When Is a 1031 Exchange Not Allowed? – Don’t Make This Mistake + FAQs

Confused about when you can (and can’t) use a 1031 exchange? You’re not alone. Many real estate investors stumble over the fine print of IRS Section 1031.

Even a minor misstep – like swapping the wrong kind of property or missing a deadline – can disqualify your exchange and leave you with a surprise tax bill.

The IRS is so strict that no extensions are granted on 1031 deadlines (except in rare disaster situations). That means it’s crucial to know exactly when a 1031 is allowed and when it’s off-limits.

1031 Exchange Basics: What It Is and Why Rules Matter

Before pinpointing when a 1031 exchange isn’t allowed, let’s quickly cover what a 1031 exchange actually is and why the rules are so strict.

A 1031 exchange (named after Section 1031 of the Internal Revenue Code) is a tax-deferment strategy that allows you to swap one investment property for another of like-kind without immediately paying capital gains tax. Essentially, you defer the tax on your gain by rolling the proceeds into a new property. This is a powerful tool for real estate investors to build wealth – industry data shows billions of dollars in capital gains are deferred each year through 1031 exchanges. 💰

However, the IRS sets tight boundaries on these exchanges to prevent abuse. The logic is: because you’re getting a big tax break, you must play by the rules. Those rules include what types of property qualify, who can be involved, and strict timelines for completing the swap. If you violate any of these, the IRS will disallow the exchange, meaning your sale becomes a fully taxable event (ouch!).

Key point: Section 1031 only applies to investment or business properties that are like-kind real estate. If you try to use it in the wrong situation – say, for your personal home or for property outside the U.S. – the IRS effectively says “No deal.” Below, we’ll delve into the exact rules from federal law that determine when an exchange is allowed, and when it isn’t.

Federal Law: IRS Rules That Limit 1031 Exchanges (What’s Allowed vs. Not Allowed)

Under U.S. federal tax law, Section 1031 lays out clear criteria for a valid like-kind exchange. Think of these as the non-negotiable ground rules set by the IRS. Violating any of these rules means your 1031 exchange won’t be allowed (or more precisely, it won’t qualify for tax deferral). Here are the core federal requirements:

• Real Property Only (Post-2018): As of the Tax Cuts and Jobs Act of 2017, only real estate qualifies for 1031 exchanges. You can no longer defer taxes by exchanging personal property (like equipment, artwork, or aircraft) or intangible property. Attempting to swap non-real-estate assets will be disallowed. For example, selling an office building and buying a rental duplex can qualify, but selling a business vehicle and buying a rental house cannot – the vehicle is personal property and won’t qualify under current law.

• Like-Kind Real Estate: The properties exchanged must be of “like kind,” meaning similar in nature or character. Fortunately, most real estate is like-kind to other real estate. You can exchange a piece of raw land for an apartment building, or a rental condo for a retail store – all are real property interests. However, certain assets are explicitly excluded from like-kind treatment no matter what. For instance, **partnership interests, stocks, bonds, or notes do not qualify for a 1031 exchange. Trading a share in a real estate LLC or REIT for a property won’t work – the IRS treats those as securities, not direct property interests. One special exception: Delaware Statutory Trusts (DSTs) are allowed as replacement properties (DSTs are a form of indirect ownership that the IRS does permit in 1031 exchanges).

• Held for Investment or Business Use: Both the property you sell (relinquished property) and the property you buy (replacement property) must be held for investment or used in a trade or business. This is crucial. If the property is primarily for personal use, it’s not eligible. That means your primary residence or a vacation home you mostly use yourself cannot be exchanged tax-free. The IRS looks at intent: you should be able to show that you acquired and held the old property for investment (e.g. collecting rent, or expecting it to appreciate for resale), and you intend to do the same with the new property. Properties held as inventory or for quick resale (like fix-and-flip projects) fail this test – they’re considered dealer property, not investment property.

• Domestic vs. Foreign Property: The IRS does not consider U.S. real estate to be like-kind with foreign real estate. In other words, you cannot exchange a domestic property for an overseas property (and vice versa) under 1031 rules. “Like-kind” is defined within geographic limits: U.S. (and its territories) with U.S., and foreign with foreign. For example, selling a rental house in California and buying a rental in Florida is fine (both in the U.S.), and selling a property in France to buy one in Japan could qualify (both foreign). But selling in New York to buy in London? ❌ Not allowed – that exchange would be disqualified by the IRS.

• Same Taxpayer Requirement: The same taxpayer who sells must be the one who buys the new property. The tax ID on the sale and purchase needs to match. You can’t sell an investment property in your personal name and then have your LLC buy the replacement (at least not without special structuring) – that would violate the same taxpayer rule. One workaround is that a person can sell individually and acquire as a single-member LLC (disregarded entity), since it’s still treated as the same taxpayer for tax purposes. But you generally cannot switch owners mid-exchange (for instance, adding a new partner to the title on the replacement property) without jeopardizing the 1031 deferral.

• Strict 45-Day and 180-Day Deadlines: Once you sell your relinquished property, the clock starts ticking. You have 45 days to identify potential replacement property(s) in writing, and 180 days to close on the new property. These are calendar days and the IRS is inflexible on this timeline. No extensions are granted for personal delays – only officially declared disasters can extend these deadlines. If you fail to identify in 45 days or close in 180 days, your exchange fails (meaning it’s fully taxable). There are also identification rules (like the 3-property rule or 200% rule) to prevent abusing the identification process, but those get into the weeds. The bottom line: missing a deadline = no 1031 tax break.

• No “Actual or Constructive Receipt” of Proceeds: To keep it a tax-deferred exchange, you can’t take possession of the sale money at any point. That’s why people use a Qualified Intermediary (QI) – a neutral middleman who holds the funds between sale and purchase. If the cash touches your hands (or your bank account) before the exchange is done, the IRS sees that as you “constructively receiving” the proceeds, which blows the exchange. For example, if you close the sale of your property without a QI and the title company cuts you a check, it’s too late – that money is now taxable gain, and you can’t undo it by later deciding to do a 1031. (One of the most common mistakes is investors learning about 1031 after they already sold – at that point, it’s not allowed.)

These federal rules set the stage. Now, if you’re within these parameters – real estate for real estate, investment use, U.S. to U.S., timely swap using a QI – you’re in the safe zone for a 1031 exchange. Step outside these lines, and the exchange won’t be permitted for tax deferral.

Next, we’ll explore how state laws can add another layer of complexity. Remember, Section 1031 is federal, but states have their own tax rules too. Let’s see what happens on the state level (spoiler: most follow along, but a few have quirks that can cost you if you’re unaware).

State Nuances: Do All States Allow 1031 Exchanges? 🏛️

At a high level, Section 1031 is federal law, so it applies in all 50 states for federal tax purposes. You might wonder, “Can my state disallow a 1031 exchange?” The answer is yes for state taxes, in some cases. While you’ll still get the federal deferral, state tax treatment can vary. Here are some key state-level nuances:

• Former 1031 Holdout – Pennsylvania: For many years, Pennsylvania was the one state that didn’t recognize 1031 exchanges for state income tax. An investor could defer IRS capital gains tax, but PA would still tax the gain on a sale in that tax year. This changed with new legislation in 2022, which made Pennsylvania finally conform to Section 1031 for exchanges completed in 2023 and beyond. So now, PA taxpayers can defer state tax on real property exchanges just like federal. (If you did a 1031 exchange in PA before 2023, you probably had to pay PA tax on your gain even though the IRS deferred it.)

• Claw-Back States: A few states allow the 1031 deferral initially but will “claw back” the deferred state tax if you sell and leave the state. 😲 California, Oregon, Montana, and Massachusetts have claw-back provisions. This usually means if you do a 1031 exchange and the replacement property is located out-of-state (or you move out of that state), those states keep track of the deferred gain. When you eventually sell without a 1031 (taxable sale), they will come after the state taxes you would have paid originally. For example, if you sell a California investment property and 1031 into a Texas property, California law requires you to file an information return each year. If you ever sell the Texas property in a taxable sale, California wants the tax on your original gain (since it was deferred when you left CA). Tip: If you’re swapping properties across state lines, be aware of the claw-back rules so you’re not surprised years later.

• State Withholding Requirements: Some states like California, New York, Maryland, and others require a withholding tax at closing when a property is sold by an out-of-state owner. If you’re doing a 1031 exchange, you can often get an exemption from withholding by filing the right forms (since the sale is tax-deferred). But it’s an extra hoop to jump through. For instance, Maryland doesn’t recognize the deferral automatically at closing – it may require a form to exempt the transaction from the usual withholding. Always check the procedure in the state where your relinquished property is, so you don’t accidentally have taxes withheld (or owe state tax) due to state-specific rules.

• No State Income Tax: States like Florida, Texas, Washington, Nevada (and a few others) have no state income tax on individuals. In those places, state conformity isn’t an issue – there’s simply no state capital gains tax to defer. This can make things simpler if you swap into those states, but remember, you still must follow all federal 1031 rules.

In summary, all states now recognize 1031 exchanges for real estate at the state-tax level (with Pennsylvania’s recent change). But how and when you ultimately pay state tax on that deferred gain can differ. Always consider both federal and state implications: you might dodge the IRS tax man and your state tax man for now, but one of them could be waiting down the road if you’re not careful.

Alright, with the groundwork laid, let’s get into the heart of the matter: When is a 1031 exchange not allowed? We already hinted at many of these situations. Now we’ll present the three primary scenarios in which taxpayers often assume they can do a 1031, but the IRS says “no.” For each scenario, we’ll explain why it’s disallowed, give concrete examples, and show what (if any) alternatives exist.

🚫 Scenario 1: Personal-Use Property (Your Primary Residence or Vacation Home)

One of the biggest misconceptions is thinking you can use a 1031 exchange on your primary home. Can you 1031 exchange your personal residence? ❌ No – absolutely not. Section 1031 is only for property held for investment or business, and your home is personal-use. The IRS explicitly disqualifies primary residences from 1031 treatment.

Why? Because you’re not holding your home for investment purposes (even if it does appreciate in value). Instead, the tax code gives homeowners a different break: Section 121 exclusion, which lets you exclude up to $250k (single) or $500k (married) of gain when selling a primary residence, provided you lived in it 2 out of the last 5 years. But you cannot defer unlimited gains via 1031 on a home sale.

What about a second home or vacation home? If it’s purely personal use (you don’t rent it out), it won’t qualify for 1031 either – it’s essentially treated like a primary residence for this purpose. The IRS safe harbor says a vacation property must be rented at least 14 days per year and personal use kept under 14 days (in each of the two years prior to the exchange) to clearly count as held for investment. If you meet those criteria, it’s considered an investment property (even if you occasionally vacation there), and then a 1031 exchange could be done. But a home you live in or use a lot yourself is off-limits for 1031.

Let’s clarify with a quick comparison in a table:

Table: When personal-use properties can (or cannot) be used in a 1031 exchange.

Example – Primary Residence: John has lived in his house for 5 years. It doubled in value. John cannot do a 1031 exchange when selling this home – it’s his primary residence. Instead, he might use the Section 121 exclusion to avoid tax on, say, $500k of gain if married. If his gain exceeds that, tough luck – the rest is taxable, because 1031 is not an option here.

Example – Mixed-Use Duplex: Sarah owns a duplex, lives in one unit and rents out the other. When selling, part of the property was her residence and part was investment. Good news: She can do a partial 1031 exchange on the rental unit portion, deferring gain on that part, while possibly using Section 121 to exclude gain on the owner-occupied part. The IRS allows this split treatment because one part qualifies and the other doesn’t.

Example – Vacation Home Turned Rental: Miguel has a beach cottage he used as a vacation retreat for years. In the last two years, he decided to rent it out most of the time (only using it personally for 10 days a year). He reports the rental on Schedule E and limits personal use. Now it’s essentially an investment property. Miguel can likely do a 1031 exchange with this property because he’s demonstrated investment intent (meeting the safe harbor guidelines). If he hadn’t rented it, it would be personal and not eligible.

🔑 Takeaway: If a property is primarily for your personal enjoyment, you generally cannot use a 1031 exchange. Only once you convert it to an investment use (with adequate time and documentation) does the door open for 1031. Otherwise, stick to the homeowner’s exclusion or other planning techniques.

🚫 Scenario 2: Fix-and-Flips, Development Projects, and Dealer Property (Inventory is Not Exchangeable)

Thinking of doing a quick flip and rolling the profits into your next deal tax-free? 🛑 Not so fast. A 1031 exchange is not allowed for property held primarily for resale. The IRS calls these “dealer” properties – think of them as inventory for a real estate business, not long-term investments. If you’re a developer or flipper who buys, improves, and sells homes or lots as a business, those properties do not qualify for 1031 deferral.

Why not? Because the tax code distinguishes between an investor and a dealer. A dealer’s profits are considered ordinary income (like selling merchandise), and 1031 is meant for capital investment, not inventory turnover. The classic example: You buy a rundown house, fix it up, and sell it six months later for a profit. Even if you immediately buy another property, the IRS sees the first house as inventory (held primarily for sale, not for rental or long-term investment). No 1031 allowed – you owe taxes on the flip profit in the year of sale.

Another angle: Land developers who subdivide and sell parcels, or home builders selling new builds. Those are sales of stock in trade, not exchanges of investment property. So, you can’t defer gains from those sales through 1031 either.

How do you know if the IRS will treat you as a dealer vs an investor? There’s no single rule, but factors include intent, holding period, frequency of sales, significant improvements, and how you report the income. A common guideline: if you hold property for only a short time before selling (especially less than a year) or you have a pattern of quick sales, it leans toward dealer activity. Conversely, if you hold for a longer term (say, a couple of years) and perhaps have rental income, you look more like an investor.

Let’s compare scenarios to illustrate this distinction:

Table: Dealer vs Investor scenarios – only true investment holdings qualify for 1031, while flips/inventory do not.

Example – The Quick Flip: Lisa, a real estate investor, buys a fixer-upper, spends 4 months renovating, then sells for a $50,000 profit. She immediately buys another fixer-upper. She tries to argue it’s a “like-kind exchange” – after all, she sold one property and bought another. The IRS will not agree. Lisa’s first house wasn’t an investment rental; it was inventory in her flipping business. She owes taxes on that $50k gain. A 1031 exchange is not an option here, and if she attempted it, it would be disallowed upon audit.

Example – Rental Turned Flip (Gray Area): Suppose John buys a house, rents it out for one year, then sells it because the market’s hot. Is that a 1031-eligible investment sale or a flip? This is a gray zone. One year is relatively short, but there was rental activity (investment use) for that year. If John planned to hold long-term but circumstances changed, he might argue it was held for investment. However, the IRS could scrutinize such a short hold. There’s no hard rule, but many experts suggest holding at least 2 years to clearly show investment intent (also aligning with safe harbor for mixed-use/vacation homes). In practice, John might get away with a 1031, but it’s risky. If the IRS decides his intent was a quick resale, they could disallow the exchange.

🔑 Takeaway: 1031 exchanges are for investments, not inventory. If you’re selling property in the ordinary course of business (quick resales, flips, developments), the IRS says “no tax deferral for you.” Structure your deals and holding periods accordingly if you hope to take advantage of 1031 on a future sale.

🚫 Scenario 3: Exchanging Non-Like-Kind Assets (Foreign Property, Stocks, Partnership Interests, etc.)

Not all trades are created equal – some things just can’t be exchanged tax-free under Section 1031. We touched on this under federal rules: the property you receive in an exchange must be like-kind real estate to what you gave up. This final scenario covers those property type mismatches where a 1031 exchange is not allowed because the assets aren’t like-kind. Common pitfalls include:

• Trading U.S. real estate for Foreign real estate: As mentioned, domestic and foreign properties are not like-kind to each other. Swap U.S. for U.S. or foreign for foreign, but not one for the other. If you try, the IRS will deny the 1031 deferral on the grounds that the properties don’t qualify as like-kind.

• Real estate for Personal property (and vice versa): You can’t, for example, sell a rental home and roll the proceeds into buying a fancy boat or heavy equipment for your business – that boat or equipment is personal property (not real property), so the exchange fails. Before 2018, you could exchange some personal property for similar personal property (like swapping airplanes or artwork collections), but now the law is strictly for real estate. Any exchange involving non-real-estate on either side is not allowed.

• Exchanging Partnership Interests or LLC Memberships: If you own property with partners and you hold your share as a partnership interest, that interest is explicitly excluded from 1031. For example, a partnership sells a building and you want to 1031 your share into another property – you can’t exchange the partnership interest itself. The partnership as a whole could do a 1031 (keeping the same entity investing in new property), but you as an individual can’t trade your partnership stake for real estate. This rule often complicates partnerships wishing to go separate ways (a situation known as “drop and swap” – which involves dissolving the partnership and converting to tenants-in-common interests before the sale to make 1031 possible. But simply swapping partnership interests is not allowed).

• Exchanging into Stocks, Bonds, or REITs: You might think, “I’ll sell my property and buy shares of a Real Estate Investment Trust (REIT) – that’s real estate, right?” Nope – buying stock in a company, even a REIT or homebuilder, is acquiring a security, not real estate directly. Stocks and bonds are not like-kind to real property and do not qualify for 1031. The only exception in this realm, as mentioned, is that DST interests (fractional shares in a Delaware Statutory Trust that owns real estate) are treated as like-kind real estate, so those can be a replacement property. But typical corporate stock or fund shares are a no-go.

• Leasehold interests longer than 30 years vs fee interest: This is a niche one, but in some cases a long-term lease (like a 99-year lease) is treated as real property interest for 1031 purposes, whereas a short-term lease is not. Exchanging a fee simple property for a very short remaining leasehold might fail like-kind, but most typical scenarios don’t encounter this issue. Just be aware that the type of legal interest (fee ownership vs lease) can matter if it’s not a standard ownership interest.

To sum up these mismatches, here’s a quick reference table of Allowed vs. Not Allowed property exchanges:

Table: Which asset swaps are like-kind (✅) and which are not (❌) under Section 1031 rules.

Example – U.S. to Foreign: Ravi sells a rental property in New York with the hope of deferring tax and buying a villa in Italy. He sets up a 1031 exchange. This will not work. When he eventually buys that Italian villa, the IRS will tax the sale of the NY property because the replacement is foreign real estate. If Ravi really wants to do a 1031, he needs to buy another U.S. property. (He could do a foreign-to-foreign exchange: for instance, sell a property in India and buy in Italy – the IRS doesn’t tax non-U.S. real estate sales for U.S. taxpayers if it’s truly foreign-to-foreign, though other countries’ taxes may apply!)

Example – Rental to REIT Stock: Emily sells her rental duplex and figures instead of another property, she’ll invest the $500k into a REIT for diversification. She does this within 180 days and thinks she’s safe. Unfortunately, come tax time, Emily discovers that the IRS wants capital gains tax on her duplex sale – because buying REIT shares didn’t count as a like-kind replacement. She should have used that money to buy another piece of real estate directly, or a DST interest, if she wanted full deferral. The REIT idea, while seemingly real-estate-related, fails the 1031 test.

Example – Partnership Split: A partnership of two friends owns a commercial building. They want to sell the building and go separate ways, each buying their own rental property. If the partnership sells the building and the partnership as a whole buys two new properties (and then later they split ownership), it could attempt a 1031 but that’s messy. If instead, before selling, they dissolve the partnership and each take title as tenants-in-common, then each sells their share, now each is selling real estate that they directly hold. That way, each friend can do a 1031 exchange individually into their new property. The key was converting the partnership interest into a direct property interest before the sale. If they hadn’t and just tried to exchange the partnership interest, the IRS would say no – partnership interests aren’t exchangeable.

🔑 Takeaway: To successfully use a 1031 exchange, you must be trading in the same category of asset – investment real estate for investment real estate (with very few exceptions). Mixing categories (like real estate for something else) or crossing borders can nullify your exchange. Always double-check that both your relinquished and replacement assets are eligible and like-kind. When in doubt, consult a 1031 expert before you sell.

Demystifying Key 1031 Terms & Concepts (Entities, Laws & Lingo)

Understanding 1031 exchanges means getting comfortable with a slew of tax terms and concepts. Here’s a breakdown of the most important ones and how they relate to the rules above:

• Section 1031 (Internal Revenue Code) – The section of the U.S. tax code that allows like-kind exchanges of real property without immediate tax. It’s the legal foundation of everything discussed here. When we say “1031 exchange,” we’re referencing the benefits (and limits) spelled out in this law.

• Like-Kind Property – In the context of real estate, almost any real estate is like-kind to any other real estate, as long as both are in the U.S. (or both are foreign). This concept is why you can exchange a farm for an office building. The term does not mean “identical type” – a rental house and a vacant land parcel can be like-kind. But like-kind also implies staying within the allowed category (real estate for real estate). If you go out-of-category (e.g. real estate for personal property), it’s not like-kind and disqualifies the exchange.

• Relinquished Property & Replacement Property – These are the terms for the property you sell (relinquished) and the property you buy (replacement) in a 1031 exchange. The timing and identification rules revolve around these: after selling the relinquished property, you must identify your replacement property within 45 days and acquire it within 180 days. Both properties must meet the like-kind and intent requirements (investment use).

• Boot – This is any non-like-kind property or cash that you receive as part of the exchange. Boot is not fatal to the exchange, but it is taxable. For example, if you do an exchange but you take $50,000 cash out (you reinvest the rest), that $50k is boot – you’ll pay capital gains tax on it. Or if you exchange into a property of lesser value and don’t reinvest the difference, that difference is boot. Boot doesn’t make the exchange “not allowed,” but it means the exchange is only partial – you’ll owe tax on the boot amount. The goal in a full 1031 is usually to have no boot (reinvest all proceeds and even equal or greater debt if any).

• Qualified Intermediary (QI) – A QI is a mandatory middleman for most 1031 exchanges. This is an independent company or person who facilitates the exchange by holding the sale proceeds and then using them to buy the replacement property for you. By doing so, they ensure you never take possession of the cash, preserving the exchange’s integrity. The QI also helps with paperwork like the identification notice. Beware: certain people are disqualified from serving as your QI, such as your agent, attorney, or accountant if they have worked for you in the past two years. You must use a neutral party. Once you close the sale, the QI holds the funds; if you fail to find a replacement, the QI will release the funds to you only after day 180 (at which point any released funds are taxable). Essentially, a QI acts as the exchange escrow.

• “Held for Productive Use in Trade or Business or for Investment” – This phrase from Section 1031 is the crux of what property qualifies. It means you must have the intent to use the property in a business or hold it as an investment (not for personal enjoyment) when you own it. It’s a bit subjective – intent can be shown by how you use the property (renting it out, for example). If you fail this and the property was primarily for personal use or quick sale, the exchange won’t qualify. Courts have looked at things like length of ownership, rental ads, income reported, etc., to decide intent.

• Section 121 (Primary Residence Exclusion) – Another tax code provision, which is actually an alternative to 1031 for personal homes. Section 121 lets you exclude $250k/$500k of gain on the sale of a primary residence (if you meet the residency requirements). Sometimes people try to combine 121 and 1031 when they convert a rental to a primary or vice versa over time. For instance, someone might do a 1031 into a rental, rent it for a couple years, then move in for a couple years and later sell, potentially using Section 121 to exclude some gain. There are complex interplay rules (if you previously did a 1031 on that property, you have to wait 5 years to use 121, and any depreciation gain isn’t excludable, etc.). But remember: you can’t use 1031 on a pure primary sale – 121 is your tool there.

• Tax Cuts and Jobs Act (TCJA) of 2017 – This federal law overhauled many tax provisions. Relevant here: it limited 1031 exchanges to real property only (before, it allowed personal property exchanges). The TCJA is why we emphasize that after 2018 only real estate qualifies. Also, the law clarified definitions of real property for 1031 purposes (generally following state law definitions, but including things like leases over 30 years, permanent structures, etc., and excluding items like equipment even if sold with a building, though there are nuances for “incidental personal property” up to 15% of the deal).

• Clawback and State Conformity – Terms related to state treatment we discussed. “Clawback” is when a state defers tax now but will demand it later if the chain of exchanges ends out-of-state. State conformity refers to whether a state follows the federal 1031 rules. As of 2023, all states with income tax conform for real estate, but some, like Pennsylvania until 2022, did not.

• Reverse Exchange / Improvement Exchange – Just to note: a reverse 1031 exchange is when you buy the replacement property before selling the relinquished property. It is allowed, but requires a special parking arrangement (you can’t own both at the same time directly, so an intermediary “parking” entity holds one temporarily). These are more complex but possible. An improvement exchange is when you use exchange funds to improve the replacement property (also allowed within certain rules). We mention these to clarify: these are special structures that are allowed under 1031, as opposed to the disallowed scenarios we covered. They require following IRS safe harbor guidance. If done wrong, they can be disqualified too.

• Starker Exchange – A term you might hear; it’s basically synonymous with a delayed 1031 exchange. It comes from a famous tax case which affirmed that a delayed exchange (non-simultaneous) can still qualify as like-kind exchange. This led to the formal 45/180 day rules in the Treasury regulations. So, if someone says “Starker exchange,” they mean a typical modern 1031 where you sell then buy within the allowed timeframe.

All these terms interconnect in the 1031 process. By understanding them, you can see how the puzzle pieces fit: The QI helps you avoid receiving boot, the like-kind rule makes sure you stick to real property, the intent requirement keeps personal or dealer use out of the picture, etc. The result, if you follow the rules, is a successful exchange deferring your gain indefinitely (or until you cash out in a taxable sale). But as we’ve outlined, stray outside the boundaries, and the IRS is ready to deny the tax break.

Before we wrap up, let’s address some frequently asked questions that often come up around when 1031 exchanges are not allowed. These quick Q&As will reinforce the concepts we’ve covered:

📋 FAQ: Common Questions on 1031 Exchange Restrictions

Q: Can I do a 1031 exchange on my primary residence?
A: No. Your primary home is personal-use, not an investment property, so it doesn’t qualify for a 1031 exchange. Instead, use the Section 121 exclusion if you meet the requirements.

Q: Are vacation homes eligible for 1031 exchanges?
A: Yes – but only if you’ve limited personal use and treated the home as an investment (e.g. rental) for a sufficient period. If it’s mostly personal use, then no, it won’t qualify.

Q: Can I 1031 exchange a fix-and-flip property?
A: No. Properties held primarily for resale (flips) are considered inventory, not investments. The IRS disallows 1031 treatment on flip profits – those are taxed as ordinary income or capital gains.

Q: Is foreign real estate eligible for a 1031 exchange?
A: No, not when exchanging with U.S. property. U.S. real estate must be exchanged for U.S. real estate. Foreign-to-foreign exchanges are allowed, but mixing domestic and foreign property is not.

Q: Do all states follow the federal 1031 exchange rules?
A: Yes. As of 2023, every state with income tax recognizes 1031 exchanges for real estate. However, some states have clawback rules to tax deferred gains later if you sell out-of-state.

Q: Can I exchange into a partnership interest or REIT shares?
A: No. You must exchange into real property. Partnership interests, LLC membership units, and stock shares (even in real estate companies or REITs) are excluded from 1031 treatment as they are not real property.

Q: What if I miss the 45-day or 180-day deadline?
A: No, you can’t get an extension (except if a federally declared disaster triggers IRS relief). Missing the 45- or 180-day deadline means the exchange fails and the sale becomes taxable – no exceptions for personal circumstances.

Q: Can I take out some cash during a 1031 exchange (for other uses)?
A: Yes – but that cash is “boot” and will be taxable. You’ll still defer the rest of your gain on the portion reinvested. Taking cash doesn’t void the exchange, but you’ll owe tax on the amount you pulled out.

Q: Can an LLC or corporation do a 1031 exchange?
A: Yes. Any taxpaying entity (individual, LLC, corporation, trust) can use 1031 if the property is held for investment. The same-taxpayer rule applies, so the entity that sells must be the one that buys the new property.

Q: Is there a holding period requirement for 1031 exchanges (like a minimum time to own the property)?
A: No specific holding period is in the law. However, to prove intent of investment, it’s wise to hold property for about 2 years or more. Very short holds (under a year) could be challenged as not truly for investment.