IRC § 1031 Exchange (Internal Revenue Code Section 1031)

What Is Internal Revenue Code (IRC) § 1031 (Section 1031 of the Internal Revenue Code)?

Internal Revenue Code § 1031 — officially numbered "IRC § 1031" and referenced interchangeably as IRS Section 1031, 1031 internal revenue code, code section 1031, or section 1031 irs code — is the United States federal tax law that governs tax-deferred "like-kind" exchanges of real property. When investors search for phrases like "internal revenue code section 1031" or "1031 internal revenue code", they are looking for the precise statutory text codified under Title 26 of the U.S. Code (the Internal Revenue Code) at Part III, Subchapter K, Chapter 1.

Under Internal Revenue Code Section 1031(a)(1): "No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment."

In plain English, this means that when you sell one investment property and buy another qualifying property following the section 1031 irs code rules, you do NOT have to pay federal (and usually state) capital gains taxes — or depreciation recapture taxes — in the year of sale. Instead, those taxes are "deferred" until you eventually sell the final replacement property in a taxable sale (potentially decades later, or never if you pass the property to heirs with a stepped-up basis).

Why do people search for so many different orderings of the same phrase? Because the statute has three equally common references:

• "internal revenue code section 1031" — the full, formal legal reference (what lawyers and the IRS use)
• "1031 internal revenue code" — the investor shorthand, leading with the memorable 3-digit section number
• "irs section 1031" / "section 1031 irs code" — mixing in the IRS as the enforcing agency
• "code section 1031" — the accountant's shorthand
• "cost section 1031" — investors researching the cost/fees of executing a 1031 exchange with a qualified intermediary

This page is intentionally optimized to answer all 5 ordering variants of the 1031 statute name, because Google searchers enter these terms in different patterns depending on their background (attorney, CPA, investor, first-time 1031 user).

What is a 1031 Exchange?

A 1031 Exchange is a tax-deferred transaction that allows real estate investors to sell one investment property and purchase another "like-kind" property without paying capital gains tax at the time of sale. The IRS considers this a "swap" rather than a sale, which is why taxes are deferred instead of eliminated.

The concept is simple: instead of paying taxes on the profit from selling your property, you reinvest all the proceeds into a new property of equal or greater value. This allows your entire investment to continue growing without being reduced by taxes.

Source: IRS Topic No. 409 Capital Gains and Losses

Key Requirements for a 1031 Exchange (Section 1031 IRS Code Rules)

1. Like-Kind Property & 45-Day / 180-Day Timeline Rules

Under the section 1031 irs code, both the property you sell (relinquished property) and the property you buy (replacement property) must be "like-kind." For real estate, this is broadly defined — nearly any real property held for investment or business purposes qualifies, including:

• Residential rental properties (single-family homes, duplexes, apartments)
• Commercial properties (office buildings, retail space, warehouses)
• Raw land
• Industrial properties
• Mixed-use properties

Important: After the 2017 Tax Cuts and Jobs Act, only real property qualifies for 1031 exchanges. Personal property (like equipment, vehicles, or artwork) no longer qualifies.

2. 45-Day Identification Period

You have exactly 45 calendar days from the date you close on the sale of your property to identify potential replacement properties. The identification must be in writing and delivered to your qualified intermediary.

There are three identification rules:

• Three-Property Rule: Identify up to 3 properties of any value
• 200% Rule: Identify any number of properties as long as their total value doesn't exceed 200% of the sold property's value
• 95% Rule: If you identify more than 3 properties exceeding 200% value, you must acquire at least 95% of the identified properties' total value

3. 180-Day Exchange Period

You have 180 calendar days from the sale date to close on the replacement property. This period includes the 45-day identification period, so you actually have 135 days after identifying the property to close the purchase.

The 180-day period cannot be extended, even if it falls on a weekend or holiday. Missing this deadline will result in the exchange being disqualified.

4. Qualified Intermediary

You cannot receive the proceeds from the sale directly. You must use a qualified intermediary (QI) — a neutral third party who holds the funds and facilitates the exchange. The QI ensures compliance with IRS rules and handles the paperwork.

The QI is critical because if you "constructively receive" the funds at any point, the exchange is disqualified. Constructive receipt means you have control over the funds, even if you don't physically receive them.

5. Equal or Greater Value

To defer all taxes, the replacement property must be of equal or greater value than the relinquished property. You must also reinvest 100% of the proceeds.

Types of 1031 Exchanges (IRC § 1031 Variations)

1. Delayed Exchange

The delayed exchange is the most common type. You sell your property first, then use the 45-day identification period and 180-day exchange period to find and purchase a replacement property.

2. Reverse Exchange

A reverse exchange allows you to buy the replacement property before selling your current one. This is useful in competitive markets where you need to act quickly. However, reverse exchanges are more complex and require a qualified intermediary to hold title to either the old or new property.

3. Improvement Exchange

Also called a "build-to-suit" exchange, this allows you to use exchange funds to make improvements to the replacement property before closing. The improvements increase the property's value to meet the equal-or-greater-value requirement.

Benefits of a 1031 Exchange (Internal Revenue Code 1031 Advantages)

1. Defer Taxes Indefinitely

The biggest benefit is the ability to defer capital gains taxes indefinitely. This allows you to keep more money working for you in your investment portfolio.

2. Grow Your Portfolio Faster

By reinvesting all proceeds, you can acquire larger or better properties than you could if you paid taxes first. This compounds your wealth over time.

3. Conserve Cash Flow

Instead of paying taxes, you keep that capital invested, which can generate additional rental income or appreciation.

4. Estate Planning Benefits

When you pass away, your heirs receive a stepped-up basis on the property, potentially eliminating capital gains taxes entirely.

Boot: What Happens When You Don't Reinvest All Proceeds (Code Section 1031 Boot Rules)

Any proceeds not reinvested in the replacement property are considered "boot" under code section 1031 and are subject to capital gains tax. Boot can include:

• Cash boot: Money you receive from the sale that isn't reinvested
• Mortgage boot: When the replacement property has less debt than the relinquished property
• Personal property boot: Non-real estate items included in the exchange

The amount of boot determines how much tax you'll owe. If you receive $50,000 in cash boot and have a $100,000 gain, you'll pay taxes on the $50,000 boot per section 1031 irs code rules.

Cost Section 1031 — Qualified Intermediary (QI) Fees & Total Expenses

When investors search for "cost section 1031", they want to know the real, out-of-pocket cost to execute a 1031 exchange with a qualified intermediary. The cost section 1031 of this guide breaks down typical fees in 2026:

Average TOTAL cost section 1031 (standard delayed exchange): $1,200 – $3,500 for a single property. This cost is almost always justified when the deferred capital gains tax exceeds $15,000+ (common for investment properties held 5+ years).

Are 1031 QI fees tax-deductible? Yes — qualified intermediary fees and most cost section 1031 expenses are treated as "costs of sale" for IRS purposes, reducing the amount of gain recognized (or increasing basis in the replacement property).

How to Execute a 1031 Exchange Step-by-Step

1. Plan ahead: Start researching replacement properties before listing your current property
2. Hire a qualified intermediary: Choose a QI with experience in 1031 exchanges
3. List and sell your property: Ensure the sale contract includes 1031 exchange language
4. Identify replacement properties: Submit written identification to your QI within 45 days
5. Close on replacement property: Complete the purchase within 180 days of sale
6. Complete paperwork: Your QI will provide documentation for your tax records

Common Mistakes to Avoid (Internal Revenue Code 1031 Violations)

• Missing deadlines: The 45-day and 180-day periods under the internal revenue code 1031 are strict — no extensions
• Receiving funds directly: Always use a qualified intermediary per code section 1031
• Not identifying enough properties: Identify multiple options in case deals fall through
• Ignoring boot: Even small amounts of boot can trigger tax liability
• Forgetting about depreciation recapture: Depreciation deductions may be recaptured as ordinary income

1031 Exchange Example (Internal Revenue Code Section 1031 Calculation)

Let's say you purchased a rental property for $200,000 and depreciated it by $50,000 over the years. You sell it for $400,000 and do a 1031 internal revenue code exchange:

• Adjusted basis: $150,000 ($200,000 - $50,000 depreciation)
• Capital gain: $250,000 ($400,000 - $150,000)
• Without internal revenue code section 1031: ~$37,500 (15% federal) + state tax = ~$40,000+ in taxes
• With internal revenue code section 1031: $0 taxes paid — $400,000 reinvested in new property

By using the 1031 internal revenue code, you keep $40,000 more working for you, which can significantly grow your portfolio over time.

FAQ — Internal Revenue Code Section 1031 (Frequently Asked Questions)

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