What are the 1031 exchange rules for real estate in 2025?

A 1031 exchange (like-kind exchange) under IRC Section 1031 allows you to defer capital gains taxes when you sell an investment property and reinvest the proceeds into another investment property. Since the TCJA, 1031 exchanges only apply to real property (not personal property, vehicles, or equipment).

Key requirements:

• Like-kind property: Both the property sold and the replacement must be real property held for investment or business use. "Like-kind" is broadly defined: you can exchange a rental house for an apartment building, vacant land for a commercial building, etc. Your primary residence does NOT qualify.
• 45-day identification period: You must identify potential replacement properties in writing within 45 calendar days of selling your relinquished property. You can identify up to 3 properties (the "3-property rule") or any number of properties whose combined value does not exceed 200% of the sold property (the "200% rule").
• 180-day closing period: You must close on the replacement property within 180 calendar days of the sale.
• Qualified Intermediary (QI): You cannot touch the sale proceeds. A QI holds the funds between the sale and purchase. Using your own agent, attorney, or family member as the QI disqualifies the exchange.

Boot: If you receive cash or non-like-kind property (called "boot") in the exchange, that portion is taxable. Common sources of boot: mortgage reduction (if the new property has less debt), cash taken out at closing, or personal property received.

Depreciation: The replacement property carries over the depreciation schedule of the relinquished property for the exchanged portion. Only the additional basis from any boot paid starts a new depreciation schedule.

No limit on exchanges: You can do successive 1031 exchanges indefinitely, deferring gains until you eventually sell without exchanging. At death, your heirs receive a stepped-up basis, potentially eliminating the deferred gain entirely.