, and every case in it is a case where we earn less. If an advisor cannot name the situation where their own product is the wrong answer, keep looking.

If you want to walk your own numbers with someone who earns nothing on which door you pick, that is a conversation rather than a sales pitch.

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