To qualify for a 1031 exchange, you must: sell an investment property (not a primary residence or personal property), identify the replacement property within 45 days of closing the sale, close on the replacement property within 180 days of closing the sale, and reinvest all proceeds through a qualified intermediary. Missing any of these deadlines invalidates the exchange and triggers the taxes.
You cannot receive the sale proceeds during a 1031 exchange — even for a single day. A qualified intermediary holds the funds from your sale and transfers them to the replacement property closing. The QI fee typically runs $800–$1,500 and is a required cost of any exchange. Establish the QI relationship before you close your sale — not after. A delayed QI setup invalidates the exchange.
For real estate, like-kind is broadly defined: you can exchange a single-family rental for a commercial property, a duplex for raw land, a vacation rental for an apartment building. The only requirement is that both properties are held for investment or business use. Primary residences and personal property do not qualify.
If you reinvest less than the full sale proceeds, the uninvested portion called boot is taxable. If you exchange a $500k property and only reinvest $420k, the $80k of boot is subject to capital gains tax. Many investors use 1031s to trade up — exchanging a smaller property for a larger one, increasing their basis and deferring all gains indefinitely.
Dan White is a licensed Virginia real estate agent at Pearson Smith Realty and founder of FreeDealCalc.com. He has been investing in Northern Virginia real estate for 20+ years.