The complete 1031 exchange playbook.
Everything. In one place.

00. Welcome to the Playbook

This playbook is for investors and brokers actively working a 1031 exchange — not for someone curious about what a 1031 is. The public guide on our site handles the introduction. This is the working document: the rules, the plays, the math, the state traps, the checklists, and the pocket wisdom from a working broker who has closed dozens of these.

It is also a living document. Rules don't change often, but states wiggle, Treasury releases procedural guidance, and the market throws new structures (or old structures wearing new sponsor branding) at every 1031 buyer. We update this playbook when something changes. The \"Updated\" date at the top is always current.

This is not tax, legal, or investment advice. The full disclaimer is at the bottom and you should read it. Short version: consult a Qualified Intermediary, a CPA, and a real estate attorney before you act on anything in this document. Your facts matter. Your state matters. Your entity structure matters. We are a publication, not your advisor.

01. The rules that cannot be broken

Section 1031 lets you defer federal capital gains tax and depreciation recapture on the sale of investment real estate if you reinvest the proceeds in qualifying replacement property under a fixed set of procedural rules. The rules are strict and unforgiving, but within them you have more latitude than most investors realize.

The non-negotiables:

• Both the relinquished property (\"downleg\") and the replacement property (\"upleg\") must be real property held for productive use in a trade or business or for investment. Primary residences and flips do not qualify.
• You cannot receive, control, or constructively receive the sale proceeds. A Qualified Intermediary must hold the funds between the two closings.
• You must identify replacement property in writing, delivered to the QI, within 45 calendar days of the downleg closing.
• You must close on replacement property within 180 calendar days of the downleg, or by your federal tax return due date (with extensions) for the year of sale — whichever is earlier.
• To fully defer gain, you must trade equal or up in purchase price, equal or up in equity, and equal or up in debt (or replace reduced debt with cash out of pocket).

Everything else — the identification rules, the structures, the DST plays, the reverse exchanges — operates inside those five rails.

02. The two clocks

Two deadlines start the moment your downleg closes. Day 1 is the day after the downleg closing. Day 45 is 45 calendar days later. Day 180 is 180 calendar days later. Weekends and holidays count. The IRS does not care that day 45 falls on a Sunday or that your CPA is on vacation.

The 45-day identification deadline

By midnight on day 45, you must deliver a signed, written identification of one or more replacement properties to your QI. Identification must be specific enough that each property is unambiguously identifiable — street address, legal description, or APN. \"A similar Walgreens in the Southeast\" will not survive IRS scrutiny.

The 180-day exchange deadline

You must close on at least one identified property by day 180 — but be careful: the deadline is the earlier of 180 days or your federal tax return due date (with extensions) for the year the downleg closed. If the downleg closes in October, November, or December, file Form 4868 to extend your return; otherwise the April 15 filing date can cut your 180-day clock short.

What counts as \"constructive receipt\"

If the sale proceeds land in your bank account, the exchange is over before it started. If your title company holds them but you have access, arguably the same. The 1991 safe harbor fixed this: proceeds must go to a properly structured QI who holds funds and disburses only to acquire replacement property.

03. Like-kind (and what isn't)

\"Like-kind\" sounds narrow. In real estate, it is spectacularly broad. A shopping center is like-kind to an apartment building. Raw land is like-kind to an industrial warehouse. A 30-plus-year leasehold is like-kind to a fee-simple interest. A Delaware Statutory Trust interest is like-kind to a whole building.

What is not like-kind:

• U.S. real estate to foreign real estate
• Real estate to REIT shares (which are securities, not real property)
• Partnership interests to real estate (hence drop-and-swap structures)
• A personal residence to anything under Section 1031 (Section 121 governs residences)

The most common mistake in this area is assuming \"like-kind\" means \"similar.\" It doesn't — in CRE, it essentially means \"U.S. real property held for investment or productive use.\"

04. The Qualified Intermediary

The QI (sometimes called an exchange accommodator or exchange facilitator) is the third-party institution that holds your funds between sale and purchase. The QI is not a lawyer, a broker, or an advisor. It is a specialized escrow-plus-administrative role created by the 1991 safe harbor to keep exchangers from taking constructive receipt.

Who cannot be your QI (\"disqualified persons\"):

• You, your spouse, or a family member
• Anyone who has been your agent within the last two years — your attorney, CPA, real estate broker, or employee
• An entity related to any of the above under the IRS related-party rules

Why QI selection is the most under-weighted decision in every exchange: your QI holds your money. In the last twenty years there have been several high-profile QI insolvencies where exchangers lost significant funds. Use a QI with (a) segregated exchange accounts, (b) a substantial fidelity bond and E&O coverage, (c) meaningful balance sheet, and (d) experienced exchange attorneys on staff. Do not pick a QI on price. See section 12 for a full vetting checklist.

05. Identification rules and tactics

You may identify replacement property under one of three rules. You pick the rule at the time of identification. You may not mix rules within a single exchange.

Three-Property Rule

Identify up to three properties of any combined value. This is the default rule for nearly all single-family, small multi-tenant, and single-asset 1031 exchangers. It is simple, forgiving, and the one attorneys will recommend if you ask.

200% Rule

Identify any number of properties as long as the combined fair market value does not exceed 200% of the downleg sale price. This rule is most common for DST portfolio identifications or for exchangers spreading proceeds across many small replacements.

95% Rule

Identify any number of properties at any combined value, but actually acquire 95% of that combined value within the 180-day window. This rule is a trap for DIY exchangers and is rarely the right answer. Use with caution and only with expert advice.

Practical identification tactics

• Always identify three. Even if you only intend to acquire one, use the other two slots as backups. Primary deal #1, fallback deal #2 (lower-quality but clearly closeable), and a DST #3 for the break-glass emergency.
• Identify early. Waiting until day 44 is an operational mistake; your QI wants the form in hand and you want the optionality to revise if something changes.
• Revise until day 45. You may revoke and replace identifications freely before midnight day 45. After, the list is frozen.
• Describe precisely. Street address, legal description, or APN. A lawyer-reviewed identification template is cheap insurance.

06. Boot and the math of full deferral

Boot is any non-like-kind value received in the exchange. The two common flavors are cash boot (proceeds left over after the replacement purchase) and mortgage boot (debt relief that isn't replaced).

The full-deferral rule of thumb: trade equal or up in purchase price, equal or up in equity, and equal or up in debt — or replace reduced debt with out-of-pocket cash. Any shortfall surfaces as boot and is taxed to the extent of your realized gain.

Worked example: full deferral

You sell a property for $3,000,000 with a $1,000,000 mortgage. Net equity to the QI: $2,000,000 (ignoring closing costs for simplicity). You buy for $3,200,000 with a new $1,200,000 mortgage and $2,000,000 of QI funds. Purchase price up, equity up (or equal), debt up. Fully deferred.

Worked example: cash boot

You sell for $3,000,000 / $1,000,000 mortgage → $2,000,000 to QI. You buy for $2,800,000 with a $1,000,000 mortgage and $1,800,000 of QI funds. $200,000 of cash returns to you — cash boot. Taxable to the extent of your gain.

Worked example: mortgage boot

You sell for $3,000,000 / $1,000,000 mortgage. You buy for $3,000,000 but with only $600,000 of new debt and $2,400,000 of cash — $400,000 of debt relief. That debt reduction is mortgage boot. You can offset mortgage boot by bringing in $400,000 of fresh cash at closing.

Partial exchanges

Partial exchanges are allowed. You can take cash out, accept boot, and defer the rest. This is often the right answer when a portion of the gain is needed for liquidity, debt paydown, or another use.

07. The trade-up, trade-across, and trade-down plays

A 1031 exchange is a tool. The right tool use depends on what you are trying to accomplish. We see four archetypal plays.

The trade-up (increase basis and income)

Sell a smaller property; buy a larger one. The classic upgrade — more square footage, better tenant, longer lease, tighter cap rate. Works especially well when accessing agency or life-company debt tiers that open up above $5M or $10M purchase prices.

The trade-across (asset-class rotation)

Sell multifamily, buy NNN retail. Sell industrial, buy storage. Asset-class rotation lets you move from management-intensive to passive, or from one cycle stage to another (e.g., from a saturated multifamily submarket to an under-supplied industrial one).

The trade-down (consolidation or passive transition)

Sell a management-intensive portfolio, buy a smaller DST or absolute-NNN replacement. This is the common pre-retirement play — trading operational intensity for quieter income. A pure trade-down into DSTs exits active management entirely.

The split (diversification)

Sell one large property, buy several smaller ones. The Three-Property or 200% Rule accommodates identifying multiple replacements. Use to diversify geographic exposure, asset class, or tenant concentration.

08. Reverse, improvement, and drop-and-swap structures

Reverse exchange

You need the replacement property now but your downleg hasn't sold. A reverse exchange parks title with an Exchange Accommodation Titleholder (EAT) until the downleg closes, preserving the like-kind treatment. Governed by Rev. Proc. 2000-37. More expensive and more complex than a forward exchange — expect additional $10K–$25K in costs.

Improvement exchange

You want to use exchange funds to build on or renovate the replacement property. An EAT takes title while improvements are made with exchange funds; the completed property transfers to you inside the 180-day window. All improvements you want credited toward the exchange must be completed by day 180.

Drop-and-swap

The partnership owns real estate. Some partners want cash, some want to 1031. Partnership interests are not like-kind property. A drop-and-swap distributes the real estate as tenant-in-common (TIC) interests, and each partner then independently sells, exchanges, or holds their share.

The IRS scrutinizes timing closely. A drop immediately before a sale can be challenged as a step transaction. Best practice is a substantial gap (ideally more than a year); with careful structuring, shorter gaps succeed but carry additional risk. This is not a DIY structure — involve experienced counsel early.

09. The DST backup plan

A Delaware Statutory Trust lets you hold a fractional beneficial interest in institutional real estate that qualifies as like-kind. IRS Rev. Rul. 2004-86 established the treatment. Most 1031 buyers should identify at least one DST on their 45-day list even if they have no intention of using it.

Why: if your primary replacement deal falls out on day 43, your identification list is frozen. Without a DST on the list, you lose the exchange entirely. With one on the list, you have a passive, closeable fallback.

When DSTs are the right answer (not just the backup):

• Exiting active management for truly passive income
• Diversifying across multiple properties and markets with modest 1031 proceeds
• Estate-planning scenarios where you want passive, easily divided real estate holdings

When DSTs are the wrong answer:

• You want operational control, refinance rights, or forced-sale triggers
• You have a short hold horizon — DSTs are illiquid
• You are sensitive to sponsor fee loads (DST offerings carry acquisition, asset management, and disposition fees that add up)

10. State minefields (CA, MA, MT, OR)

Federal 1031 treatment is one question. State tax is another. Most states conform to federal treatment; a handful have enacted \"clawback\" or similar provisions that recapture deferred gain when you eventually sell a replacement property acquired with in-state proceeds.

California

California tracks deferred gain from California-source property. When you eventually sell a replacement property in a non-conforming state, California seeks to tax the original deferred gain. Filing obligations and payment timing depend on facts — a California-source 1031 buyer should consult a CA-experienced CPA annually during the hold period.

Massachusetts, Montana, Oregon

MA, MT, and OR have clawback or similar reporting rules for certain interstate exchanges. The specifics vary and change; verify current state guidance with a CPA before exchanging across state lines.

Practical advice

Before doing an interstate exchange (or any exchange where the replacement property is in a different state than the relinquished), check (a) whether your source state has a clawback rule, (b) whether the replacement state requires any filing, and (c) whether the combined state treatment changes your planning. Federal deferral does not guarantee state deferral.

11. Depreciation recapture math

Section 1031 defers not just capital gain but also depreciation recapture. Understanding how depreciation flows through an exchange is critical because the deferred amount compounds over multiple exchanges.

Basis in the replacement property

Your basis in the replacement property equals your basis in the relinquished property, plus any additional cash or debt you brought into the exchange, minus any boot received, plus any gain recognized. The deferred gain effectively reduces your starting basis on the replacement — which reduces future depreciation and increases future recapture exposure.

Recapture rates

Unrecaptured Section 1250 gain (the depreciation recapture on real property) is taxed at a maximum federal rate of 25% when eventually recognized. That rate sits on top of any remaining capital gain (taxed at 0/15/20% federal, plus 3.8% net investment income tax for many investors). State rates apply separately.

Worked example

You originally bought for $1,000,000, depreciated $400,000 over 15 years (basis down to $600,000), and sell for $2,000,000. Realized gain: $1,400,000, of which $400,000 is unrecaptured Section 1250 gain and $1,000,000 is long-term capital gain. In a successful 1031, both amounts are deferred; your basis in the replacement carries forward at $600,000 plus any new cash/debt contributed, meaning the $400,000 of recapture rides into the new property until you eventually sell outside an exchange (or die holding and get a step-up).

12. QI vetting checklist

Ask every candidate QI in writing:

• Where are exchange funds held? In segregated accounts by exchanger, or pooled?
• What bank holds the funds? What is that bank's credit rating?
• What is the firm's fidelity bond amount? What does it cover?
• What is the firm's errors-and-omissions (E&O) policy limit? Who underwrites it?
• What is the firm's balance sheet? Is financial information available?
• How long has the firm been in business? How many exchanges do they process annually?
• Is the firm bonded and insured for reverse and improvement exchanges? (If you think you'll need one.)
• Does an exchange attorney review your exchange documents?
• What is the full fee schedule, including wire fees, extension fees, and any per-identification charges?
• Do they provide a written exchange agreement and identification forms in advance of the downleg closing?

A reputable QI answers all of these without hesitation and in writing. A vague answer is your cue to look elsewhere.

13. 45/180-day timeline tracker

Recommended cadence for a forward exchange starting on the downleg closing date (\"D\"):

• D − 30 days: Engage QI, sign exchange agreement, confirm exchange account wire instructions with title company.
• D − 14 days: Begin replacement-property search. Line up at least 3 candidates. Start initial conversations with sellers/brokers.
• D − 7 days: Confirm title company understands the exchange structure. Confirm wiring sequence with QI.
• D + 0: Downleg closes. Funds wire to QI. Clock starts.
• D + 1 to D + 14: Primary and secondary candidate properties identified, LOIs submitted, initial due diligence opened.
• D + 14: If no primary deal under LOI, accelerate search and initiate DST backup identification.
• D + 30: If no LOI signed on primary, seriously commit to a DST identification.
• D + 40: Draft and review identification form with QI and attorney.
• D + 45: Deliver signed identification form to QI by midnight.
• D + 60 to D + 120: Execute on primary deal: purchase agreement signed, due diligence, financing, title, closing docs.
• D + 150: Target close on replacement. Buffer the remaining 30 days for wire timing and closing delays.
• D + 180: Final deadline. Close before midnight or exchange fails.

14. Identification form language

Your QI will provide an identification form. Generic template language for reference (check your QI's actual form):

\"Pursuant to Treasury Regulations § 1.1031(k)-1, I hereby identify the following real property as potential replacement property for the property relinquished on [DATE] located at [ADDRESS / LEGAL DESCRIPTION]:
1. [Street address, city, state, ZIP of replacement property 1, plus APN or legal description]
2. [Street address, city, state, ZIP of replacement property 2, plus APN or legal description]
3. [Street address, city, state, ZIP of replacement property 3, plus APN or legal description]
I elect to identify under the [Three-Property Rule / 200% Rule / 95% Rule].\"

Sign, date, and deliver to your QI via a method that creates a clear paper trail — tracked email with PDF attachment is standard; some QIs require certified mail. Keep copies of the signed form and proof of delivery.

15. Red flags and war stories

• \"I'll sell first and find something later.\" The second-most-common reason exchanges fail. Start the search before the downleg goes under contract.
• \"My attorney can be the QI since they already know the deal.\" Your attorney is a disqualified person under the two-year agent rule. Exchange voids.
• \"The seller wants to hold back 5% as a holdback escrow.\" A 5% holdback can be treated as constructive receipt depending on terms. Structure the escrow through the QI or consult counsel before agreeing.
• \"I'll just do a partial exchange.\" Fine, but understand the cash portion is fully taxable. Model both options with your CPA before committing.
• \"The replacement property is in a different state, so state tax is someone else's problem.\" CA, MA, MT, OR have clawback. Your source state follows you.
• \"My partner and I will each take half.\" Partnership interests aren't like-kind. Drop-and-swap requires advance planning.
• \"The DST fees look high but the yield is 6%.\" The 6% yield is typically on investor capital after fees — but the economic reality of fees still shows up in the exit. Read the PPM carefully.
• \"I'll just identify the 95% rule so I can add more options.\" You must close on 95% of combined identified value. Pick another rule.

16. Playbook FAQ

Can I 1031 a primary residence?

No. Section 121 (the $250K/$500K primary-residence gain exclusion) handles that. 1031 requires investment or business-use property.

Can I 1031 into a short-term rental?

Yes, if it is held primarily for investment and rented consistently at market rates. Personal use greater than 14 days per year or 10% of rental days may disqualify it from \"investment\" status.

Can two related parties 1031 with each other?

Yes, but with specific holding-period rules (generally two years) and disclosure requirements. Get an exchange attorney involved.

What happens if I miss day 45?

Exchange fails. The downleg sale becomes a taxable event. Plan for this; don't pray against it.

What happens if I miss day 180?

Same — exchange fails. The partial completion doesn't save you unless you completed acquisition of identified property within the window.

Can I finance the replacement with a mortgage larger than the downleg's mortgage?

Yes. Higher replacement debt supports full deferral as long as purchase price and equity also meet or exceed the downleg's.

Is there a lifetime limit on 1031 exchanges?

No. You can chain 1031 exchanges indefinitely. Each exchange rolls basis and deferred recapture into the next property.

What happens when I die holding a 1031 property?

Under current law, heirs receive a step-up in basis to fair market value at date of death, erasing the deferred gain and recapture. This is why \"swap till you drop\" is a real estate-planning strategy.

Does the IRS audit 1031 exchanges often?

Exchanges are reported on Form 8824 with each return. Audit rates are not published separately but the structural points (QI, timing, identification, boot math) are the usual audit focus. Keep clean files.

Should I use the same QI for every exchange?

If they are reputable, yes — relationship continuity matters when things get complex. Re-verify annually that the firm's financials and insurance are intact.

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This playbook is generalized guidance. Your actual exchange involves specific facts — your basis, your state, your entity structure, your property type, your debt situation, your partnership structure, your heirs — none of which we know. The difference between a successful 1031 and a failed one is often the difference between working with an experienced QI, CPA, and real estate attorney, or trying to figure it out by reading a newsletter. Hire the professionals. We're a publication, not your fiduciary.