1031 exchange
A 1031 exchange, named for section 1031 of the Internal Revenue Code, lets an investor sell real property held for business or investment purposes and roll the proceeds into like-kind real property without recognising capital gain at the time of sale. The tax is deferred, not forgiven.
The two clocks#
Both run from the day the relinquished property closes, and both are strict.
45 days to identify replacement property in writing. Usually up to three properties, or more under the 200% rule so long as their combined value does not exceed twice the value of what was sold.
180 days to close on identified property — or the due date of that year's tax return including extensions, whichever falls first.
The clocks run concurrently. The 180-day period is not 45 plus 180; it is 180 total, leaving 135 days after identification closes. Missing either deadline by a day collapses the exchange into a fully taxable sale, and the IRS does not grant extensions outside presidentially declared disasters.
The qualified intermediary#
The investor must not receive the proceeds. A qualified intermediary holds them from the sale through to the replacement purchase.
Taking constructive receipt of the money — even briefly, even into an account the investor controls and does not spend from — invalidates the exchange. The intermediary has to be engaged before the first closing, not retrofitted afterward.
What qualifies#
Real property only. The 2017 tax law removed personal property from section 1031 entirely, so equipment, vehicles and artwork no longer qualify.
Within real property the like-kind test is generous: almost any US real estate held for investment is like-kind to almost any other. A duplex can be exchanged for farmland, farmland for a strip mall. What does not qualify is a primary residence, or property held primarily for resale — which is why a flipper's inventory generally cannot be exchanged.
The Minnesota timing problem nobody mentions#
Here is an arithmetic collision specific to this state.
A Minnesota sheriff's sale does not deliver a property. It delivers a sheriff's certificate and a redemption period, and in most cases that period is six months. Six months, counted from any date in the calendar, is 181 to 184 days — never 180 or fewer.
So an investor buying at a Minnesota sheriff's sale cannot have the redemption period expire inside a 180-day exchange window. It is always at least a day too long, and usually four.
That does not settle how a sheriff's certificate is treated for exchange purposes, which is a question for a tax adviser on the specific facts. But the day count is the day count, and anyone planning to land an exchange on a foreclosure purchase should run it before committing, not after.
Tax-forfeited land sales, by contrast, convey outright with no redemption period attached, which makes them a structurally cleaner fit for a deadline this unforgiving.
Boot#
Where the replacement property costs less, or carries less debt, or where cash comes out of the transaction, the difference is boot and it is taxable. Full deferral requires equal or greater price, equal or greater debt, and all cash reinvested.