What is a 1031 exchange?

A 1031 exchange lets an owner defer capital gain on real property held for productive use in a trade or business or for investment by exchanging it for like-kind real property. You have 45 days to identify replacement property in writing and 180 days to receive it. A personal residence does not qualify.

What qualifies, after the Tax Cuts and Jobs Act

Section 1031 of the Internal Revenue Code now applies only to real property. The Tax Cuts and Jobs Act removed personal property and intangible property from the section, so exchanges of equipment, vehicles, artwork or franchise rights no longer qualify (IRS, Like-Kind Exchanges — Real Estate Tax Tips).

The property has to be held for productive use in a trade or business or for investment — both the property given up and the property received. A personal residence does not qualify. Neither does property held primarily for resale.

"Like-kind" is broader than most people expect within real property. Real property is generally like-kind to other real property regardless of grade or quality — raw land, a rental house, a retail building. What matters is how the property was held, not what type of building sits on it. Whether a particular property was held in a qualifying way is a facts-and-circumstances question, and it is a CPA's call, not an agent's.

Deferral is not forgiveness

A 1031 exchange defers gain. It does not erase it. The deferred gain generally carries forward into the basis of the replacement property, which is why a chain of exchanges can push a large embedded gain forward for years and why the eventual taxable event, if there is one, can be much larger than the gain on any single sale.

That is the part worth understanding before anyone builds a strategy on it. It is also exactly where a CPA or tax advisor earns their fee, because the basis carryover, any boot received, depreciation recapture and the interaction with the taxpayer's other holdings are all specific to the filer.

The two clocks, and the one that surprises people

Both clocks start at the transfer of the relinquished property — the day the old property closes.

45 days to identify. Replacement property must be identified in writing, signed by the taxpayer, and delivered to a person involved in the exchange, such as the qualified intermediary or the seller of the replacement property (IRS). Identification is a formal written act with a deadline, not a conversation with an agent.

180 days to receive the replacement property — or the due date of the tax return, including extensions, for the year of the transfer, whichever is earlier.

That "whichever is earlier" is the rule that catches people, and it catches them in one specific situation: a relinquished property that closes late in the calendar year. Sell in November, and 180 days runs into May — but the return due date arrives first unless the taxpayer files an extension. The fix is usually mechanical and usually involves an extension, and it has to be handled by the CPA before the deadline, not discovered after it.

These deadlines are strict. If the timing fails, the gain may be taxable in the year of the transfer.

The qualified intermediary is not optional in practice

A qualified intermediary structure is what allows a deferred exchange — one where the sale and the purchase happen on different days — to be treated as a like-kind exchange rather than a sale followed by a purchase (IRS).

The practical rule that flows from that: the seller cannot take receipt of the proceeds. Money that lands in the seller's account, or in an account the seller controls, generally blows the exchange. The intermediary has to be engaged before the relinquished property closes — not after the funds move, and not "we'll set it up next week."

This is the single most common way a 1031 fails in the field. The deal closes normally, the title company wires the seller, and the exchange is over before the CPA hears about it. Engage the intermediary while the property is still under contract.

Choosing an intermediary is a diligence exercise of its own. They hold the money, they are not federally licensed in the way a bank is, and the taxpayer bears the counterparty risk. A CPA or attorney can point to ones they have used.

How it shows up in a Texas contract

TREC publishes an Addendum for Section 1031 Exchange, form 60-0, effective 01/03/2025 (TREC contract forms). It is the promulgated way to put the other side on notice that the transaction is part of an exchange and to address cooperation.

Two things it does not do. It does not make the exchange work — the intermediary and the deadlines do that. And it is not a substitute for the exchange documents themselves, which the qualified intermediary prepares.

TREC license holders may not draft contract language. If the situation needs something the promulgated addendum does not cover, that is a Texas real estate attorney's work.

Reporting

The exchange is reported to the IRS on Form 8824 (IRS Instructions for Form 8824). It gets filed with the return for the year the relinquished property was transferred, which means a 1031 shows up on a return even though no tax is being paid on the gain.

What this page deliberately does not tell you

There are specific IRS rules governing how many replacement properties a taxpayer may identify within the 45 days and at what aggregate value. Those rules exist and they matter, and the version of them circulating on real estate blogs is frequently stated wrong. Ask the qualified intermediary and the CPA for the current identification rules in writing before the 45th day.

Likewise, nothing here addresses whether a 1031 is the right move at all. Deferring gain has a cost — the replacement property is chosen under a 45-day clock, which is not a condition anyone would choose for a major acquisition. Sometimes paying the tax and buying the right asset in ninety days beats deferring it into the wrong one in forty-five.

Who decides what

CPA or tax advisor: whether the property qualifies, whether the exchange makes sense, basis and boot, depreciation recapture, the extension needed to protect the 180 days.
Qualified intermediary: the exchange documents, holding the proceeds, the identification mechanics and the current identification rules.
Texas real estate attorney: entity and title questions, any contract language beyond the promulgated addendum.
Real estate agent: finding and contracting the replacement property inside the 45-day window, which is the part that actually runs out first.

Questions about a specific property?

Call or text 830-446-3847 · Email heath.shepard@kw.com

This page explains the mechanism of a Section 1031 exchange as of September 2026 and is not tax or legal advice. A CPA or tax advisor and a qualified intermediary decide how Section 1031 applies to your situation.