Section 1031 Like-Kind Exchanges: Real Property Only, the 45 and 180 Day Rules, Qualified Intermediaries and Form 8824

Section 1031 defers gain when a taxpayer exchanges real property held for business use or investment for other real property of like kind that will also be held for business use or investment. Since 2018 the exchange must be real property for real property. For a deferred exchange, the replacement property must be identified in writing within 45 days after the transfer of the old property and received by the earlier of 180 days or the due date, with extensions, of the return for the year of transfer. Form 8824 reports the exchange, the recognized gain and the basis of the new property.

What qualifies after 2017?

Section 1031(a)(1) provides that no gain or loss is recognized when real property held for productive use in a trade or business or for investment is exchanged solely for real property of like kind that is held for the same purposes. Section 1031(a)(2) excludes real property held primarily for sale, so a developer's inventory does not qualify.

The Form 8824 instructions confirm that like-kind treatment applies only to real property held for business or investment. Stock, bonds, notes, partnership interests and similar intangibles generally do not qualify, although certain stock, such as cooperative housing stock, does. Regulations effective for exchanges after December 2, 2020 define real property and address incidental personal property.

Equipment, vehicles and other personal property no longer qualify, so a client who swaps a building with furnishings should have the furnishings valued and treated separately.

What are the 45 day and 180 day rules?

Section 1031(a)(3) treats replacement property as not like-kind unless it is identified within 45 days after the relinquished property is transferred and received by the earlier of two dates: 180 days after the transfer, or the due date, including extensions, of the transferor's return for the year of transfer.

Treas. Reg. 1.1031(k)-1(b)(2) states both periods run from the transfer of the relinquished property and end at midnight, on the 45th day for identification and on the earlier of the 180th day or the return due date for the exchange period.

Example: the client transfers the old building on November 20, 2026. Day 45 is January 4, 2027, and day 180 is May 19, 2027. If the client's return for 2026 is due before May 19, 2027 and is not extended, the return due date ends the exchange period early. Filing an extension of the return keeps the full 180 days.

How must replacement property be identified?

Under 1.1031(k)-1(c), the identification must be a written document signed by the taxpayer and sent before the 45 day period ends to the person obligated to transfer the replacement property or to another person involved in the exchange, such as an intermediary or escrow agent. A written exchange agreement signed by all parties before the deadline also counts. The property must be unambiguously described; for real property, a legal description, street address or distinguishable name is generally enough.

The regulation limits how many properties may be identified:

• Three-property rule: up to three properties, regardless of value.
• 200 percent rule: any number of properties if their aggregate fair market value at the end of the identification period does not exceed 200 percent of the aggregate fair market value of the relinquished properties.
• 95 percent rule: if the client exceeds both limits, the identification stands only if the client receives identified property worth at least 95 percent of the aggregate fair market value of all identified properties.

Property received before the identification period ends is treated as identified. Replacement property must be received before the exchange period ends and must be substantially the same property as identified.

What does a qualified intermediary do?

Regulation 1.1031(k)-1(g)(4) provides a safe harbor in which the intermediary is not treated as the taxpayer's agent. The intermediary:

• is not the taxpayer or a disqualified person;
• enters a written exchange agreement with the taxpayer;
• acquires the relinquished property from the taxpayer and transfers it, and acquires the replacement property and transfers it to the taxpayer, as the agreement requires.

The agreement must expressly limit the taxpayer's rights to receive or otherwise obtain money or property held by the intermediary. The regulation's access limits in (g)(6) bar the taxpayer from receiving or using the funds before the exchange period ends, subject to specified exceptions. If the taxpayer gets constructive receipt of the cash before the exchange closes, the exchange fails. The file should hold the signed exchange agreement, the assignment notices, and the intermediary's closing statements.

Worked example: boot and basis

A client transfers rental property with an adjusted basis of $400,000 for $1,000,000 net of selling costs, with no debt. The intermediary holds the proceeds. The client identifies and buys replacement property for $900,000. At the end of the exchange the intermediary returns $100,000 in cash.

1. Realized gain. $1,000,000 amount realized minus $400,000 basis = $600,000.
2. Boot. The $100,000 cash is money received. Under section 1031(b), gain is recognized up to the money plus the fair market value of other property received.
3. Recognized gain. The lesser of realized gain ($600,000) and boot ($100,000) = $100,000.
4. Deferred gain. $600,000 minus $100,000 = $500,000.
5. Basis of the replacement property. Under section 1031(d), the basis of the property given up ($400,000), decreased by money received ($100,000) and increased by gain recognized ($100,000), equals $400,000. Check: $900,000 value minus $500,000 deferred gain = $400,000.

Liabilities count. Under section 1031(d), if the other party assumes a liability of the client, the assumption is treated as money received. Losses are not recognized in an exchange that includes boot, under section 1031(c).

What do related-party exchanges require?

Section 1031(f) denies nonrecognition if the client exchanges with a related person (by reference to sections 267(b) and 707(b)(1)) and either party disposes of the property within 2 years after the last transfer. Exceptions cover death, certain involuntary conversions and cases where tax avoidance was not a principal purpose. The Form 8824 instructions require a filer who made a related-party exchange to file the form for the 2 years after the exchange year, and indirect exchanges through an intermediary count.

What goes on Form 8824 and in the file?

The Form 8824 instructions say anyone who exchanged business or investment real property for like-kind real property must file. Part III figures the gain recognized when cash or other property is part of the exchange and determines the basis of the property received. Multiple exchanges can be summarized on one form with an attached statement.

The workpaper file should contain:

1. Settlement statements for both properties, with the transfer date that starts both clocks.
2. The signed identification letter and proof of delivery before day 45.
3. The exchange agreement and intermediary statements.
4. A boot and liability schedule.
5. The recognized gain and basis computation, tied to Form 8824.
6. Depreciation records for the old and new property. See PP&E capitalization and depreciation.
7. A related-party flag and a two-year follow-up reminder.

For the audit side of real estate clients, see the real estate company audit guide, and for deal structure choices, asset vs stock purchase.

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

Sources

• Legal Information Institute, 26 U.S.C. 1031, Exchange of real property held for productive use or investment: https://www.law.cornell.edu/uscode/text/26/1031
• Legal Information Institute, 26 CFR 1.1031(k)-1, Treatment of deferred exchanges: https://www.law.cornell.edu/cfr/text/26/1.1031(k)-1
• Internal Revenue Service, Instructions for Form 8824: https://www.irs.gov/instructions/i8824

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error