Important Notice
These IRS 1031 exchange rules are not suggestions - they are mandatory requirements that can save or cost you thousands in taxes. One misstep can disqualify your entire exchange and trigger immediate tax consequences.
This comprehensive guide covers the 7 essential rules you must follow to execute a successful 1031 exchange in 2025.
What is a 1031 Exchange?
A 1031 exchange, also known as a like-kind exchange, allows real estate investors to defer capital gains taxes by exchanging one investment property for another of equal or greater value. Named after Section 1031 of the Internal Revenue Code, this powerful tax strategy has helped investors preserve and grow wealth for decades. IRS
Ready to explore how a 1031 exchange can benefit your investment strategy? Schedule a free consultation with our specialists to assess your options.
The 7 Critical IRS 1031 Exchange Rules
Rule #1: Like-Kind Property Requirement
Both properties must be held for business or investment purposes
Rule #2: 45-Day Identification Rule
Identify replacement properties within 45 days of sale
Rule #3: 180-Day Completion Rule
Complete the exchange within 180 days of sale
Rule #4: Qualified Intermediary Requirement
Use a neutral third-party to facilitate the exchange
Rule #5: Equal or Greater Value Rule
Replacement property must be equal or greater value
Rule #6: 100% Reinvestment Rule
All proceeds must be reinvested to avoid taxes
Rule #7: Same Taxpayer Rule
Same entity must sell and buy the properties
Rule #1: Like-Kind Property Requirement
The Rule: Both the relinquished property (what you're selling) and replacement property (what you're buying) must be held for business or investment purposes and qualify as like kind property for the 1031 exchange.
What Qualifies
- • Commercial real estate → residential rental property
- • Apartment buildings → retail shopping centers
- • Vacant land → office buildings
- • Industrial warehouses → multifamily properties
What Doesn't Qualify
- • Personal residences or vacation homes
- • Property held primarily for sale (dealer property)
- • Stocks, bonds, or other securities
- • Personal property
Key Insight: "Like-kind" refers to the nature or character of the property, not its grade or quality. This gives investors significant flexibility in diversifying their real estate portfolios while maintaining tax deferral benefits.
Rule #2: The 45-Day Identification Rule
The Rule: You have exactly 45 calendar days from the sale of your relinquished property to identify potential replacement properties in writing.
Identification Options:
- Three-Property Rule: Identify up to three properties regardless of their combined value
- 200% Rule: Identify any number of properties as long as their combined value doesn't exceed 200% of the relinquished property's value
- 95% Rule: Identify more than the 200% limit, provided you acquire at least 95% of the total identified value
Critical Requirements:
- • Identification must be in writing
- • Must be signed by the taxpayer
- • Must be delivered to the Qualified Intermediary before midnight on the 45th day
Warning: Late identification or improper notice automatically disqualifies your exchange. There are no extensions except in rare cases of presidentially declared disasters.
Rule #3: The 180-Day Exchange Completion Rule
The Rule: You must close on your replacement property within 180 calendar days of selling your relinquished property.
Important Details:
- • The 180-day period includes the initial 45-day identification period
- • Both deadlines run concurrently, not consecutively
- • Extensions are extremely rare and only granted for extraordinary circumstances
- • If your tax return due date falls before the 180-day deadline, you must complete the exchange by the earlier date (unless you file an extension)
Need help meeting these tight deadlines? Explore our current DST marketplace for pre-vetted replacement properties.
Rule #4: Qualified Intermediary (QI) Requirement
The Rule: A neutral third-party Qualified Intermediary must facilitate your exchange and hold all sale proceeds.
Why It's Critical:
- • You cannot touch the funds from your property sale at any point
- • Direct receipt of proceeds disqualifies the entire exchange
- • The QI acts as a safeguard to ensure IRS compliance
QI Restrictions - Your QI cannot be:
- • Your employee or agent
- • Your attorney or accountant (within the past two years)
- • A close relative
Best Practice: Choose an experienced QI with a strong track record, proper insurance, and segregated client accounts to protect your funds. If you need help finding one, schedule a call with us at Anchor1031 and we can refer one to you that we've worked with before.
Rule #5: Equal or Greater Value Rule
The Rule: To defer 100% of capital gains taxes, your replacement property must be of equal or greater value than your relinquished property.
Value Components:
- Purchase Price: The replacement property's total cost
- Equity Investment: Your cash investment in the new property
- Debt Replacement: New debt must equal or exceed the debt on your relinquished property
Example:
If you sell a property for $1,000,000 with $600,000 in debt and receive $400,000 in equity:
- Full Deferral: Buy a $1,000,000+ property with $600,000+ debt and invest all $400,000 equity
- Partial Deferral: Buy a $900,000 property - you'll owe taxes on the $100,000 difference ("boot")
Rule #6: 100% Reinvestment Rule
The Rule: All net proceeds from your relinquished property sale must be reinvested into the replacement property.
What Constitutes "Boot" (Taxable Cash):
- • Any cash received from the exchange
- • Debt reduction (if new debt is less than old debt)
Strategy Tip: To avoid taxable boot, consider using Delaware Statutory Trusts (DSTs) which often include pre-arranged financing to help match your debt requirements.
Rule #7: Same Taxpayer Rule
The Rule: The same taxpayer entity that sells the relinquished property must be the buyer of the replacement property.
Key Points:
- • Partnership ownership cannot be changed to individual ownership
- • The tax ID number and ownership structure must remain consistent
- • Spouses can generally exchange between individual and joint ownership
Planning Consideration: If you want to change ownership structure, do so before initiating the exchange or after completing it - never during the exchange process.
Common Mistakes That Disqualify 1031 Exchanges
- Missing Critical Deadlines: Even one day late on identification or closing disqualifies your exchange
- Improper Use of QI: Accessing funds or using a disqualified intermediary
- Non-Qualifying Property: Attempting to exchange personal residences or dealer property
- Inadequate Property Value: Buying replacement property of lesser value triggers taxable boot
- Ownership Changes: Altering taxpayer entity during the exchange process
- Vague Property Identification: Failing to clearly and specifically identify replacement properties
Frequently Asked Questions
Ready to Execute Your 1031 Exchange?
Understanding these IRS 1031 exchange rules is your foundation for a successful tax-deferred exchange. However, navigating the complexities, deadlines, and compliance requirements requires professional guidance and careful planning.
At Anchor1031, our military-grade approach to risk assessment and strategic planning ensures your exchange meets all IRS requirements while maximizing your investment opportunities.
Get Started Today:
- Schedule a free consultation to assess your exchange strategy
- Download our comprehensive 1031 Exchange Guide
- Browse current replacement properties in our curated marketplace
Don't let complex rules derail your wealth-building strategy. Contact Anchor1031 at (502) 556-1031 for professional guidance on your 1031 exchange.
Disclosure
Tax Complexity and Investment Risk
Tax laws and regulations, including but not limited to Internal Revenue Code Section 1031, bonus depreciation rules, cost segregation studies, and other tax strategies, contain complex concepts that may vary depending on individual circumstances. Tax consequences related to real estate investments, depreciation benefits, and other tax strategies discussed herein may vary significantly based on each investor's specific situation and current tax legislation. Anchor1031, LLC and Great Point Capital, LLC make no representation or warranty of any kind with respect to the tax consequences of your investment or that the IRS will not challenge any such treatment. You should consult with and rely on your own tax advisor about all tax aspects with respect to your particular circumstances. Please note that Anchor1031 and Great Point Capital, LLC do not provide tax advice.
The information contained in this article is for general educational purposes only and does not constitute legal, tax, investment, or financial advice. This content is not a recommendation or offer to buy or sell securities. The content is provided as general information and should not be relied upon as a substitute for professional consultation with qualified legal, tax, or financial advisors.
Tax laws, regulations, and IRS guidance regarding 1031 exchanges are complex and subject to change. Information herein may include forward-looking statements, hypothetical information, calculations, or financial estimates that are inherently uncertain. Past performance is never indicative of future performance. The information presented may not reflect the most current legal developments, regulatory changes, or interpretations. Individual circumstances vary significantly, and strategies that may be appropriate for one investor may not be suitable for another.
All real estate investments, including 1031 exchanges, are speculative and involve substantial risk. There can be no assurance that any investor will not suffer significant losses, and a loss of part or all of the principal value may occur. Before making any investment decisions or implementing any 1031 exchange strategies, readers should consult with their own qualified legal, tax, and financial professionals who can provide advice tailored to their specific circumstances. Prospective investors should not proceed unless they can readily bear the consequences of potential losses.
While the author is a partner at Anchor1031, the views expressed are educational in nature and do not guarantee any particular outcome or create any obligations on behalf of the firm or author. Neither Anchor1031 nor the author assumes any liability for actions taken based on the information provided herein.
Stephen Haskell
Partner at Anchor1031
Stephen Haskell is a partner at Anchor1031, bringing a unique perspective to real estate investment through his distinguished military background. With a career managing intelligence operations for elite special missions units in Afghanistan, Iraq, and Africa, Stephen developed critical expertise in strategic planning and risk mitigation - skills that were literally a matter of life or death.
Transitioning to the real estate industry, Stephen identified a critical flaw: a relaxed, unbalanced approach to risk management. For investors looking to retire, he recognized that an overlooked risk could compromise a lifetime of hard-earned wealth. This realization became the foundation of Anchor1031, where Stephen applies the same meticulous approach to risk assessment that he used in military operations.
Anchor1031's primary objective is to identify risk, educate clients on its potential impact, and build portfolios based on transparency and integrity. Stephen's military-grade discipline in strategic planning now protects investors' wealth through carefully vetted 1031 exchanges and DST investments.