Basic Eligibility Requirements

Before diving into whether a 1031 exchange fits your situation, let’s review the basic legal requirements. If you can’t meet these conditions, the exchange won’t apply to your transaction.

1. Property Use

Both the property you’re selling (called the relinquished property) and the one you’re buying (the replacement property) must be:

• Held for investment purposes or for use in a trade or business

• Not used as your primary home or vacation residence (except in rare cases with very limited personal use)

• Not held primarily for resale purposes, such as fix-and-flip projects

2. Like-Kind Requirement

• “Like-kind” doesn’t mean the properties must be exactly the same. Most U.S. real estate held for investment purposes qualifies as like-kind to other U.S. real estate.

• Both properties must be located within the United States to meet this requirement.

3. Timing Rules

• You have 45 days from the sale of your property to identify potential replacement properties.

• You must close on the new property within 180 days of the original sale.

4. Same Taxpayer Rule

• The same entity or individual who sells the relinquished property must also purchase the replacement property.

Signs You Might Be a Good Candidate for a 1031 Exchange

Understanding IRS rules is important, but the real question is whether a 1031 exchange helps you meet your investment and financial goals. Below are some of the most common signs that indicate you’re a strong candidate.

You’re Facing a Big Capital Gains Tax Bill

If your property sale will result in substantial capital gains taxes (especially in high-tax states like California or New York) a 1031 exchange can help you defer those taxes and reinvest more of your profits.

Pro Tip: Even if depreciation recapture applies, the deferral of capital gains tax can still offer significant financial benefits.

You Want to Stay Invested in Real Estate

A 1031 exchange is designed for investors who want to reinvest their proceeds, not for those looking to cash out. If your plan is to continue investing in income-producing or appreciating properties, this strategy allows you to use the full proceeds instead of losing a portion to taxes.

You Want to Trade Up or Diversify

Investors often use 1031 exchanges to consolidate smaller properties into one larger asset, or to divide a large property into several smaller ones for diversification or estate planning purposes. This strategy is also helpful if you want to:

• Move from high-maintenance properties to more passive investments like a Delaware Statutory Trust (DST)

• Transition from undeveloped land to income-producing real estate

• Shift your portfolio geographically to a market with better returns or growth potential

You’re Planning for Retirement or Estate Transition

Many investors approaching retirement use 1031 exchanges to simplify their holdings and reduce management responsibilities. They may exchange into properties that generate passive income, such as triple-net (NNN) leases or DSTs. Others use the strategy to defer taxes with the intention of passing the property to their heirs. In this case, the heirs can receive a step-up in basis that eliminates the deferred taxes entirely.

Lesser-Known Strategy: When planned carefully, a 1031 exchange can become part of a multigenerational approach to building and preserving wealth by deferring taxes while maintaining income-generating properties for your family.

You Already Own Investment Property

If you already own property that is being rented out, used in a business, or held for long-term appreciation, you may be holding a qualifying asset. Many people are surprised to learn that vacant land, rental duplexes, or cell tower lease sites may qualify even if they haven’t been actively managed.

You Have a Development or Repositioning Plan

Experienced investors and developers sometimes use 1031 exchanges to:

• Sell a stabilized property and buy land for new construction or rehab

• Use improvement exchanges to upgrade the replacement property before taking final ownership

Caution: These approaches are more complex and require close coordination with a Qualified Intermediary to ensure compliance with IRS rules.

You’re Comfortable Planning Ahead

Investors who begin planning before listing their property for sale are more likely to complete a successful exchange. If you are willing to consult your tax advisor, identify a Qualified Intermediary early, and create a reinvestment strategy before closing, you are in a strong position.

When You Might Not Qualify for (or Benefit From) a 1031 Exchange

Even if your property meets the technical requirements, a 1031 exchange may not make sense depending on your goals, your timeline, or how the property has been used. Here are situations where it may not be the right fit.

You’re Selling a Primary Residence

Primary residences do not qualify for 1031 exchanges, even if they have appreciated significantly. However, you may qualify for the Section 121 exclusion, which allows you to exclude up to $250,000 in gains ($500,000 for married couples filing jointly) if you’ve lived in the home for at least two of the past five years.

Lesser-Known Scenario: If you converted a former residence into a rental and held it for one to two years with documented rental activity, it might qualify. Please note that you’ll need to clearly demonstrate investment intent.

You’re Flipping Property or Holding It Short-Term

Properties that are bought with the intent to quickly resell do not qualify. This includes situations where:

• You hold the property for less than 12 months

• You’ve repeatedly flipped properties in a short time

• You list the property for sale immediately after acquisition

Even if the property is briefly rented, the IRS considers your pattern of activity and intent, not just the classification on paper.

You Want to Take Cash Out

You are allowed to keep some cash proceeds from the sale, but any amount not reinvested is taxable. This is known as receiving “boot.”

You will owe taxes if you:

• Take part of the cash instead of reinvesting it

• Purchase a less expensive property

• Pay off a mortgage without acquiring new debt

Clarification: Receiving boot does not disqualify your exchange, but it results in partial tax liability. If your goal is full deferral, keeping any proceeds may not be the right approach.

You Don’t Have a Clear Replacement Plan

You must identify a replacement property within 45 days and close on it within 180 days. If you do not have a plan in place for what to buy, or you are unable to act within that timeframe, your exchange could fail.

Risk to Consider: A tight inventory market or financing delays can create issues. Many failed exchanges are due to a lack of planning rather than eligibility problems.

You’re Selling Property That Isn’t Real Estate

After the 2017 Tax Cuts and Jobs Act, personal property no longer qualifies for 1031 exchanges. This means you cannot exchange:

• Equipment

• Vehicles

• Artwork or collectibles

• Licenses or goodwill

Only real estate located in the U.S. qualifies.

You’re Trying to Exchange Between Foreign and U.S. Property

Real estate within the U.S. is not considered like-kind to property outside the U.S. For example, selling a vacation rental in Mexico and buying an apartment in Texas would not qualify.

Note: While foreign-to-foreign exchanges might be permitted under other rules, they do not qualify for 1031 treatment under U.S. tax law.

You Waited Too Long or Didn’t Use a Qualified Intermediary

If the sale has already closed and you received the funds, it is too late to start a 1031 exchange. You must engage a Qualified Intermediary before closing, and the funds must be held by them—not disbursed to you or your attorney.

There is no exception to this rule. Once the funds are in your hands, the transaction is taxable.

Key Signs You’re Ready (or Not) For A 1031 Exchange

You’re likely a good candidate if:

• You expect significant capital gains and want to reinvest, not cash out

• You are looking to trade up or diversify your portfolio

• You already own investment property and are planning strategically

• You are thinking about retirement or long-term estate planning

• You are prepared to plan ahead and involve qualified professionals

A 1031 exchange may not be the best fit if:

• You’re selling your primary home or a flip property

• You want to access sale proceeds for other uses

• You don’t have a replacement property strategy

• You’re dealing with personal property or foreign real estate

• You already closed without involving a Qualified Intermediary

Final Thought: Plan Early to Keep More of What You Earn

Many 1031 exchanges fail not because the investor was ineligible, but because they did not plan in time. If you’re even considering a sale, reach out to one of our 1031 exchange experts. A few proactive steps now can help you avoid taxes and make a smarter move into your next investment.

Let your money keep working for you. Just make sure the process starts before the clock runs out.