A properly structured exchange can defer recognition of gain when a taxpayer exchanges qualifying real property held for productive use in a trade or business or for investment for other qualifying real property of like kind. In 2025, that means the taxpayer generally does not currently recognize capital gain on the exchanged real estate, except to the extent the taxpayer receives cash or other non-like-kind property, commonly called boot. The deferred gain is preserved through a carryover basis in the replacement property rather than eliminated.
Remains one of the most important federal tax deferral tools for real estate investors in 2025 because it allows reinvestment of equity that otherwise would be reduced by current tax on gain. That can matter especially where a sale would trigger not only long-term capital gain, but also depreciation recapture and tax on any cash or debt relief realized in the transaction.
The basic rule
Provides that no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment if that real property is exchanged solely for real property of like kind that will also be held for productive use in a trade or business or for investment.
In practical terms, four core requirements must be satisfied:
- The taxpayer must exchange real property, not merely sell property and keep the cash.
- Both the relinquished property and the replacement property must be held for investment or for productive use in a trade or business. Property held primarily for sale does not qualify.
- The properties must be of like kind. For real estate, that standard is broad.
- The taxpayer must comply with the statutory timing rules for identifying and receiving replacement property.
What “deferral” really means
A 1031 exchange does not erase tax. It postpones it.
Under, the basis of replacement property generally equals the basis of the relinquished property, adjusted for money received, gain recognized, and certain other items. That carryover basis preserves the built-in gain in the replacement property. If the taxpayer later sells the replacement property in a taxable transaction, the deferred gain generally becomes taxable then.
So the tax benefit is timing. Instead of paying tax immediately on the disposition of appreciated real estate, the taxpayer rolls the investment into replacement real estate and carries the deferred gain forward.
Why this matters in 2025
For 2025, long-term capital gains and qualified dividends are taxed at preferential rates of 0%, 15%, or 20%, depending on taxable income. For most individual taxpayers, the 15% rate applies once taxable income exceeds the 0% threshold and until the 20% threshold is reached. For example, in 2025 the 0%/15% breakpoint is $48,350 for single filers and $96,700 for married filing jointly, and the 15%/20% breakpoint is $533,400 for single filers and $600,050 for married filing jointly.
That means a taxable sale of appreciated real estate in 2025 can produce a meaningful current federal tax cost. And for depreciated real estate, the tax burden may also include depreciation recapture. A 1031 exchange can defer that current recognition, preserving more capital for reinvestment.
What property qualifies in 2025
Since the post-2017 changes, applies only to real property. Personal property such as machinery and equipment no longer qualifies.
The Form 8824 instructions explain that, for 2018 and later years, like-kind treatment is limited to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale. They also note that real property is broadly defined under the regulations and generally includes land, improvements to land, unsevered natural products of land, and certain intangible interests in real property.
Examples of qualifying exchanges can include:
- raw land for improved commercial property,
- farmland for an apartment building,
- a warehouse for an office building,
- one investment parcel for multiple replacement parcels.
But there are important limits:
- Real property held primarily for sale does not qualify.
- U.S. real property and foreign real property are not like kind. expressly separates domestic and foreign real estate.
- Property used solely as a personal residence does not qualify.
The 45-day and 180-day deadlines
The timing rules are strict and are central to how a deferred exchange works.
Requires that replacement property be identified within 45 days after the taxpayer transfers the relinquished property and received by the earlier of:
- 180 days after the transfer of the relinquished property, or
- the due date, including extensions, of the taxpayer’s return for the year of transfer.
The Form 8824 instructions reinforce that in a deferred exchange, the replacement property must be identified within 45 days and received within 180 days, subject to the return due date rule.
These deadlines are unforgiving. If the taxpayer misses them, the transaction generally fails treatment and the sale becomes taxable.
Why a qualified intermediary is usually essential
Most modern exchanges are deferred exchanges, not simultaneous swaps. That creates a constructive receipt problem: if the taxpayer receives or controls the sale proceeds, the IRS can treat the transaction as a taxable sale rather than an exchange.
The regulations provide a safe harbor for use of a qualified intermediary. Under Treas. Reg. section 1.1031(k)-1(g)(4), if the exchange is structured through a qualified intermediary and the taxpayer’s rights to the proceeds are properly restricted, the intermediary is not treated as the taxpayer’s agent for purposes of.
That is why exchange documents generally must be in place before the relinquished property closes. If the taxpayer closes first and only later tries to “turn it into” a 1031 exchange, the taxpayer may already have constructively received the proceeds.
A 2025 private letter ruling illustrates the IRS’s continued acceptance of qualified intermediary and exchange accommodation titleholder safe harbors where the transaction is carefully structured and the taxpayer avoids actual or constructive receipt of exchange funds.
Boot: when some gain is still taxable
Defers gain only to the extent the taxpayer receives like-kind real property and does not receive cash or other non-like-kind property.
Provides that if an exchange otherwise qualifies under but the taxpayer also receives money or other property, gain is recognized, but only up to the amount of that money and the fair market value of that other property.
Common forms of boot include:
- cash received at closing,
- non-like-kind property,
- debt relief not offset by replacement debt or additional cash contributed,
- exchange proceeds used for nonqualifying expenses.
Also states that where another party assumes the taxpayer’s liability, that assumption is treated as money received.
So if a taxpayer sells highly leveraged property and acquires replacement property with less debt and without contributing additional cash, the reduction in liabilities can create taxable mortgage boot.
Related-party traps
Imposes special rules on exchanges with related persons.
If:
- the taxpayer exchanges property with a related person,
- the exchange otherwise qualifies for nonrecognition, and
- either party disposes of the exchanged property within 2 years after the last transfer in the exchange,
then the original exchange generally loses nonrecognition treatment and the deferred gain becomes recognizable when the later disposition occurs.
There are limited exceptions, including death, certain involuntary conversions, and cases where tax avoidance was not a principal purpose.
Goes further and denies treatment to transactions structured to avoid the purposes of the related-party rules.
The Form 8824 instructions emphasize that exchanges structured to avoid the related-party rules should not be reported as qualifying exchanges.
Basis carryover is the mechanism of deferral
The tax deferral works because the replacement property generally takes a substituted basis.
Provides that the basis of property acquired in a exchange is generally the same as the basis of the property exchanged, decreased by money received and increased by gain recognized.
That means:
- no current tax on deferred gain,
- lower basis in the replacement property than its fair market value,
- deferred gain preserved for future recognition.
This is why a 1031 exchange is best understood as a rollover, not a forgiveness provision.
Reporting the exchange
Taxpayers report like-kind exchanges on Form 8824. The form is used to report the exchange, compute recognized gain if boot is received, and determine the basis of the replacement property.
The 2025 Form 8824 instructions also note that treatment is limited to real property and provide guidance for reporting multi-asset exchanges, related-party exchanges, and exchanges involving home-sale exclusion issues.
Common misconceptions
A few misconceptions continue to cause problems:
- “Any real estate qualifies.” Not if it is held primarily for sale or used solely personally.
- “A 1031 exchange eliminates tax forever.” It generally defers tax through basis carryover.
- “I can receive the sale proceeds and still do an exchange.” Usually no; constructive receipt can destroy the exchange unless a proper safe harbor structure is used.
- “All closing costs are harmless.” Some uses of exchange proceeds can create taxable boot.
- “Personal property can still be exchanged.” Not under current law for post-2017 exchanges.
