US Federal Section 1031 Like-Kind Exchange

Scope

Applies to US taxpayers (sole props, LLCs, partnerships, S/C corps, investors) exchanging real property held for business or investment use under IRC §1031 (real property only, post-TCJA). Tax year 2025. Covers deferred exchanges via qualified intermediary, reverse exchanges, timing/identification rules, boot, basis, related-party and TIC structures, and the §121 interaction. Does NOT cover personal property, crypto, partnership-interest exchanges, or Opportunity Zone deferrals.

Rules

• Held-for-use qualification requirement — To qualify under §1031(a)(1), both the relinquished and replacement property must be held for productive use in a trade or business or for investment (not inventory, not a primary residence — vacation homes need the Rev. Proc. 2008-16 safe harbor of ≥14 rental days and personal use capped at the greater of 14 days or 10% of rental days for the 24 months before and after). (§1031(a)(1); Rev. Proc. 2008-16)
• Real property only since TCJA — Since TCJA, only real property qualifies — personal property, equipment, and cryptocurrency are permanently excluded, and "like kind" for real property is extremely broad (virtually any US real estate for any other US real estate, but never US-for-foreign). (TCJA)
• Qualified intermediary requirement — A deferred exchange requires an unrelated qualified intermediary (not the taxpayer's attorney, accountant, broker, or employee within the prior 2 years) to hold sale proceeds — any actual or constructive receipt by the taxpayer voids the entire deferral. (§1031)
• 45-day identification / 180-day acquisition timing — The replacement property must be identified in writing within 45 days of the relinquished property's closing (using the 3-property, 200%, or 95% rule) and acquired within 180 days, or by the extended due date of the return, whichever is earlier — a taxpayer selling late in the year must file Form 4868 to preserve the full 180 days. (§1031; Form 4868)
• Recognized gain and boot — Recognized gain equals the lesser of realized gain or total boot received, where boot includes cash, net mortgage relief, and any personal property received. (§1031)
• Basis carryover and holding period tacking — Basis in the replacement carries over from the relinquished property, adjusted for boot paid/received and debt assumed/relieved, with the holding period tacking under §1223(1). (§1223(1))
• Reverse exchanges — Reverse exchanges (replacement acquired before the sale) require an Exchange Accommodation Titleholder under the Rev. Proc. 2000-37 safe harbor, with the same 45/180-day structure running from the EAT's acquisition date instead. (Rev. Proc. 2000-37)
• Related-party 2-year monitoring — Related-party exchanges carry a 2-year monitoring requirement under §1031(f) — if either party disposes of their property within 2 years, the original deferred gain is recognized retroactively. (§1031(f))
• Cost-segregated §1245 components excluded — Cost-segregated components previously reclassified as §1245 personal property do NOT qualify for §1031 deferral and trigger immediate ordinary-income recapture even with zero boot received — this must be computed before the exchange closes. (§1245)
• TIC co-ownership structures — TIC (tenant-in-common) co-ownership structures qualify for §1031 only if they satisfy the 15 conditions of Rev. Proc. 2002-22 (no partnership filing, unanimous consent on major decisions, pro-rata revenue/expense sharing) or the IRS will recharacterize the interest as a disqualified partnership interest. (Rev. Proc. 2002-22)
• Reporting and California FTB Form 3840 obligation — Every exchange is reported on Form 8824, and California-relinquished property exchanged for out-of-state replacement triggers a perpetual annual FTB Form 3840 filing obligation (Cal. R&TC §18032) until the replacement is sold or re-exchanged back into California. (Form 8824; Cal. R&TC §18032)

Self-checks

The replacement property was both identified in writing within 45 days AND acquired within 180 days (or the extended return due date, if earlier) of the relinquished property's closing. The qualified intermediary is confirmed NOT to be a disqualified person (no professional services to the taxpayer in the prior 2 years). Boot (cash, net mortgage relief, personal property received) has been computed and compared against realized gain to determine recognized gain. Any §1245 personal property in the relinquished property (including cost-segregated components) has its recapture computed separately — it doesn't defer even with zero boot. If either party is related under §267(b)/§707(b), the 2-year disposition monitoring period is calendared. Form 8824 is prepared for the year of exchange, and California Form 3840 is calendared annually if the relinquished property was California real estate exchanged for an out-of-state replacement.

Sources

IRC §1031 (like-kind exchanges, incl. §1031(a)(1), (a)(2), (a)(3), (b)-(d), (f), (h), (i)) IRC §121(d)(10) (§1031/§121 sequential interaction) IRC §168(i)(7); Treas. Reg. §1.168(i)-6 (depreciation of exchanged-basis property) IRC §1223(1) (holding period tacking) IRC §1245(b)(4); IRC §1250(d)(4) (recapture in like-kind exchanges) IRC §1400Z-2 (Opportunity Zones — mutually exclusive alternative) Tax Cuts and Jobs Act, P.L. 115-97 (2017) (restriction to real property) Treas. Reg. §1.1031(a)-1 (like-kind definition) Treas. Reg. §1.1031(a)-3 (real property definition, TD 9935, Dec. 2020) Treas. Reg. §1.1031(b)-1, §1.1031(d)-1/-2 (boot and basis) Treas. Reg. §1.1031(j)-1 (multiple property exchanges) Treas. Reg. §1.1031(k)-1 (deferred exchange rules, QI, identification) Rev. Proc. 2000-37, as modified by Rev. Proc. 2004-51 (reverse exchange safe harbor) Rev. Proc. 2002-22 (TIC safe harbor) Rev. Proc. 2005-14 (§121 + §1031 stacking) Rev. Proc. 2008-16 (vacation-home safe harbor) Rev. Rul. 2019-24; CCA 202124008 (cryptocurrency not §1031-eligible) Starker v. United States, 602 F.2d 1341 (9th Cir. 1979) Suburban Realty v. United States, 615 F.2d 171 (5th Cir. 1980) Click v. Commissioner, 78 T.C. 225 (1982) DeCleene v. Commissioner, 115 T.C. 457 (2000) Teruya Bros., Ltd. v. Commissioner, 580 F.3d 1038 (9th Cir. 2009) Cal. R&TC §18032 (AB 92, 2013); Cal. R&TC §19133.5 (Form 3840 claw-back and penalty) Form 8824, Form 4797, Form 4868, California Form 3840

Contributed by James Wallach.