What is a 1031 Exchange?
Named after Section 1031 of the Internal Revenue Code, a **1031 Exchange** (also called a Like-Kind Exchange) allows an investor to sell a property and reinvest the proceeds into a new property of equal or greater value, deferring all capital gains and depreciation recapture taxes.
The Golden Rule of 1031 Exchanges
To qualify for tax deferral, the property being sold and the property being bought must both be held for investment or for use in a trade or business. Your primary residence (the home you live in) does not qualify.
Strict Timing Rules
The IRS is extremely strict about the timeline for a 1031 exchange. If you miss a deadline by even one day, the entire exchange becomes taxable.
- The 45-Day Rule: From the day you sell your property, you have 45 days to "identify" the new property you intend to buy in writing.
- The 180-Day Rule: You must close on the new property within 180 days of the sale of the old property (or by the due date of your tax return).
What is "Like-Kind" Property?
Contrary to popular belief, "like-kind" is very broad. You can sell an apartment building and buy a warehouse, or sell a strip mall and buy a rental house. As long as it is real estate held for investment in the United States, it generally qualifies.
The Role of the Qualified Intermediary (QI)
You cannot touch the money from the sale. If the cash hits your bank account, the 1031 exchange is void. You must hire a **Qualified Intermediary** to hold the funds in escrow between the sale of the old property and the purchase of the new one.
Why This Matters for Depreciation
One of the biggest benefits of a 1031 exchange is deferring the **Depreciation Recapture**. As you move from property to property over decades, you essentially keep using the government's tax money to fund your growth. Pro investors often use the "Swap Til You Drop" strategy, rolling over properties until they pass away, at which point their heirs get a "stepped-up basis," effectively eliminating the deferred taxes forever.
Planning a Real Estate Sale?
Use our Rental Property Calculator to estimate how much depreciation you've taken and what your potential recapture tax might be without an exchange.
Rental Property Calculator →MyDepreciation Editorial Team
Tax & Accounting Experts
Last reviewed: March 2026
Our editorial team includes tax professionals and financial analysts who review every calculator and guide for accuracy. All content is cross-referenced with IRS Publication 946 and current tax legislation.