Strategy: property exchange and 1031
An exchange defers the tax. The plan decides whether deferral is the point.
A 1031 exchange lets an owner sell investment real estate and defer the gain by acquiring replacement real property, identified within 45 days and received within 180, with a qualified intermediary holding the proceeds in between. Since 2018 it applies to real property only. It is one of six exits from an appreciated property, and we model every one of them, including paying the tax, before recommending any.
The situation
The building did its job. The tax is why it is still yours.
Households in this position usually own one to three rentals held for a decade or more, depreciated most of the way down, still producing the calls and repairs that come with tenants. The rent no longer justifies the work. A sale would be welcome, except that a large share of the equity would go to tax in the year of closing.
The options tend to arrive attached to a product. An exchange is pitched by a sponsor, a trust interest by a broker, a partnership contribution by a REIT. Each is legitimate in the right case, and each carries costs, lock-ups, and a tax result that is easy to misread when the comparison is made by the party selling one of them.
Our role is the comparison itself. We lay every exit side by side for the actual property, including the plain sale, model the after-tax result of each with your CPA, and only then talk about vehicles. We do not sell exchange products and receive nothing from any sponsor.
Why it’s complex
Five things that decide whether an exchange fits
The calendar has no extensions
Replacement property must be identified in writing within 45 days of the sale and received within 180, or by the return due date if that comes first. Both periods end at midnight and are not extended for weekends or holidays. A missed date means the gain is recognized that year.
Boot is taxed, and debt counts
Cash taken out of the exchange, non-real-estate property received, and any net reduction in mortgage debt are boot, and gain is recognized up to that amount (IRC §1031(b)). A full deferral means reinvesting essentially all of the proceeds and replacing the debt.
Recapture has two layers
Straight-line depreciation on the building returns as unrecaptured §1250 gain at up to 25%. Components carved out by a cost-segregation study return as ordinary income under §1245. An exchange generally defers both. An installment sale defers neither.
After a big gainDeferral ends at death, in the owner’s favor
The basis of the old property carries into the new one, so the deferred gain travels with each exchange. Property held at death takes a basis equal to its fair market value (IRC §1014), and the recapture rules do not apply to a transfer at death. A chain of exchanges held for life can end with no income tax on the gain at all.
Read the guideA trust interest trades control for quiet
A Delaware statutory trust interest can serve as replacement property (Rev. Rul. 2004-86), but the trustee cannot take new capital, renegotiate debt, or reinvest sale proceeds, and the interest has no public market. Sponsor fees and selling costs sit inside the price. It is a private placement, limited to accredited investors.
Alternative investmentsSide by side
Six exits from an appreciated property
What each one asks of the owner, and what it gives back. Fees, terms, and tax results vary by transaction; the table is the shape of the comparison, not a recommendation.
| Exit | What must be reinvested | Liquidity and control | Recapture | At death |
|---|---|---|---|---|
| Exchange into a property you manage | Essentially all proceeds; debt replaced | Illiquid; full control; still a landlord | Deferred | Step-up; deferred gain eliminated |
| Exchange into a DST interest | Essentially all proceeds; debt replaced | Illiquid; no control; accredited investors only | Deferred | Step-up |
| 721 contribution (UPREIT) | The property or DST interest | Units may become liquid over time; no further 1031 | Deferred until units are sold or converted | Step-up |
| Installment sale | Nothing | Liquid as payments arrive; buyer credit risk | Recognized in the year of sale (§453(i)) | Unpaid note continues; that gain is not stepped up |
| Charitable remainder trust | The property goes to the trust | Income stream to you; remainder to charity; irrevocable | Not triggered by the trust’s sale; distributions carry the gain out over time | Remainder passes to charity |
| Sell and pay | Nothing | Fully liquid; full control | Due in the year of sale | Fresh basis in whatever the proceeds buy |
The Opportunity Zone election is a seventh path for the capital-gain layer only. It is not a destination for an exchange, and the deferred gain inside it does not receive a step-up at death. See the questions below.
Sources: IRC §1031 and Treas. Reg. §1.1031(k)-1; IRS Form 8824 instructions; IRS Topic No. 409; IRC §1411; Rev. Rul. 2004-86; IRC §453(i); IRC §721; IRC §1014; IRC §1250(d); IRC §121; 17 CFR 230.501(a); IRS Rev. Proc. 2025-32; Treas. Reg. §1.1400Z2(a)-1; IRS Notice 2026-40.
Our approach
Vehicles come last
We work from the plan toward the structure, not the other way around. The property’s history, the household’s timeline, and what the proceeds must do for the next decade decide which exits are open. Only then do we compare the vehicles, and one of them is always the plain sale.
Two questions before any product
Did you ever live in it, and will you hold it for life? A former home used as the principal residence for two of the last five years can exclude $250,000 of gain, or $500,000 on a joint return, before any exchange is considered (IRC §121). Rental years after the family moved out do not count against it. And an owner who will plausibly hold until death is already positioned for the step-up, which changes the value of every deferral tool.
Split the gain with your CPA
A single gain figure is not a usable fact. We separate the unrecaptured §1250 layer, any §1245 recapture from a cost-segregation study, and the remaining capital gain, then place each against the year’s brackets. For 2026 the 0% long-term rate ends at $98,900 of joint taxable income and the 20% rate begins above $613,700 (Rev. Proc. 2025-32); the 3.8% surtax starts at $250,000 of joint MAGI.
Lay the exits side by side
Exchange into another property you manage, into a DST interest, or into a REIT’s operating partnership under §721; sell on an installment note; contribute to a charitable remainder trust; or sell and pay. For each we show what must be reinvested, the liquidity and control given up, the fees, the tax character, and what happens at death. The comparison is built for your property, with your CPA, not from a brochure.
Run the calendar and the diligence
The qualified intermediary is engaged before the sale closes, since proceeds that reach your account end the exchange. Identification follows the three-property or 200% rule. Debt is matched so nothing becomes boot. Any DST sponsor answers our questions on debt, fees, tenant concentration, and exit plan before the interest is considered, and we receive nothing for the introduction.
Fold the result into the plan
Proceeds become part of the income plan or the estate plan, whichever the exit served. Deferred gain and carryover basis are tracked so the next decision is never a surprise, and our Quarterly Rounds keep cash flow, risk, estate, and tax in sequence.
The work
What you’ll work through with us
- A §121 review for any property that was once your home
- The gain split into its layers: unrecaptured §1250, §1245 recapture, and capital gain, with your CPA
- An after-tax comparison of every exit for the specific property, including the plain sale
- A year-of-sale analysis against the 2026 brackets, the surtax line, and any Roth conversion already planned
- Exchange logistics coordinated with the qualified intermediary: calendar, identification, debt replacement
- Independent diligence on any DST or UPREIT sponsor, with no placement fee to us
- A step-up review with your estate attorney, including how the property is titled between spouses
- An income portfolio built from the proceeds when the exit is a sale
Property exchange strategy at the firm is led by Theo Halbardier, CFP®, CIMA®, CAIA®, the firm’s founder. The CAIA curriculum covers real assets and the private structures built around them, which is the vocabulary of trusts, partnership units, and sponsor terms an exchange runs into. We are fee-only: no commissions, no product sales, no placement fee on any exchange vehicle. About Theo
Questions
Common questions about 1031 exchanges
What are the 1031 exchange rules?
A 1031 exchange defers gain on real property held for business or investment when it is exchanged for other real property of like kind (IRC §1031(a)). Replacement property must be identified in writing within 45 days of the sale and received within 180 days, or by the return due date if earlier. A qualified intermediary must hold the proceeds. Cash or debt relief received is boot and is taxed. Since 2018 the rule covers real property only.
Can a 1031 exchange go into a Delaware statutory trust?
Yes. Rev. Rul. 2004-86 treats a beneficial interest in a qualifying DST as an undivided interest in the trust’s real estate, so it can serve as replacement property. The trade is control: the trustee cannot accept new capital, renegotiate debt, or reinvest proceeds, and the interest has no public market. DSTs are private placements limited to accredited investors, so eligibility and sponsor diligence come before the calendar.
Can I exchange into an Opportunity Zone fund?
No. A fund interest is not like-kind real property, and the Opportunity Zone deferral applies only to gain that would otherwise be recognized (Treas. Reg. §1.1400Z2(a)-1). The two are alternatives, not a sequence. A failed exchange is different: gain recognized when the exchange fails may still be invested in a fund within its own 180-day window. The Opportunity Zone rules change for investments made on or after January 1, 2027, so the funding date matters.
Does an installment sale avoid depreciation recapture?
No. Under IRC §453(i), recapture income is recognized in the year of sale regardless of when payments arrive; only the gain above recapture is spread across the note. For a long-held, fully depreciated rental that limits what an installment sale can do. It still spreads the capital-gain layer across years, which can keep more of it in lower brackets, at the cost of carrying the buyer’s credit.
What happens to the deferred gain when I die?
Under current law it generally disappears. Property held at death takes a basis equal to its fair market value (IRC §1014), and the depreciation recapture rules do not apply to a transfer at death (IRC §1250(d)(2)). Gain deferred through a chain of exchanges ends with the owner. The exception is gain moved out of real estate into a deferral election that receives no step-up, which is one reason we ask about the estate before the vehicle.
Is a 721 exchange the same as a 1031?
No. Under IRC §721, contributing property or a DST interest to a REIT’s operating partnership in exchange for units is not taxed, and the units offer diversification and, over time, a path to liquidity. But operating partnership units cannot be exchanged again under §1031, and converting them to REIT shares is a taxable event. It is the final stop on the deferral chain, not another link, though units held at death still receive the step-up.
How are you paid on an exchange?
Only by you. We are fee-only and receive no commission, placement fee, or sponsor compensation on any exchange, trust interest, or partnership contribution. That is what lets us include the plain sale in every comparison and say so when it is the better exit.
Reviewed by Theo Halbardier, CFP® · Updated September 2026 · Figures current for 2026
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