Short answer
Every 1031 exchange has two sides. The relinquished property is the one you sell or give up. The replacement property is the one you buy or receive. Both must be real estate held for investment or for use in a business, but the rules that apply to each are different: the relinquished property starts the clock and sets the value you have to match, and the replacement property must be identified within 45 days, bought within 180 days and titled to the same taxpayer. Investors also call them the "downleg" and the "upleg".
| Relinquished property | Replacement property | |
|---|---|---|
| What it is | The property you sell | The property you buy |
| Timing | Its closing starts the 45-day and 180-day clocks | Identified by day 45, received by day 180 |
| Use | Held for investment or business before the sale | Held for investment or business after the purchase |
| Value | Its net sale price sets the target | Must cost at least that much to defer all the gain |
| Debt | Loan paid off at the sale | New debt or added cash must at least replace it |
| Basis | Your adjusted basis is used up | Takes a carried-over, lower basis |
| Title | In your name or your entity's | Must be in the same taxpayer's name |
| Money | Proceeds go to the qualified intermediary | The QI pays the seller from those proceeds |
On this page
The relinquished property
To qualify, the property you sell must have been held for investment or used in your business. A rental, an office you own and occupy for your business, a warehouse or land held for appreciation all qualify. Your home, a property you fixed up to resell, and property outside the US do not. The law has no fixed minimum holding period, but intent matters; see how long you need to own a property.
Before the sale closes, you sign an exchange agreement with a qualified intermediary and assign the sale contract to it. The net proceeds go to the QI, not to you. The day of that closing is day 0.
The replacement property
Within 45 days you must identify the replacement property in writing, signed by you and delivered to the QI, with an unambiguous description such as a street address or legal description. Most investors use the three-property rule. You then must receive the property by the earlier of day 180 or your tax return due date (with extensions), under Treas. Reg. §1.1031(k)-1. Check your list with the identification validator and see the identification rules.
Matching value and debt
To defer all the gain, two things must be true: the replacement costs at least as much as the relinquished property's net sale price, and you reinvest all of the cash proceeds. Paying off a $400,000 loan on the sale means you need at least $400,000 of new debt or your own added cash on the purchase. Anything short of that is boot and taxable up to your gain. Model it in the 1031 exchange calculator.
Basis and holding period carry over
The replacement doesn't start fresh. Its basis is generally its purchase price minus the gain you deferred, and your holding period for the relinquished property tacks on, so a later sale qualifies for long-term rates right away. Depreciation continues on the carried-over basis; see depreciation in a 1031 exchange.
Example
Jordan sells a rental condo (relinquished) for a net $620,000 and pays off a $220,000 mortgage, so $400,000 goes to the QI. Jordan's adjusted basis is $300,000, so the gain is $320,000. On day 30 Jordan identifies a duplex and two backups. On day 95 Jordan buys the duplex (replacement) for $700,000 using the $400,000 and a $300,000 loan. The price is higher than $620,000 and the new loan is larger than the old one, so all $320,000 is deferred. The duplex's basis is $380,000 ($700,000 minus $320,000).
Replacement property checklist
| Check | Why |
|---|---|
| Real property held for investment or business | Personal use or a plan to resell disqualifies it |
| Located in the US | US and foreign property are not like-kind |
| Not property you already own | You can't buy from yourself; see exchanging into property you already own |
| Not bought from a relative who is cashing out | Related-party purchases are generally disallowed |
| Same taxpayer on title | The seller of the old property must be the buyer of the new one |
| Price at least the old net sale price | A lower price leaves taxable boot |
| Financing ready before day 45 | Loan delays are the most common reason for missing day 180 |
| Due diligence done | Don't buy a weak property just to save tax; see due diligence for replacement property |
Frequently asked questions
What is relinquished property in a 1031 exchange?
The investment or business property you sell or give up. Its sale starts the 45-day identification period and the 180-day exchange period.
What is replacement property in a 1031 exchange?
The like-kind property you acquire with the proceeds. It must be identified in writing within 45 days and received within 180 days of the sale.
Does land qualify for a 1031 exchange?
Yes. Land held for investment is like-kind to buildings and other real estate. Land you are subdividing and selling as lots is held for sale and does not qualify.
What is the fee for a 1031 exchange?
QI fees vary with the type of exchange; a reverse or improvement exchange costs more than a standard delayed exchange. See our page on estimating the costs of a 1031 exchange.
How long do you have to hold replacement property?
The law sets no minimum. You must hold it for investment or business use, and many advisors suggest at least one to two years. The vacation home safe harbor uses 24 months.
Sources
- 26 U.S.C. §1031 (real property held for business or investment)
- Treas. Reg. §1.1031(k)-1 (identification and receipt rules)
- Rev. Proc. 2008-16 (24-month vacation home safe harbor)
- Instructions for Form 8824 (reporting and basis)
This article is general information, not tax or legal advice. Talk to your CPA or tax attorney about your situation.
