Like-Kind Replacement: 45-Day Rule, Boot, and Basis

Like-kind replacement property in a 1031 exchange must be real property located in the United States, held for business or investment use, identified in writing within 45 days of selling the property you gave up, and acquired within 180 days or by the due date of your tax return, whichever comes first. Miss any one of those requirements and the whole exchange collapses, turning the deferred capital gain into an immediate tax bill. The rules are strict on timing and mechanics but surprisingly flexible on what actually counts as “like-kind.”

What Counts as Like-Kind

Like-kind refers to the nature of the property, not its quality or appearance. A raw parcel of land held for appreciation is like-kind to a fully leased apartment building. An office tower is like-kind to a strip mall. What matters to the IRS is that you hold both properties for productive use in a trade or business or for investment, not whether the two look anything like each other.

Since the Tax Cuts and Jobs Act took effect in 2018, only real property qualifies. The prior rules had allowed exchanges of personal property such as equipment, vehicles, artwork, and collectibles, but that route is closed.¹ Section 1031 now applies exclusively to real property exchanges.²

Certain categories are excluded no matter how closely they touch real estate. Stocks, bonds, notes, other securities, partnership interests, and certificates of trust do not qualify.³ Real estate held primarily for sale, such as houses a developer builds as inventory, also fails.⁴ Your intent for the replacement must be to hold it, not flip it.

Location is a hard boundary. Real property inside the United States is not like-kind to real property outside it. You cannot sell a domestic asset and defer the gain by buying foreign real estate. And personal-use property, including your primary home and a purely personal vacation home, is out (with a narrow safe harbor for mixed-use vacation property covered below).³

Fractional Interests That Qualify

Some investors want replacement property they don’t have to manage. REIT shares won’t work, because they are securities. But a beneficial interest in a Delaware Statutory Trust can qualify. In Revenue Ruling 2004-86, the IRS held that an owner of an undivided fractional interest in a DST is treated as owning the underlying real estate directly rather than a certificate of trust, so long as the trustee’s powers are limited. If the trustee can sell the property, renegotiate leases, refinance debt, or make more than minor structural modifications, the IRS reclassifies the DST as a partnership, and the interest no longer qualifies for 1031 treatment.⁵

Tenancy-in-common interests can also work if they meet the conditions in Revenue Procedure 2002-22. The important ones: no more than 35 co-owners, each holding title through an individual deed under local law; profits and losses shared proportionally to ownership; no separate business entity under state law; and co-owner control over major decisions such as selling the property or hiring managers. Fail those tests and the TIC is treated as a partnership interest, which is excluded.

The 45-Day Identification Rule

Once your relinquished property closes, you have 45 calendar days to identify the replacement in writing, signed, and delivered to your Qualified Intermediary. The identification must be unambiguous: a street address, legal description, or distinguishable property name. Weekends and holidays don’t extend the clock. If day 45 lands on a Sunday, the identification is due that Sunday. Any property you actually acquire during the 45-day window is automatically treated as identified.

The Treasury Regulations give you three ways to identify. You need to satisfy only one, but flunking all three means you’ve identified nothing and the exchange fails.⁶

Three-property rule. Identify up to three potential replacements, regardless of their combined value. This is what most exchangers use.
200-percent rule. Identify any number of properties, provided their combined fair market value is no more than 200% of what you sold. A $5 million sale caps identified replacements at $10 million total.
95-percent rule. If you blow past both limits above, you must actually acquire at least 95% by value of everything identified. There is almost no margin for error, which makes this a fallback, not a plan.

What you ultimately buy must be substantially the same as what you identified. Minor price changes or small corrections to a legal description are fine. Buying a fundamentally different property, or a much larger parcel, is not.

The 180-Day Acquisition Deadline

The second clock also starts the day the relinquished property transfers. The exchange period ends on the earlier of 180 days after that transfer or the due date, including extensions, of your tax return for the year of the sale.⁴ Individuals typically file by April 15. If you sell in November or December, 180 days runs past April 15 into the following spring. Without a tax extension, your exchange period ends prematurely on April 15.

The fix is simple: file for an extension. That pushes your return due date to October 15, well beyond any 180-day window, and preserves the full six months. Skipping the extension when you sell late in the year is one of the most preventable exchange failures, and it happens often.

Sell on January 1 and your identification deadline is February 15 and your acquisition deadline is June 30; the following April 15 doesn’t interfere because that return isn’t due until a year later. Sell on November 1 and the 180-day period runs into late April of the following year, past April 15 for the year of sale. No extension, no full 180 days.

The exchange itself is reported on Form 8824.⁷

Using a Qualified Intermediary

You cannot touch the sale proceeds from the relinquished property. The moment you have access to the cash, the IRS treats you as having received it, and deferral collapses. A Qualified Intermediary steps in to hold the funds and facilitate both closings.

The QI is engaged through a written exchange agreement signed before the relinquished property closes. The QI receives the sale proceeds, holds them, and applies them to the replacement purchase. During that period you cannot receive the money, pledge it, borrow against it, or otherwise benefit from it.

Not everyone can serve. The Treasury Regulations disqualify anyone who has been your “agent” within the two years before the sale, which includes your attorney, accountant, investment banker, or real estate broker who has worked for you in those roles during that window.⁶ Independent QI companies exist to fill this gap. The QI industry is not uniformly regulated at the federal level, and state bonding and insurance requirements vary widely, so vetting the QI’s financial protections matters.

Matching Value and Debt to Avoid Boot

Full deferral requires the replacement to be equal to or greater than the relinquished property in both value and debt. Any shortfall is “boot,” and boot triggers taxable gain up to the amount received.³

Cash boot is the simpler version. Any net proceeds left after the QI buys the replacement and pays exchange expenses come back to you and are taxable in the year of the exchange.

Mortgage boot is less obvious. If the debt on the replacement is lower than the debt on the property you gave up, the difference counts as boot received. Sell a property with a $1 million mortgage, buy a replacement with a $700,000 mortgage, and the $300,000 debt reduction is treated as if you had pocketed $300,000 in cash. You can offset that either by taking on equivalent replacement debt or by adding your own cash into the exchange in the same amount.

Partial boot doesn’t destroy the exchange. You still defer gain on the portion properly exchanged. But failing to replace both equity and debt is the most common reason an exchanger ends up with an unexpected tax bill. The operating rule: trade up or even in both total value and debt.

Basis Carries Into the New Property

A 1031 exchange defers capital gains tax. It does not erase it. The deferred gain lives on inside the replacement property as a reduced basis. If you paid $400,000 for a property, held it until it was worth $1 million, and exchanged into a $1 million replacement, your basis in the new property is $400,000, not $1 million. The $600,000 of deferred gain waits inside the replacement, taxable whenever you sell without doing another exchange.

Roughly speaking: take the basis of the relinquished property, add any gain you recognized (from boot), add any additional cash or debt you contributed, and subtract any boot you received. That’s your basis in the replacement. Chain multiple exchanges over decades and the original low basis carries all the way forward against a much larger deferred gain.

Under current law, when the owner dies, heirs receive the property with a basis stepped up to fair market value at the date of death. The accumulated deferred gain effectively disappears. Someone who exchanged through three properties over 30 years, deferring $2 million cumulatively, can pass the final property to heirs with a basis equal to its current value. If the heirs sell right away at that value, no capital gains tax is owed. That interaction between lifetime deferral and step-up at death is why 1031 exchanges sit at the center of long-term real estate strategies.

Vacation Homes as Replacement Property

A pure personal-use home doesn’t qualify. But a mixed-use vacation property can, under the safe harbor in Revenue Procedure 2008-16. For the relinquished side, you must have owned it for at least 24 months immediately before the exchange, and in each of the two 12-month periods within that window you must have rented it at a fair rental for at least 14 days while limiting your personal use to no more than the greater of 14 days or 10% of the days rented.

The mirror image applies to the replacement property over the 24 months immediately after the exchange: fair-market rental for at least 14 days in each 12-month period, personal use capped at 14 days or 10% of rental days. Investors who plan to eventually convert a replacement into a personal-use home need to clear these thresholds first, or the IRS can retroactively disqualify the exchange.

Related-Party Replacements

Exchanging with a related party invokes Section 1031(f). A related person includes siblings, a spouse, ancestors, descendants, and entities in which the taxpayer owns more than 50%.⁴

Both parties must hold the acquired properties for at least two years after the last transfer. If either disposes of the property inside that window, the deferred gain snaps back into taxable income in the year of the early disposition.⁴

Three narrow exceptions override the two-year hold. A disposition following the death of either party doesn’t trigger recognition. Neither does an involuntary conversion such as eminent domain or a natural disaster, provided the exchange occurred before the threat of that conversion. And the rule doesn’t apply if both parties can show, to the IRS’s satisfaction, that neither the exchange nor the disposition had tax avoidance as a principal purpose.⁴ Separately, the IRS will disregard any exchange structured as part of a broader transaction designed to sidestep these rules, even without an early disposition.

When You Buy Before You Sell: Reverse and Improvement Exchanges

Reverse Exchanges

Sometimes the right replacement appears before the old property has sold. A reverse exchange lets you close on the replacement first, but you cannot hold title to both properties at once and still have a valid exchange. Revenue Procedure 2000-37 provides a safe harbor through an Exchange Accommodation Titleholder, which temporarily holds title to one of the two properties while the other side of the transaction closes.⁸ The arrangement is formalized in a Qualified Exchange Accommodation Arrangement between you and the EAT.

The 45-day and 180-day deadlines still apply. The relinquished property must be identified within 45 days of the EAT taking the replacement, and the exchange must finish within 180 days or by the return due date.⁸ Reverse exchanges cost more, because of the EAT, extra legal documentation, and the cost of carrying two properties during the exchange window.

Improvement Exchanges

An improvement exchange, sometimes called a build-to-suit, uses exchange proceeds to construct or renovate the replacement property before you take title. This can absorb equity that would otherwise become boot. The catch: all improvements must be completed before you receive the property. Work done after title transfers is outside the exchange and may be treated as boot.

In practice, the EAT or another accommodation party holds title while improvements are built with exchange funds. The same 180-day period applies to both the construction and the closing, which creates real pressure. Complex projects that can’t finish inside 180 days will not fully qualify, and any unfinished work at title transfer falls outside the exchange. This structure requires tight coordination between the QI, the accommodation titleholder, contractors, and the closing calendar.

1
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
2
Federal Register. Statutory Limitations on Like-Kind Exchanges
3
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
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Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment
5
Internal Revenue Service. Revenue Ruling 2004-86
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GovInfo. Treasury Regulation 1.1031(k)-1 – Treatment of Deferred Exchanges
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Internal Revenue Service. About Form 8824, Like-Kind Exchanges
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Internal Revenue Service. Revenue Procedure 2000-37