1031 Exchange: Rules, Timelines, and Fractional Replacement Options

What a 1031 exchange actually does

Section 1031 of the U.S. tax code lets an investor sell a property held for business or investment use and defer the capital gains tax (plus depreciation recapture) by reinvesting the proceeds into one or more like-kind investment properties. The tax is not erased — it rolls forward into the new property's basis until the investor eventually sells without exchanging.

• Only investment or business-use real estate qualifies. Personal residences and house flips do not.
• After the 2017 Tax Cuts and Jobs Act, 1031 applies to real property only. Personal property no longer qualifies.
• Both equity and the loan balance must usually be replaced to fully defer the tax. Cash or debt left over is taxable "boot."

The two deadlines that trip people up

A 1031 exchange is governed by two strict clocks that start the day the relinquished property closes. Missing either deadline can disqualify the exchange.

• 45-day identification: replacement properties must be identified in writing and delivered to the qualified intermediary within 45 calendar days.
• 180-day completion: the replacement property must be acquired within 180 calendar days, regardless of weekends, holidays, or extensions.
• A qualified intermediary (QI) must hold the sale proceeds. If the investor takes constructive receipt of the cash, the exchange is dead.

Identification rules: 3-property, 200%, and 95%

Investors can identify multiple potential replacements within the 45-day window using one of three rules. Most use the 3-property rule, which allows up to three candidates regardless of value. The 200% rule allows more candidates as long as their combined fair market value does not exceed twice the relinquished property's sale price. The 95% rule is rarely used and requires acquiring at least 95% of the value of all identified properties.

Reverse and improvement exchanges

Two common 1031 variants give investors more flexibility under the same 45- and 180-day clocks. Both rely on an Exchange Accommodation Titleholder (EAT) under IRS Revenue Procedure 2000-37, which lets a third party temporarily hold title so the investor never owns both properties at once.

• Reverse 1031: acquire the replacement property first, then sell the relinquished property within 180 days.
• Improvement (build-to-suit) 1031: use exchange proceeds to construct improvements on replacement property while the EAT holds title.
• Both variants require the Qualified Exchange Accommodation Agreement (QEAA) to be in place within five business days of the EAT taking title.

What a 1031 actually costs

A standard delayed exchange usually costs roughly $600 to $2,500 in qualified intermediary fees. Reverse and improvement exchanges are more expensive because the EAT structure is more complex. These fees are typically much smaller than the federal tax that would otherwise be due, but they should still be modeled when deciding whether the exchange is worth the effort.

Where Lofty fits the 1031 picture

A 1031 exchange does not always require buying another whole property. Some investors use Delaware Statutory Trusts (DSTs) or Tenant-in-Common (TIC) interests to access fractional replacement property without managing the asset themselves. Lofty's product is different: it is a marketplace for buying fractional shares of individual U.S. rental properties, not a DST or TIC replacement property today. Investors searching for "1031 exchange into partial ownership" should work with a qualified intermediary, DST or TIC sponsor, and tax advisor before assuming any fractional structure qualifies.

Common reasons exchanges fail

Many failed 1031 exchanges trace back to avoidable process mistakes after the relinquished property has already closed.

• Missing the 45-day identification deadline because no acceptable replacement property surfaced in time.
• Identifying replacement properties that fall through and leave the investor without a backup option.
• Using an advisor who is disqualified because they recently acted as your attorney, CPA, broker, or agent instead of an independent qualified intermediary.
• Receiving cash, debt relief, or non-like-kind property at closing, creating taxable boot.