Section 1031 of the U.S. Internal Revenue Code (26 U.S.C. § 1031) 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 like-kind real property.

Section 1031 defers rather than forgives tax.

In a Section 1031 exchange, the taxpayer's basis carries over to the replacement property.

Since the Tax Cuts and Jobs Act of 2017, Section 1031 applies only to real property.

Exchanges of personal property no longer qualify under Section 1031.

Code IRS +2 IRS +2 IRS Legal Information Institute Legal Information Institute +1 U.S.

Code +1 IRS +1 Congress.gov +1 Congress.gov U.S.

Code §1031 IRS guidance IRS Bulletin 2020-52 IRS Publication 544 Form 8824 instructions Congress.gov

Internal Revenue Code section 1031SummarySection 1031 of the U.S.

§ 1031) permits taxpayers to defer capital gains and depreciation recapture taxes when disposing of real property used in a trade or business or held for investment by acquiring replacement real property of a "like-kind".

Rather than eliminating tax liability, the exchange carries over the tax basis from the relinquished property to the replacement asset, deferring recognition until a future taxable sale occurs.

Compliance requires adhering to strict statutory timelines and utilizing a qualified intermediary to prevent the constructive receipt of sales proceeds.Key factsSection 1031(a) mandates that no gain or loss is recognized when property held for productive use in trade or business or for investment is exchanged solely for property of like-kind.Following amendments enacted under the Tax Cuts and Jobs Act of 2017, Section 1031 applies exclusively to real property, excluding personal property and intangible assets.Real property located within the United States and real property located outside the United States are statutorily defined as not of like-kind under Section 1031(h).Properties held primarily for personal use, such as primary residences or second homes, as well as property held primarily for inventory or sale (dealer property), do not qualify for Section 1031 treatment.Taxpayers must engage a qualified intermediary (QI) to hold funds during a deferred exchange to prevent actual or constructive receipt, which would invalidate tax deferral.Within 45 calendar days following the close of the sale of the relinquished property, the taxpayer must formally identify potential replacement properties in writing.Under the standard three-property rule, a taxpayer may identify up to three potential replacement properties without regard to their aggregate market value.The acquisition and closing of the replacement property must occur no later than 180 calendar days after the sale of the relinquished property, or by the due date of the taxpayer's federal income tax return for that tax year, whichever is earlier.Cash, debt relief, or non-like-kind property received in the transaction is termed "boot" and triggers immediate taxable gain to the extent of its value.To achieve complete tax deferral, the taxpayer must reinvest all net sales proceeds into the replacement property and maintain an equal or greater debt load.Section 1031(d) specifies that the basis of the newly acquired replacement property equals the adjusted basis of the property given up, decreased by any cash received and increased by any recognized gain.Completed transactions and supporting asset data are formally reported to the Internal Revenue Service via Form 8824 attached to the annual tax return.Contested pointsFederal tax policy discussions periodically feature debate regarding whether to restrict or eliminate real estate tax deferrals under Section 1031, with critics arguing the provision disproportionately advantages high-net-worth investors and proponents contending it fosters market liquidity and capital formation [UNSOURCED].SourcesInternal Revenue Service (IRS); Government Fact Sheet; October 2008; https://www.irs.gov/pub/irs-news/fs-08-18.pdfAmerican Bar Association (ABA); Professional Legal Reference; undated; https://www.americanbar.org/groups/real_property_trust_estate/resources/real-estate/1031-exchange/Thomson Reuters; Tax & Accounting Glossary; January 30, 2026; https://tax.thomsonreuters.com/en/glossary/1031-exchangeFidelity Investments; Financial Educational Resource; undated; https://www.fidelity.com/learning-center/wealth-management-insights/what-is-a-1031-exchangeWikipedia; Collaborative Encyclopedia Database; August 2026; https://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031

The Section 1031 provision defers tax rather than eliminating it.

In a Section 1031 exchange, basis carries over from the relinquished to the replacement property.

Personal-property exchanges were removed from Section 1031.

Section 1031 of the U.S. Internal Revenue Code (26 U.S.C. § 1031) enables taxpayers to defer capital gains and depreciation recapture taxes upon the disposition of real property used in a trade or business or held for investment.

Deferral is provided provided the proceeds are reinvested in qualifying "like-kind" replacement property.

Rather than permanently forgiving tax liability, the statutory mechanism rolls over the historical tax basis from the relinquished asset to the newly acquired property.

The statutory mechanism defers recognition until a subsequent taxable sale occurs.

Strict statutory timelines and the use of a neutral third party are required to maintain compliance and avoid disqualification.

Section 1031 applicability omits personal property, vehicles, equipment, and intangible assets.

Real property located within the United States and real property located outside the United States are statutorily defined as not of like-kind.

Properties held primarily for personal use, such as a primary residence, do not qualify.

Properties held primarily as inventory or dealer property for resale do not qualify.

Under IRS regulations, real properties are broadly considered "like-kind" if they share the same nature or character, regardless of differences in grade, quality, or whether they are improved or unimproved.

Taxpayers must utilize a qualified intermediary (QI) to hold sales proceeds during the transaction to prevent actual or constructive receipt of cash.

Actual or constructive receipt of cash would invalidate tax deferral.

Within 45 calendar days following the closing of the sale of the relinquished property, the taxpayer must formally identify potential replacement properties in writing.

Under the standard three-property identification rule, a taxpayer may designate up to three potential replacement properties without regard to an aggregate value limit.

The acquisition and closing of the replacement property must occur no later than 180 calendar days after the sale of the relinquished property, or by the due date of the taxpayer's federal income tax return for that year, whichever is earlier.

Cash, debt relief, or non-like-kind property received in the exchange transaction is designated as "boot" and triggers immediate taxable gain to the extent of its value.

To achieve complete tax deferral, the taxpayer must reinvest all net sales proceeds and acquire a replacement property of equal or greater value.

To achieve complete tax deferral, the taxpayer must replace any relieved debt with equivalent new debt or cash.

The tax basis of the relinquished property transfers to the replacement property with statutory adjustments, preserving the deferred gain for future recognition.

Completed transactions must be reported to the Internal Revenue Service by filing Form 8824 alongside the taxpayer’s annual federal income tax return.

Federal tax policy debates periodically review whether to restrict or repeal Section 1031 real estate provisions.