What is a 1031 exchange?
A 1031 exchange lets an investor sell a property and roll the gain into another one without paying capital gains tax in the year of the sale. The word to notice is defer: the tax is not cancelled, it is carried forward into the replacement property, and it comes due when that property is eventually sold outright.
A 1031 exchange defers tax; it does not erase it. Sell investment or business real property, buy replacement real property of equal or greater value through a qualified intermediary, and the gain that would otherwise be taxed this year is instead subtracted from the replacement property's basis — taxed later, when that property is sold without another exchange.
It only works within strict limits: what counts as like-kind, two deadlines that cannot be extended, and a rule that taxes part of the gain immediately if you take any cash or debt relief out of the deal along the way.
What has to be true for it to qualify
The property given up and the property received both have to be real property, and both have to be held for investment or for use in a trade or business — not held primarily for resale, and not used as a personal residence. Since 2018 the exchange has applied only to real property: the IRS is direct about this, noting that "exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property and intangible business assets generally do not qualify."
Almost any real property qualifies as like-kind to almost any other — a rental house for a warehouse, raw land for an apartment building. The like-kind test is about the nature of the interest, not the type or grade of the property.
The two deadlines
From the day the original property's sale closes, you have 45 days to identify replacement property in writing, and 180 days to close on it — both run from the sale date itself, not from each other, and neither is six months. The Form 8824 instructions set out the mechanics in full, including that the 180-day period can end earlier: the statutory limit is the earlier of day 180 and your tax return's due date, including extensions. The 1031 exchange calculator computes both dates from a sale date you enter.
Boot: the part that does not defer
"Boot" is anything you take out of the exchange that is not like-kind real property — cash, or debt relief you do not replace. The IRS states the rule plainly: if you receive other property or money as part of the exchange, you recognize gain to the extent of what you received, and you cannot recognize a loss this way. Boot is what makes an exchange partly, rather than fully, taxable.
Here is one sale run two ways. A property sells for $600,000, with $36,000 in selling costs and a $400,000 basis — a $164,000 realized gain.
Scroll the table sideways to see both columns.
| One sale, two exchanges | Buys $650,000 | Buys $500,000 |
|---|---|---|
| Realized gain | $164,000 | $164,000 |
| Boot (the shortfall bought back as cash) | $0 | $64,000 |
| Gain recognized now | $0 | $64,000 |
| Gain deferred | $164,000 | $100,000 |
Buying a property worth at least as much as the net sale price, with debt at least equal to what was cleared, defers the whole gain. Buying a cheaper property brings $64,000 back out as cash — boot — and that portion is recognized this year rather than deferred. It is taxed as depreciation recapture before it is taxed as capital gain, which is why the calculator splits the two: boot up to the depreciation already claimed is taxed at the higher recapture rate first.
A primary residence does not qualify
A home you live in is not held for investment or for use in a trade or business, so it is outside section 1031 regardless of how much it has appreciated. A different provision covers it: sell your main home and you may exclude up to $250,000 of the gain from income, or up to $500,000 filing a joint return, under the separate home-sale exclusion. The two rules do not combine — a primary residence gets the exclusion, an investment property gets the exchange, and a property that was genuinely both at different times has its own separate rules this guide does not cover.
Can you exchange into a REIT?
Not into an ordinary, publicly traded REIT. Shares of a REIT are securities, not real property, and section 1031 has applied only to real property since 2018 — so REIT shares do not qualify as replacement property, and a REIT is not a place to park exchange proceeds.
What is often confused with a REIT does qualify: a beneficial interest in a properly structured Delaware statutory trust. The IRS ruled in Revenue Ruling 2004-86 that an investor holding such an interest is treated as owning the underlying real property directly, provided the trust meets specific conditions — among them a trustee with no power to acquire new property, renegotiate leases or reinvest sale proceeds. A DST interest and a REIT share can look similar to an investor comparing yields; for exchange purposes they are not the same thing, and the difference is the trustee's powers, not the label on the offering.
What this calculator does not model
Reverse exchanges (acquiring the replacement before selling the original) and improvement exchanges (using exchange funds to build on the replacement property) are real, IRS-recognized structures with their own rules and their own qualified-intermediary requirements — this site does not model either, beyond naming that they exist. Related-party exchanges carry a two-year holding requirement this calculator does not check, and some states claw back deferred gain when you eventually sell outside that state. None of that is covered here.
This is background, not tax advice. The proceeds from the sale must go to a qualified intermediary and never to you — receiving them, even briefly, disqualifies the exchange. Confirm the property qualifies as like-kind and as held for investment before you list it, work out the deadlines with a qualified intermediary before you close, and confirm the tax treatment with a CPA before you file.