The 1031 Exchange: Deferring Tax on an Investment Property Sale

A 1031 exchange lets an investor sell one investment property and buy another while deferring the capital gains tax — but only if the structure is in place before the first sale closes, and only if two hard deadlines are met. Miss either one and the exchange fails entirely; there is no partial credit and no extension for good reasons.

It applies to investment and business property only. Your primary residence does not qualify; that is governed by the federal exclusion covered in our capital gains guide. A rental property, a multi-family you do not occupy, or land held for investment can qualify.

The two deadlines

Both start on the day the sale of the relinquished property closes, and neither is extended for a fallen-through deal or a thin market:

• 45 days to identify the replacement property or properties, in writing, delivered to your qualified intermediary. Calendar days, including weekends and holidays.
• 180 days to close on the replacement property — or the due date of your tax return for that year including extensions, whichever comes first.

A 45-day window to find suitable replacement property in a competitive market is genuinely tight; an investor who has not lined up candidates before selling is starting the clock blind.

The most common way an exchange fails is not a missed deadline. It is that the seller closed first and set it up afterward. Once sale proceeds have touched your hands or your bank account, the exchange is dead — you have constructive receipt, and there is no fixing it retroactively. The qualified intermediary must be engaged before the sale closes.

What is a qualified intermediary, and why is one required?

An independent third party who holds the sale proceeds between the two transactions. You cannot hold the money, and neither can your attorney, your accountant, or your agent if they have acted for you within the prior two years.

Choose carefully. QIs are not federally licensed, they hold very large sums, and failures — through fraud or insolvency — have happened. Ask about bonding, insurance, whether funds are held in segregated qualified escrow accounts, and how long the firm has operated.

Identification must be unambiguous — a street address or legal description — and in writing to the QI within the 45 days.

What is "boot," and why does it create a surprise tax bill?

Boot is anything you receive in the exchange that is not like-kind property: cash left over, or debt relief. To defer the entire gain, you generally need to buy replacement property of equal or greater value, reinvest all of the net proceeds, and carry equal or greater debt.

That last condition catches people. If you sell a property with a $400,000 mortgage and buy one with a $250,000 mortgage without adding cash, the $150,000 of debt relief is boot, and it is taxable — even though no cash reached you. Trade down in any dimension and you owe tax on the difference. That may still be a fine outcome; it should simply not be a surprise.

What is the deferral actually worth?

Time and compounding. The tax is deferred, not forgiven — it follows you into the replacement property through a carried-over basis, and comes due when you eventually sell without exchanging. What you gain is the use of the money in the meantime, invested in a larger asset than you could otherwise have bought.

Investors can also exchange repeatedly. Under current federal law, property held until death generally receives a stepped-up basis, which is the reason "swap till you drop" is a recognized phrase in this corner of tax planning. That treatment is a matter of law and could change; do not build an irreversible plan around it.

Massachusetts note: a gain that does become taxable enters Massachusetts taxable income and can interact with the 4% surtax on income above the indexed threshold — $1,107,750 for tax year 2026.

When is an exchange not worth doing?

When the gain is small relative to the cost and constraint. Between QI fees, the compressed timeline, and the pressure to buy something within 45 days, exchanges push investors into purchases they would not otherwise make. A mediocre property bought to satisfy a deadline can easily cost more than the tax it saved. The deferral is a benefit — it is not a reason to buy.

General information as of 2026, not tax or legal advice. Work with a CPA and a qualified intermediary.