Real Estate
1031 Exchange: How It Saves You $30,000-$200,000+ in 2026
A 1031 exchange (like-kind exchange) allows you to sell an investment property and defer ALL capital gains tax and depreciation recapture by reinvesting the proceeds into a replacement property of equal or greater value. You must identify the replacement property within 45 days and close within 180 days. A qualified intermediary must hold the funds, you can never touch the money. This is one of the most powerful wealth-building tools in real estate because you can upgrade properties indefinitely without paying tax.
Who Qualifies
- Selling an investment or business property (not primary residence)
- Reinvesting in like-kind real property (any real estate for any real estate)
- Can identify replacement property within 45 days
- Can close on replacement property within 180 days
Who does NOT qualify
- Selling a primary residence (use §121 exclusion instead)
- Cannot find a replacement property within the 45-day window
- Want to cash out the proceeds (partial exchange possible but gain is recognized on the cash)
How the Math Works
Capital gains tax: $400K × 20% = $80K. Depreciation recapture: $200K × 25% = $50K. NIIT: $400K × 3.8% = $15,200. Total deferred: $145,200.
By exchanging into a $1.5M replacement property, the entire $145,200 tax bill is deferred. The cost basis of the new property carries over, so tax is deferred, not eliminated. But the time value of deferral is enormous.
Legal Basis & IRC Citations
- IRC §1031: Like-kind exchange of real property
- IRC §1031(a)(3): 45-day identification and 180-day closing rules
- IRC §1250: Depreciation recapture at 25%
What to Tell Your CPA
“I'm selling my rental property at [address] for $[amount] with approximately $[X] in capital gains and $[X] in depreciation recapture. I'd like to execute a 1031 exchange. Can you help me set up a qualified intermediary and ensure we meet the 45-day identification and 180-day closing deadlines?”
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Frequently Asked Questions
What is the 45-day rule?
You must identify up to 3 potential replacement properties in writing within 45 calendar days of selling your property. This deadline is strict, no extensions, even for weekends or holidays.
Can I 1031 exchange into a short-term rental?
Yes. Any real property used for investment or business qualifies. An STR property held as a rental investment (not personal vacation home) is valid like-kind property for a 1031 exchange.
What is a qualified intermediary?
A QI is a neutral third party who holds the sale proceeds during the exchange. You cannot touch the money yourself, or the exchange fails. The QI is required by regulation, use an established exchange company, not your attorney or CPA.
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