A capital gains rollover lets you defer federal tax on a sold asset by reinvesting into a qualifying replacement, and the federal code offers four main routes: a Section 1031 like-kind exchange for real estate, a Qualified Opportunity Fund investment for gains from almost any asset, a Section 1045 rollover for qualified small business stock, and a Section 721 contribution to a partnership or REIT. Each has its own eligibility rules, reinvestment windows, and reporting forms. Miss a deadline or a filing and the deferral collapses into a fully taxable sale.
Section 1031: Like-Kind Exchanges of Real Estate
Section 1031 lets you swap one piece of investment or business real estate for another without recognizing the gain at the time of the exchange.1Office of the Law Revision Counsel. 26 US Code 1031 – Exchange of Real Property Held for Productive Use or Investment The gain doesn’t disappear. It rolls into the replacement property by reducing that property’s basis, so you’ll owe the tax when you eventually sell without exchanging again.
Since the 2017 Tax Cuts and Jobs Act, only real property qualifies. Stocks, bonds, partnership interests, equipment, vehicles, and other personal property are out.2Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 So is property held primarily for resale, like a developer’s flip inventory. Both the property you give up and the one you receive must be held for investment or used in a trade or business. A primary residence doesn’t qualify.
“Like-kind” is broader than most people expect. It refers to the nature of the asset, not its quality or use. Raw farmland is like-kind to a downtown office tower, and a warehouse is like-kind to a long-term ground lease of 30 years or more.
Boot and Mortgage Boot
Any cash or non-like-kind property you receive is “boot” and is taxable up to the amount of your realized gain.1Office of the Law Revision Counsel. 26 US Code 1031 – Exchange of Real Property Held for Productive Use or Investment It shows up in three ways: cash pocketed at closing, personal property received in the deal, or debt relief that isn’t offset by new debt on the replacement.
Mortgage boot is the one that catches people. Sell a property with a $400,000 mortgage and buy a replacement with a $250,000 mortgage, and the $150,000 of debt relief is taxable even though no check ever changed hands. To avoid it, take on equal or greater debt on the replacement, or add cash to offset the difference.
The Deadlines You Cannot Extend
A delayed 1031 exchange runs on two clocks that both start on the day you transfer the relinquished property.
Within 45 days, you must identify potential replacement properties in writing, signed and delivered to the qualified intermediary or the seller of the replacement.2Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031 The description has to be specific enough to be unambiguous, usually a street address or legal description. Two identification limits apply: the Three-Property Rule (up to three properties, any value) or the 200% Rule (any number of properties as long as their combined fair market value doesn’t exceed twice the value of what you gave up).
Within 180 days, you must close on one or more identified properties.1Office of the Law Revision Counsel. 26 US Code 1031 – Exchange of Real Property Held for Productive Use or Investment There’s a wrinkle: the exchange period actually ends on the earlier of 180 days or the due date (with extensions) of your tax return for the year of the transfer. Sell late in the year without filing an extension and your return due date can arrive first, cutting the window short.
The two clocks run concurrently. You don’t get 45 days plus a fresh 180. And there is no process for requesting an extension of either deadline.
The Qualified Intermediary Rule
You cannot touch the sale proceeds. If the money hits your account even briefly, the IRS treats it as constructive receipt and the exchange fails. A qualified intermediary holds the funds from the closing of the relinquished property until they wire to purchase the replacement. The exchange agreement with the intermediary must be signed before the sale closes.
The intermediary has to be independent. Anyone who has been your employee, attorney, accountant, real estate agent, or investment banker within the prior two years is disqualified. In practice, this means using a company that specializes in exchange facilitation and has no other relationship with you.
Reverse and Related-Party Exchanges
If you find the replacement before your current property has sold, a reverse exchange works. An exchange accommodation titleholder takes title to the new property under a Qualified Exchange Accommodation Arrangement.3Internal Revenue Service. Revenue Procedure 2000-37 – Qualified Exchange Accommodation Arrangements The 45-day and 180-day deadlines still apply. Setup costs are higher because of the additional structure.
Exchanges with related parties (family members, or entities you control or that control you) carry a two-year holding requirement on both sides. If either party disposes of the acquired property within two years, the originally deferred gain becomes taxable immediately. Exceptions cover death, involuntary conversion, and transactions the IRS determines weren’t structured to avoid taxes.
Qualified Opportunity Funds: Deferral for Any Kind of Gain
A Qualified Opportunity Fund (QOF) accepts gains from any asset type — stocks, a business sale, cryptocurrency, or real estate.4Internal Revenue Service. Invest in a Qualified Opportunity Fund Created by the 2017 Tax Cuts and Jobs Act, QOFs invest in economically distressed census tracts designated as Opportunity Zones.
You have 180 days from the date you realize a capital gain to reinvest the gain amount (not the full sale proceeds) into a QOF. For gains flowing through a partnership, the 180 days can start either when the partnership realized the gain or on the last day of the partnership’s tax year. The investment must be an equity interest; a loan to a QOF doesn’t count.
The fund itself must hold at least 90 percent of its assets in Qualified Opportunity Zone property, tested every six months.5Internal Revenue Service. Opportunity Zones Frequently Asked Questions Compliance is the fund manager’s job, which makes operator due diligence a practical necessity for investors.
The 2026 Recognition Date
Every deferred gain parked in a QOF comes due on December 31, 2026, whether or not you sell your interest.4Internal Revenue Service. Invest in a Qualified Opportunity Fund You recognize the lesser of your original deferred gain or the current fair market value of the QOF investment. If the investment has fallen below the original gain amount, you recognize the lower amount.
For someone investing a new gain into a QOF in 2026, the deferral piece is essentially gone; the tax comes due at year-end anyway. The 10-year benefit, described next, is a different story.
The 10-Year Basis Step-Up
Hold the QOF interest for at least 10 years and you can elect to step up your basis to fair market value when you sell.4Internal Revenue Service. Invest in a Qualified Opportunity Fund Appreciation in the QOF investment itself becomes tax-free. This exclusion applies only to growth generated by the QOF investment, not to the original deferred gain, which is still taxed in 2026.
Section 1045: Rollovers of Qualified Small Business Stock
Section 1045 lets an individual investor defer gain from selling qualified small business stock (QSBS) held more than six months by purchasing replacement QSBS within 60 days of the sale.6Office of the Law Revision Counsel. 26 US Code 1045 – Rollover of Gain From Qualified Small Business Stock The deferred gain reduces the basis of the replacement stock, the same mechanic as a 1031. Corporations can’t use this provision.
Both the stock sold and the replacement stock must meet the QSBS definition under Section 1202(c), which generally means stock in a domestic C corporation with gross assets of $50 million or less at the time of issuance. The replacement must be purchased at cost, not received by gift or inheritance. Gain treated as ordinary income doesn’t qualify.
Section 1045 pairs with the Section 1202 exclusion, which can eliminate up to 100 percent of gain on QSBS held for at least five years. If you want to exit current QSBS before hitting five years, a 1045 rollover moves you into new qualifying stock and keeps you building toward the full exclusion on the replacement shares.
Section 721: Contributions to a Partnership or REIT
Section 721 lets you contribute appreciated property to a partnership in exchange for a partnership interest without recognizing gain at the contribution. In real estate, this is the mechanic behind UPREIT (Umbrella Partnership REIT) transactions: you contribute property to a REIT’s operating partnership and receive operating partnership units.
The trade-off is diversification for deferral. Instead of a single building, you hold units in a partnership that owns a portfolio managed by a professional REIT. Gain is deferred until you sell or redeem the units. There is no fixed identification or exchange deadline the way there is with a 1031, because the contribution happens in one transaction. Most REITs accepting UPREIT contributions set minimum property values and quality standards, so this route generally suits larger commercial properties.
What You File
Every rollover has a reporting requirement, and missing the paperwork can cost you the deferral.
For a 1031 exchange, file Form 8824 with your return for the year you transferred the relinquished property.7Internal Revenue Service. Form 8824 – Like-Kind Exchanges The form captures the properties, the identification and closing dates, and the calculation of deferred gain and new basis. Multiple exchanges in one year each get their own section.
QOF investors file Form 8997 every year to report investment status, basis adjustments, and any dispositions.8Internal Revenue Service. About Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments The remaining deferred gain that becomes taxable on December 31, 2026 goes on your 2026 return. Keep records of the original gain amount, the QOF investment date, and any accumulated basis adjustments.
Section 1045 rollovers go on Schedule D. Report the sale of the original QSBS and elect deferral by reducing the basis of the replacement stock. Keep documentation that both the original and replacement stock qualify as QSBS, since the IRS may ask for proof of the issuing company’s asset size and other eligibility criteria long after the transaction.