Real estate tax

1031 exchanges and exit planning

Defer the gain, swap into the next property, and step up the basis at death. The 1031 exchange turns capital-gains deferral into something close to forgiveness.

The 1031 exchange is the closest thing in the tax code to a legal way to never pay capital gains tax. The catch is in how you get there: you keep swapping, and then you die.

How we got here

The like-kind exchange is more than a century old. In 1921, Congress let investors defer gain when they traded one investment property for another, on the theory that someone who stayed invested had not really cashed out. The provision became Section 1031 in 1954.

For decades everyone assumed the swap had to be simultaneous. In 1979 the Ninth Circuit decided Starker v. United States and allowed a delayed exchange, where you sell first and buy later. That freedom needed limits, so the 1984 tax act imposed the two deadlines that still govern every exchange: 45 days to identify the replacement property, 180 days to close. In 1991 the regulations created the qualified intermediary safe harbor, the rule that the sale proceeds must never touch your hands. In 2000 the IRS blessed reverse and improvement exchanges. In 2017 the Tax Cuts and Jobs Act narrowed 1031 to real property only, ending like-kind treatment for planes, art, and equipment.

The cluster

This pillar covers the beginner’s mechanics, the 45 and 180-day clocks, qualified intermediaries, reverse and improvement exchanges, vacation and mixed-use property, partial exchanges and boot, Delaware statutory trusts and tenant-in-common interests, the partnership problems and their drop-and-swap and swap-and-drop fixes, related-party rules, identification rules, financing, recapture, and the exit questions: installment sales, the step-up in basis, and how death interacts with a 1031.

The seam most advisors miss

Deferral is not forgiveness, until it is.

A 1031 exchange does not erase your gain. It moves the gain into the basis of your next property, which stays low, and waits. Do this once and you have postponed the tax. Do it for a lifetime and then die, and Section 1014 hands your heirs a basis stepped up to the property’s fair market value at your death. The deferred gain, and all the depreciation recapture riding with it, disappears. This is why estate planners and 1031 intermediaries describe the same strategy from opposite ends: swap until you drop.

A 1031 exchange does not forgive the tax; it buries it in the basis of the next property and waits.

Swap until you drop: a lifetime of exchanges plus a stepped-up basis at death turns deferral into permanent forgiveness.

The other seam is the partnership problem, where exchanges most often break. A partnership can exchange at the entity level, but its members cannot each go their own way, because a partnership interest is not like-kind to real estate. When partners want to split, some drop the property out to the members as tenants in common before the sale, then each swaps their share. The IRS attacks these drop-and-swaps on the theory that the members did not hold the real estate long enough with the right intent. Name the rule, and the structuring consequence is about timing: the drop has to season, ideally across a tax year, before the swap.

A partnership cannot exchange on behalf of members who want to separate, and the drop-and-swap that fixes it lives or dies on its timing.

1031 versus the opportunity zone, after 2025

For years the 1031 exchange and the opportunity zone were rival ways to defer real estate gain. In 2025 the opportunity zone program became permanent, which changes the comparison. A 1031 requires like-kind real property, a qualified intermediary, and strict deadlines, and it can defer indefinitely with a step-up at death. An opportunity zone takes any capital gain, not only real estate, drops the deadlines, and after a 10-year hold makes the new appreciation tax-free, though the original deferred gain eventually comes due.

There is a hard date in the middle. Gains invested by December 31, 2026 follow the original opportunity-zone rules. Gains invested on or after January 1, 2027 follow the new regime, with its rolling five-year deferral. The full mechanics sit in advanced strategies.

The choice between a 1031 exchange and an opportunity zone now turns partly on a calendar: the rules change for gains invested after 2026.

The bottom line

A 1031 exchange defers gain by carrying a low basis into the next property.
Held until death, the deferred gain and its recapture can vanish under a stepped-up basis.
The qualified intermediary rule is absolute: touch the proceeds and the exchange fails.
Partnerships cannot exchange for departing members without a carefully timed drop-and-swap.
After 2026, the opportunity-zone alternative runs on a new, rolling clock.

Flippers should note that dealer property does not qualify; that story sits with the fix-and-flip LLC.

Keep reading: entity and LLC tax strategies, depreciation and cost segregation, and advanced real estate tax strategies. Back to the real estate tax resource center.

Last verified July 2026.

Every guide on this topic

01Beginner's guide to 1031 exchangesA 1031 exchange lets you sell an investment property, buy another, and pay no tax on the gain, if you follow a rigid set of rules to the letter. Here is the whole thing in plain English, before the specialized pages go deep.02Timeline rulesThe 45-day and 180-day deadlines are the part of a 1031 exchange with no mercy. They run at the same time, they start the day you sell, and missing either one by a single day destroys the entire deferral. Here is exactly how the clocks work.03Qualified intermediariesA 1031 exchange legally requires a qualified intermediary, a third party who holds your sale proceeds so you never touch them. Choosing the wrong one, or someone the IRS disqualifies, blows up the exchange. Here is who qualifies, who does not, and what they do.04Reverse exchangesSometimes you find the replacement property before you have sold the old one. A reverse exchange lets you buy first and sell second, using a parking arrangement, so you do not lose the deal to the 1031 timeline. It is powerful, and more expensive and complex than a standard exchange.05Improvement exchangesSometimes the replacement property is not worth enough, or does not exist yet. An improvement exchange lets you use exchange funds to build or renovate the replacement before you take title, so new construction can count toward your 1031. The 180-day clock makes it a race.06Vacation homesA vacation home is personal-use property, which normally cannot touch a 1031 exchange. But a specific IRS safe harbor lets a vacation home qualify if you rent it enough and use it little enough, over a two-year window, and it opens a clever exit into a future retirement home.07Mixed-use propertyA duplex where you live in one unit and rent the other. A building with a store below and your apartment above. Mixed-use property is part investment, part personal, and a 1031 exchange can defer tax on the investment part while you handle the personal part separately.08Partial exchangesYou do not have to defer all the gain or none of it. A partial exchange lets you pull some cash out, or buy a smaller property, and defer the rest. The part you take out is taxable boot, and sometimes taking it on purpose is the smart move.09Boot explainedBoot is anything you receive in a 1031 exchange that is not like-kind real estate: cash you pocket, debt you shed, personal property thrown in. Boot is the taxable part of an otherwise tax-free exchange, and understanding it is how you control your tax bill to the dollar.10Delaware statutory trustsA DST lets you 1031 into a fractional slice of an institutional property and become a completely passive owner, no tenants, no toilets, no deadline scramble. The tradeoff is total loss of control, locked in by seven IRS rules that keep the structure legal.11Tenant-in-common interestsA tenant-in-common interest lets several investors co-own one property, each on title, each able to 1031 into or out of their share independently. It is the flexible, higher-control cousin of the DST, with real liability and a governance catch: major decisions need everyone to agree.12Partnership issues in a 1031A partnership can do a 1031 exchange. Its partners cannot exchange their shares, and cannot each go their own way. This single rule, that a partnership interest is not like-kind to real estate, causes more 1031 heartbreak than any other, and it is why drop-and-swap exists.13Drop and swapThe drop and swap is how partners who want different exits get them. The partnership distributes the property to the partners as tenants in common before the sale, so each can 1031 or cash out on their own. It works, and the IRS watches the timing like a hawk.14Swap and dropThe swap and drop reverses the order: the partnership completes the 1031 exchange first, then distributes interests in the new property to partners who want out later. It is the choice when the partnership wants to exchange together now and separate afterward.15Partnership division (708 spin-off)The cleanest way to split partners for a 1031, and the one tax authorities challenge least. Instead of dropping property to co-owners right before a sale, the partnership formally divides under Section 708, and each resulting partnership inherits the original's holding period. No seasoning scramble.16Related-party rulesYou can do a 1031 exchange with a family member or your own entity, but a special set of rules watches for one thing: using the related party to shift basis and cash out tax-free. Break the two-year holding rule or trip the anti-abuse catch-all, and the exchange is disallowed.17Identification rulesBy day 45 you must name your replacement property in writing, and there are limits on how many you can name and how much they can be worth. Three rules govern the choice, and picking the wrong one, or naming too much, quietly voids your identification.18Financing issuesA 1031 exchange has a debt rule, not just a value rule: your new mortgage generally has to match or exceed your old one, or the shortfall is taxable. And refinancing to pull cash, before the exchange, is one of the fastest ways to turn a clean deferral into a tax bill.19Replacement property rulesWhat counts as a valid replacement property is broader than most investors think and narrower than they hope. Almost any US investment real estate is like-kind to any other, but it must be held for investment, must be equal or greater in value, and must be bought by the same taxpayer who sold.20Depreciation recapture in a 1031A 1031 exchange defers depreciation recapture along with the capital gain, which is a major advantage over a regular sale. But the recapture rides into the new property through a low carryover basis, quietly shrinking the depreciation you get going forward.211031 vs opportunity zoneTwo ways to defer capital gains on real estate, and after 2025 they are more different than ever. A 1031 defers forever but demands full reinvestment; an opportunity zone can make new gains tax-free but has a hard calendar. The 2026-to-2027 line changes the whole comparison.22Selling without a 1031A 1031 is not always the right move. Sometimes paying the tax now is smarter, when you have losses to offset the gain, when you want out of real estate, or when the deferral would just trap you in a worse investment. Knowing when not to exchange is its own skill.23Installment salesAn installment sale spreads your capital gain over the years you collect payments, which can keep you in lower brackets and defer tax without a 1031. But it has a brutal catch: depreciation recapture is taxed in full in year one, even on money you have not received yet.24Capital gains tax on real estateThis is the tax everything else in the pillar exists to defer or avoid. Long-term rates run 0, 15, or 20%, plus a 3.8% surtax and a 25% cap on the depreciation piece. Knowing how the layers stack is how you know what a 1031 is actually saving you.25Step-up in basisThis is the reason the whole deferral game works. When you die, your heirs' basis in your property resets to its market value, and every dollar of deferred gain, depreciation recapture, and appreciation you spent a lifetime deferring simply disappears. It is the largest break in the tax code.26Death and the 1031Swap until you drop. It sounds glib, but it is the most powerful legal tax strategy in American real estate: exchange your way through a lifetime of properties, never pay the tax, then die and let the step-up erase all of it. Here is how the whole plan fits together.

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