Most 1031 exchanges do not fall apart on the tax law. They fall apart on the calendar. We see it every year. A client closes escrow in Culver City, gets busy, and calls us on day 41 with nothing identified. At that point there is no fix.

Here is how we actually run one.

What qualifies

You have to be selling real property held for investment or use in a trade or business, and buying the same. Like-kind is broad for real estate. A duplex in Highland Park for raw land in Riverside is fine.

  • Held for investment or business use, not personal use.
  • Your primary residence is out. A vacation rental can work if personal use was minimal.
  • Foreign property is not like-kind to US property.

The two clocks

45 days to identify. From the day your relinquished property closes, you have 45 calendar days to identify replacement property in writing to your qualified intermediary. No extensions, except when the IRS postpones deadlines for a federally declared disaster. Weekends and holidays count.

180 days to close. You have 180 days from that same closing to take title, or until your tax return due date (including extensions) for the year of the sale, whichever comes first. A sale late in the year can lose weeks if you file without extending.

Line up your qualified intermediary before you sign the sale contract, not after. Once the proceeds touch your own account, the exchange is dead.

Boot

Boot is anything you receive that is not like-kind property. Cash left over, or debt you shed and do not replace. You pay tax on it in the year of the exchange.

Depreciation recapture

If you have been taking bonus depreciation under section 168(k), and most of our cost seg clients have, you are sitting on recapture. The 5- and 7-year property a cost seg study creates is Section 1245 property, recaptured as ordinary income, not capped at 25%. The 15-year land improvements are generally Section 1250 property. The building structure is Section 1250, taxed as unrecaptured gain at up to 25% federal. Sell outright and both layers come due, plus NIIT and California tax on top.

A 1031 carries that basis forward. Nothing is forgiven, just postponed. One catch is that Section 1245 recapture isn't fully deferred in a real-estate-for-real-estate exchange unless the replacement property has enough Section 1245 property of its own, so run the numbers before you close.

DSTs when you cannot find a deal

If the 45 days are closing in and nothing pencils, a Delaware Statutory Trust is a legitimate landing spot. Rev. Rul. 2004-86 treats a DST interest as like-kind real property.

When to call us

The useful conversation happens about six months before you list. If you are thinking about selling in 2026, send us the property and the debt figures and we will model the exchange against a straight sale.

Related reading: Taxable Boot in a 1031 Exchange.