1031 Exchange Planning and Coordination (2026)

A 1031 exchange defers the entire gain on an investment property sale, including depreciation recapture. It is the single most powerful deferral available to a real estate investor and the one most often executed badly.

The failures are almost never about the qualified intermediary or the paperwork. They are about decisions made before the property was ever listed.

The Deadlines Are Absolute

Under IRC Sec. 1031(a)(3), replacement property must be identified within 45 days of the transfer of the relinquished property, and the exchange must be completed within 180 days or by the due date of the return including extensions, whichever is earlier.

There are no extensions for a failed acquisition, a financing problem, or a seller who backs out. Limited relief exists for federally declared disasters and nothing else.

The 180-day rule interacts with the filing deadline in a way that catches fourth-quarter sellers. An exchange beginning in November has fewer than 180 days available unless the return is extended, and the extension must actually be filed.

Identification Strategy

Three rules govern identification. The three-property rule permits identifying up to three properties regardless of value. The 200% rule permits identifying any number so long as their combined fair market value does not exceed 200% of the relinquished property's value. The 95% rule permits identifying more than that only if you acquire at least 95% of the identified value.

Most investors use the three-property rule, and most identify only the property they intend to buy. That is the mistake.

Identifying a backup costs nothing if the primary closes. A Delaware statutory trust interest makes an excellent third identification because it closes quickly, requires no negotiation, and is available at specific leverage ratios to satisfy debt replacement.

An investor at day 42 with a collapsed primary target and no backup identified has a failed exchange and a fully taxable sale.

Avoiding Boot

Boot is anything received that is not like-kind property, and it triggers gain recognition to the extent received.

Cash boot arises from proceeds not reinvested. Mortgage boot arises when the debt on the replacement is less than the debt on the relinquished property, and it catches investors who reinvested every dollar of equity but paid down debt.

The rules are asymmetric in a useful way. Contributing outside cash cures debt relief. Taking on additional debt does not cure cash actually received.

The safe pattern is trading up in both value and debt. Trading up in value while reducing debt requires outside cash equal to the reduction.

Recognized boot comes out in the worst order first: Sec. 1245 recapture at ordinary rates, then unrecaptured Sec. 1250 gain at 25%, then capital gain. For an investor with a prior cost segregation study, even a small amount of boot is expensive.

Coordinating With Cost Segregation

Replacement property basis has two components. Carryover basis from the relinquished property, and excess basis where the replacement cost exceeds the relinquished basis plus boot.

Carryover basis is not eligible for bonus depreciation. Excess basis generally is, and a cost segregation study on that excess basis can produce a substantial first-year deduction.

Many preparers treat exchanged-into property as having no study opportunity at all, which is wrong whenever the replacement is more expensive than the relinquished property's basis. An investor exchanging a property with $180,000 of remaining basis into a $1,400,000 replacement has roughly $1,220,000 of excess basis available.

Suspended passive losses do not release in an exchange, because it is not a fully taxable disposition. They carry over to the replacement property.

Partnership and Co-Ownership Problems

IRC Sec. 1031(a)(2) excludes partnership interests. A member of an LLC taxed as a partnership cannot exchange their membership interest, and the entity can only exchange if all members go the same direction.

Where co-owners want different outcomes, the standard solution is a drop and swap: the LLC distributes undivided tenancy in common interests to members under IRC Sec. 731, generally without gain, and each former member exchanges independently.

The risk is the holding requirement. A distribution executed days before closing invites an argument that the interest was held for sale rather than for investment. Execute the drop as far ahead of the sale as circumstances allow, ideally in a prior tax year, and report consistently.

What We Do

We model the exchange before the property is listed: the debt replacement requirement, the identification strategy including backups, the boot exposure, and what the tax would be if the exchange failed.

We coordinate the timeline against your filing deadline, since a fourth-quarter sale can lose days off the 180-day window without an extension.

We evaluate whether the exchange is actually the right answer. An investor with large suspended passive losses and modest gain sometimes does better recognizing the gain, releasing the losses, and investing freely.

And we run the cost segregation analysis on the replacement property's excess basis, which is the part almost everyone leaves on the table.

Frequently Asked Questions

What are the 1031 exchange deadlines?

45 days to identify replacement property and 180 days to complete the exchange, or the due date of your return including extensions, whichever is earlier. Under IRC Sec. 1031(a)(3) these are absolute, with limited relief only for federally declared disasters.

What is mortgage boot?

Debt relief where the replacement property carries less debt than the relinquished property. It triggers gain even if every dollar of cash proceeds was reinvested. Contributing outside cash equal to the shortfall cures it; taking on more debt does not cure cash you actually received.

Can I do a cost segregation study on a property I exchanged into?

Yes, on the excess basis. Carryover basis from the relinquished property is not bonus eligible, but any amount by which the replacement cost exceeds the relinquished basis plus boot generally is. This is commonly overlooked on exchange acquisitions.

Do my suspended passive losses release in an exchange?

No. An exchange is not a fully taxable disposition, so the losses stay suspended and carry over to the replacement property. Only a fully taxable disposition of the entire interest to an unrelated party releases them under IRC Sec. 469(g).

Can I exchange my LLC interest?

No. IRC Sec. 1031(a)(2) excludes partnership interests. Where co-owners want different exits, a drop and swap distributing tenancy in common interests under IRC Sec. 731 before the sale is the standard solution, and it should be executed well ahead of closing.

1031 Exchange Planning