Real Estate Tax Calc
Rule 1: The held-for requirement
Both the relinquished property (what you sell) and the replacement property (what you buy) must be held for "productive use in a trade or business or for investment." This means:
Investment intent must exist at the time of the exchange. The IRS looks at why the property was acquired and why it is being sold. A property recently purchased with the immediate intent to flip is likely dealer property, not investment property. A property held for many years as a rental and then sold in an exchange is clearly investment property.
After the exchange, the replacement property must continue to be held for investment or business use. If you immediately convert the replacement property to personal use after the exchange, the IRS may argue that the "held for investment" requirement was never met. Standard guidance suggests holding the replacement property for at least 1–2 years before converting to personal use, though the minimum period is not specified by statute.
Properties that fail the held-for requirement include primary residences, vacation homes used primarily for personal enjoyment, and dealer inventory (properties a developer or flipper buys to sell in the ordinary course of business).
Rule 2: Like-kind property requirement
Both properties must be "like-kind" to each other. For real property, the standard is broad: any US real property is like-kind to any other US real property, regardless of property type (residential, commercial, industrial, raw land). A rental duplex is like-kind to a warehouse; farmland is like-kind to an apartment complex.
US real property is NOT like-kind to foreign real property. If your relinquished property is in California and the replacement is in Canada, the exchange does not qualify under §1031.
Since TCJA 2017, personal property (equipment, vehicles, machinery) no longer qualifies for §1031 exchange treatment at all. Only real property qualifies.
Rule 3: The same-taxpayer requirement
The entity or individual that transfers the relinquished property must be the same as the entity or individual that acquires the replacement property. This is the "same taxpayer" rule.
Common violations of the same-taxpayer rule:
An individual sells a property personally but takes title to the replacement in a newly formed LLC. (Exception: if the LLC is a single-member disregarded entity owned by the same individual, the taxpayer is legally the same.)
A partnership sells the relinquished property, but individual partners buy the replacement (the "drop and swap" or "swap and drop" issue—these require careful structuring to comply with the same-taxpayer rule).
Property held as tenants in common is sold and one co-owner tries to do a solo exchange with the other co-owner's proceeds. Each co-owner must do their own exchange.
Rule 4: The 45-day identification deadline
Within 45 calendar days of closing the relinquished property, you must submit a written, signed identification of potential replacement properties to the qualified intermediary (or another party involved in the exchange). Identification must be specific—property addresses or legal descriptions. Verbal identification does not count.
Identification rules for choosing how many properties to identify:
3-Property Rule (most common): Identify up to three replacement properties of any value. You do not have to acquire all three—you just have to acquire one or more of the identified properties.
200% Rule: Identify any number of properties as long as the aggregate fair market value of all identified properties does not exceed 200% of the relinquished property's FMV. Useful when you want to identify more than three properties.
95% Rule: Identify any number of properties of any total value, but you must actually acquire at least 95% of the aggregate FMV of all identified properties. This is rarely used because it is very difficult to satisfy.
Rule 5: The 180-day closing deadline
The replacement property must actually close—meaning you must take legal title—no later than the earlier of:
180 calendar days after the relinquished property closes; OR
The due date of your federal income tax return for the year of the exchange (including extensions). If your relinquished property closes in December and you do not file a tax extension, your replacement property must close by April 15—not June (180 days from December).
The 180-day period runs from the same starting point as the 45-day period: the date the relinquished property closes.
Rule 6: Boot rules and the equal-or-greater price requirement
To defer all gain, the replacement property must be at least equal in value and equal or greater in debt to the relinquished property. Any deviation creates "boot"—taxable proceeds.
Cash boot: If the replacement property's price is less than the relinquished property's selling price, the unused exchange funds are cash boot—taxable up to the amount of gain.
Mortgage (debt) boot: If the debt on the relinquished property exceeds the debt assumed on the replacement, the net debt relief is mortgage boot—taxable up to the amount of gain.
Offsetting boot: Cash and mortgage boot can offset each other. Adding cash eliminates mortgage boot dollar for dollar, but assuming more debt does not offset cash boot.
Worked example: calculating boot
An investor sells a rental house for $450,000. The outstanding mortgage is $180,000, so net equity going to the QI is $270,000. The investor buys a replacement for $400,000, taking a $100,000 mortgage.
Cash boot analysis: Replacement price ($400,000) < relinquished price ($450,000). Exchange funds unused: $270,000 − ($400,000 − $100,000 mortgage) = $270,000 − $300,000 = −$30,000 (negative means investor adds cash, not that boot is received). Let's recalculate: exchange funds = $270,000. Replacement needs = $400,000 − $100,000 financing = $300,000 out of exchange. But the investor only has $270,000 in exchange. Wait—$270,000 ≠ $300,000. The investor must add $30,000 cash. No cash boot received. But: replacement price ($400,000) < relinquished price ($450,000), so $50,000 in value is unaccounted for if no cash is added... Let's simplify:
Say the investor buys a $400,000 replacement with $100,000 mortgage and $270,000 from QI, but $270,000 + $100,000 = $370,000, not $400,000. The investor must add $30,000 cash at closing. Still no boot received.
However: relinquished property value was $450,000 and replacement is $400,000. To avoid boot, the investor needs to buy replacement worth at least $450,000. Buying at only $400,000 means the QI returns $50,000 ($450,000 − $400,000) to the investor—and that $50,000 is cash boot, taxable to the extent of gain.
Net debt relief analysis: Debt on relinquished = $180,000. Debt on replacement = $100,000. Net debt relief = $80,000 of mortgage boot (in addition to any cash boot).
Total boot in this scenario: $50,000 cash boot + $80,000 mortgage boot = $130,000 of boot, taxable up to the realized gain. The investor would need to add $130,000 of cash to completely eliminate all boot: $50,000 to cover the price shortfall and $80,000 to offset the net debt relief.
Rule 7: Related-party restrictions
IRC §1031(f) imposes special rules when an exchange involves related parties. If you exchange with a related party—meaning you buy the replacement property from a related party or sell the relinquished property to a related party—the exchange is disqualified if either party disposes of the exchanged property within two years.
Related parties for this purpose include: spouses, ancestors (parents, grandparents), lineal descendants (children, grandchildren), siblings, and entities (corporations, partnerships, LLCs) in which you own more than 50%.
Example: You sell your rental to your brother in a 1031 exchange and buy a replacement from an unrelated party. If your brother then sells the property he received from you within two years, your deferred gain becomes taxable immediately. The two-year clock runs from the date of the exchange.
Frequently asked questions
Is there a minimum holding period to qualify for a 1031 exchange?
The IRS has not specified a minimum holding period, but the property must be held for investment or business use. If you sell immediately after purchasing, the IRS may argue there was never investment intent. Common guidance suggests at least 1–2 years of rental or investment holding provides strong evidence of qualifying intent, though shorter periods can qualify based on facts and circumstances.
What is boot in a 1031 exchange?
Boot is anything received in the exchange that is not like-kind real property. It includes cash (any exchange funds not reinvested), net mortgage relief (when relinquished property debt exceeds replacement debt), and the FMV of non-like-kind property received. Boot is taxable to the extent of realized gain.
What is the same-taxpayer rule in a 1031 exchange?
The taxpayer who sells the relinquished property must be the same taxpayer who acquires the replacement property. An individual cannot sell personally and buy in an LLC (unless it is a single-member disregarded entity). A partnership cannot sell and have individual partners buy the replacement. Violating the same-taxpayer rule disqualifies the exchange.
What are the related-party rules in a 1031 exchange?
Under IRC §1031(f), if you exchange with a related party (family member, controlled entity), the exchange is disqualified if either party disposes of the exchanged property within two years. Related parties include spouses, ancestors, lineal descendants, siblings, and entities in which the taxpayer holds more than 50% ownership.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.