1031 exchanges

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.