Named after Section 1031 of the U.S. Internal Revenue Code, a 1031 Like-Kind Exchange allows an investor who sells an appreciated business or investment real estate asset (the "Relinquished Property") to defer paying federal capital gains tax (15%–20%), Net Investment Income Tax (3.8%), and depreciation recapture tax (25%) by rolling 100% of the net equity and debt into one or more "Replacement Properties".
Strict statutory requirements enforced by the IRS include: 1. Qualified Intermediary (QI) Mandate: The seller must NEVER touch or have constructive receipt of the sale proceeds. Funds must pass directly from the closing escrow to an independent Qualified Intermediary (Accommodator). 2. The 45-Day Identification Window: Within exactly 45 calendar days of closing the sale of the relinquished property, the investor must formally identify potential replacement properties in writing to the QI (commonly under the Three-Property Rule or 200% Rule). 3. The 180-Day Closing Deadline: The investor must close on the replacement property within 180 calendar days of the relinquished sale (or the tax return due date, whichever is earlier). 4. Equal or Greater Value & Debt: To achieve 100% tax deferral, the replacement property must be of equal or greater purchase price, and all net cash proceeds must be reinvested. Any cash pulled out or net reduction in mortgage debt is taxed as "Boot".