In one sentence: A 1031 exchange lets you sell an investment property and roll the proceeds into another one without paying capital gains tax at the time of the sale — the tax is deferred, not forgiven — as long as you follow strict deadlines and use a Qualified Intermediary. It’s one of the most powerful wealth-building tools in real estate, and one of the easiest to botch. Here are the rules that matter, drawn from Jon’s 1031 client guides.
What are the deadlines?
Day 0 is the day your sale closes. From there: 45 days to identify your replacement property in writing to the Qualified Intermediary, and 180 days to close on the replacement (or your tax-return due date, if sooner). These deadlines do not move for weekends, holidays, or financing delays. Miss one and the exchange fails and the tax comes due.
What are the rules for full deferral?
- Investment or business property only. Rentals, land, ranches and commercial buildings qualify in any combination. Not a primary residence, not a flip.
- Real estate for real estate. Since 2018, only real property qualifies.
- Equal or greater value. Buy at least the net sale price of what you sold.
- Reinvest all the equity. Cash you keep, or debt you don’t replace, is taxable ‘boot.’
- Same taxpayer. Whoever sells must be the one who buys.
- Engage the QI before closing. The proceeds must go straight to a Qualified Intermediary — $0 can pass through your hands. Your agent, CPA, or attorney from the past two years can’t serve as your QI.
How do I identify replacement properties?
Three options: the three-property rule (name up to 3 properties of any value — most investors use this), the 200% rule (any number, up to twice the value you sold), or the 95% rule (any number, if you actually buy 95% of what you named).
What’s different in California?
Two things catch people out. First, the state’s 3.33% withholding can be waived for a qualifying exchange using FTB Form 593. Second, the ‘clawback’: if your replacement property is outside California, you’ll file FTB Form 3840 every year so the state can track the deferred gain.
What is a reverse exchange?
Sometimes the perfect replacement appears before your current property sells. In a reverse exchange you buy first: a third party called an Exchange Accommodation Titleholder ‘parks’ one of the properties until your sale closes, because the IRS won’t let you own both inside an exchange at once. Same 180-day clock, more moving parts — plan it early, not urgently.
FAQ
Can I do a 1031 exchange on a vacation home?
A pure personal-use vacation home doesn’t qualify. Properties with genuine rental use can, under specific rules — this is a CPA question before you list, not after.
Can I exchange into a property I already own?
No — the replacement must be acquired as part of the exchange. Related-party and already-owned structures have their own rules and risks.
What happens if I can’t find a replacement in 45 days?
The exchange fails, the QI releases your funds after the identification period, and you owe the tax as a normal sale. This is why experienced exchangers identify backup properties, not just a favorite.
Jon’s full guides — the one-page overview, the step-by-step client guide, and the reverse-exchange guide — are in Terms Explained, with PDFs to download and share with your CPA. Thinking about an exchange in the Ojai Valley or Ventura County? Start the conversation early — before your sale closes, not after.
For general education only; not tax, legal or financial advice. Consult a CPA or tax attorney and a qualified exchange company before starting an exchange.
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