Key Takeaways
- Section 1031 provides TAX DEFERRAL (not tax-free)—gain is recognized when the replacement property is eventually sold without another exchange.
- Since the TCJA (2018), Section 1031 applies ONLY to real property; personal property exchanges (vehicles, equipment, artwork) no longer qualify.
- The 45-day identification rule requires written identification of replacement property within 45 days of transferring the relinquished property.
- The exchange must be completed within 180 days of the transfer OR by the tax return due date (with extensions), whichever is earlier.
- "Boot" (cash or non-like-kind property received) triggers gain recognition to the extent of the boot received or the realized gain, whichever is less.
Like-Kind Exchanges (Section 1031)
A Section 1031 like-kind exchange allows taxpayers to defer recognition of gain when exchanging real property held for productive use in a trade or business or for investment. This provides tax deferral, not tax elimination.
Post-TCJA Changes: Real Property Only
The Tax Cuts and Jobs Act (TCJA) of 2017, effective for exchanges after December 31, 2017:
| Before TCJA (2017 and earlier) | After TCJA (2018 and later) |
|---|---|
| Real property AND personal property qualified | Only real property qualifies |
| Vehicles, equipment, artwork could be exchanged | Personal property NO LONGER qualifies |
What Qualifies as "Like-Kind" Real Property?
For real property, "like-kind" is interpreted very broadly:
| Relinquished Property | Replacement Property | Qualifies? |
|---|---|---|
| Office building | Apartment complex | Yes |
| Vacant land | Shopping center | Yes |
| Industrial warehouse | Farmland | Yes |
| Rental house | Commercial building | Yes |
Important: U.S. real property is NOT like-kind to foreign real property.
Timeline Requirements: The 45/180 Day Rules
45-Day Identification Period
Within 45 calendar days of transferring the relinquished property, you must identify replacement property in writing.
180-Day Exchange Period
You must acquire the replacement property within the earlier of:
- 180 calendar days after the transfer, OR
- The due date (including extensions) of your tax return
These deadlines cannot be extended except in cases of federally declared disasters.
Property Identification Rules
| Rule | Requirements |
|---|---|
| 3-Property Rule | Identify up to 3 properties of any value |
| 200% Rule | Identify any number, but total FMV cannot exceed 200% of relinquished property's value |
| 95% Rule | Identify any number, but must acquire at least 95% of total value identified |
Boot: Taxable Portion of the Exchange
"Boot" is any cash or non-like-kind property received. Boot triggers immediate gain recognition.
Gain Recognition Rule
Recognized Gain = Lesser of:
- Boot received, OR
- Realized gain
Boot Example
| Item | Amount |
|---|---|
| FMV of relinquished property | $500,000 |
| Adjusted basis | $200,000 |
| FMV of replacement property | $450,000 |
| Cash received | $50,000 |
- Realized gain: $500,000 – $200,000 = $300,000
- Boot received: $50,000
- Recognized gain: Lesser of $50,000 or $300,000 = $50,000
- Deferred gain: $250,000
Basis of Replacement Property
Replacement Property Basis = FMV of Replacement Property – Deferred Gain
Or equivalently: Basis = Adjusted Basis of Relinquished Property + Recognized Gain
Qualified Intermediary Requirement
A Qualified Intermediary (QI) is essential for most 1031 exchanges. The following are disqualified persons:
- The taxpayer
- The taxpayer's agent (broker, attorney, accountant)
- Anyone who has acted in the above capacities within the prior 2 years
- Related parties
Related Party Rules
If either party to a related-party exchange disposes of the property within 2 years, the original exchange is disqualified.
EA Exam Tips
- Post-TCJA = Real property ONLY: Personal property no longer qualifies after 2017
- Deferral, not exclusion: Section 1031 defers gain; it does not eliminate it
- 45/180 are concurrent: The 180-day period includes the 45-day identification period
- Boot = taxable: Any cash or non-like-kind property received triggers recognition
- Basis preserves deferred gain: Replacement property basis is reduced by deferred gain
- Domestic/foreign mismatch: U.S. and foreign real property are NOT like-kind
Which of the following exchanges qualifies for Section 1031 treatment in 2024?
Marcus transfers his relinquished property on March 15, 2024. By what date must he identify potential replacement properties?
Jennifer exchanges a commercial building (FMV $800,000, adjusted basis $300,000) for a smaller office building worth $650,000 plus $150,000 cash. What is her recognized gain?
In a Section 1031 exchange, David exchanges property with an adjusted basis of $250,000 and receives replacement property worth $400,000. He also receives $30,000 cash. His realized gain is $180,000. What is his basis in the replacement property?