A 1031 exchange can defer the tax on real estate you sell as part of an exit. It does not apply to the business itself, and the planning has to happen before the sale closes.

Owners often hear about a 1031 exchange for the first time when a sale is already close to signing. A friend mentions it, or a buyer’s advisor does. The idea sounds like a way to keep the tax on the whole sale from landing at once.

It is narrower than that. A 1031 exchange applies to real estate. It postpones tax on the gain from that real estate; it does not erase the gain. And it runs on deadlines that the calendar will not move for you.

This article explains what an exchange can cover in a business sale, what it cannot, and the questions worth answering while you still have choices.

What an exchange can and cannot cover

Section 1031 of the Internal Revenue Code lets you postpone tax when you exchange real property held for business use or investment for other real property of the same kind. Since 2018, it applies only to real property. Exchanges of equipment, vehicles, patents, and other business assets generally no longer qualify.1

That limit matters in a sale. Shares of stock in a corporation and interests in a partnership are not real property, so selling them is not an exchange of real estate, even if the company owns buildings. A single-member LLC can be different. If it is disregarded for tax purposes, the law treats its owner as owning what the LLC owns, so the building it holds is treated as yours.8 Goodwill and other intangible value do not qualify either. Property held mainly for sale, such as lots a developer builds on and sells, is also excluded.1, 2

In practice, an exchange can reach only the part of your gain that comes from real estate you hold for use in a business or for investment. The rest of the sale is taxed the way it would have been without the exchange.

Who owns the real estate matters

Many owners hold the building their company uses in a separate entity, or personally. Others hold it inside the operating company. What matters for an exchange is who the taxpayer is for federal income tax purposes, and legal title does not settle that. In general, the same taxpayer who gives up the old property must be the one who receives the replacement.8

Consider a distribution company and its warehouse. Suppose the warehouse is held by a separate LLC. If that LLC is disregarded and you own it, you are the taxpayer on the warehouse. If it is taxed as a corporation or a partnership, it is its own taxpayer, and the answers below change. Suppose, too, that the buyer wants only the company and will lease the building from you. You may not sell the warehouse at all, so there is nothing to exchange. If you sell it years later, you could consider an exchange then.

Now suppose the buyer wants both, and the warehouse sells at the same closing. The gain on the warehouse might qualify for deferral if you sell it as real estate and then follow the exchange rules. The gain on the company is a separate matter.

Moving a building out of a company shortly before a sale is a different kind of step. The move can have its own tax results, and it can raise a fair question about why you held the property. Whether a property was held for use or investment, and by whom, depends on the facts. Review ownership years ahead when you can, and have your CPA and attorney look at any transfer before it happens.

The deadlines do not move

You must identify the replacement property in writing within 45 days after you transfer the property you are selling. You must receive the replacement property by the earlier of 180 days after that transfer or the due date of your tax return for that year, including extensions.2

The second deadline catches people. A building sold in November or December may leave fewer than 180 days before the return is due. A timely extension of the return can preserve the full 180 days, and it does not have to be filed before the sale. Evaluate the return deadline early, and ask your CPA to file an extension when you need one.

The regulations also limit how many properties you may identify. In general, you can name up to three properties of any value, or more than three if their combined value stays within 200 percent of what you sold.3

You also cannot take the sale proceeds yourself and then buy the replacement. If you receive the cash, the exchange can fail. Sellers usually engage a qualified intermediary before closing to hold the funds and complete the exchange.3

Because a business sale and a building sale often close together, the 45 days starts on the date the building transfers. It does not start when you first thought about an exchange.

Cash, debt, and the part that is still taxable

If you receive money or other property that is not real estate of the same kind, you must recognize gain up to the amount you received. Tax professionals call that extra value boot.1

Debt works the same way. If someone else takes over a mortgage on the property you sold, the law treats that relief as money you received.2 How new debt or added cash on the replacement property offsets it is something to model with your CPA before you buy. A replacement that costs less, or carries less debt, can leave part of the gain taxable even though you completed an exchange.

You report the exchange on Form 8824 with your return for the year of the transfer.4

Deferral is not forgiveness

The tax you postpone stays attached to the replacement property. When you later sell that property in a taxable sale, the deferred gain comes due along with any new gain, including depreciation you have claimed.5

For that reason, an exchange is a decision about the next property, not only the one you are selling. You are choosing something to own, and possibly to exchange again, for a long time. Cash flow, management, concentration in one asset or one market, and your plans for the next decade all belong in the analysis before the tax does.

An exchange also does not always defer every tax on the property. Part of the gain can be taxed as ordinary income because of depreciation you claimed, and a prior cost segregation study can make that more likely, because it moves part of the basis into shorter-lived property. If the replacement does not include property of the same kind, recapture under section 1245 or 1250 can apply in the year of the exchange.4 Review the depreciation schedule before anyone projects complete deferral.

California adds a filing

California follows the federal exchange rules but asks for more when you leave the state. If you exchange California property for property outside California, you must file Form FTB 3840 for the year of the exchange and for each later year, generally until the California gain is recognized.6

The Franchise Tax Board explains that the source of the gain is determined when the gain is realized and stays California income, whenever you later recognize it.6 Moving the money out of state does not move the gain.

Delaware statutory trusts as replacement property

Some sellers want to leave property management behind. An interest in a Delaware statutory trust can be treated as an interest in real estate for an exchange when the trust is structured as the IRS describes in Revenue Ruling 2004-86.7

The same conditions that make that treatment possible also limit what the trustee can do, and you will have no say in how the property is run. Interests are usually hard to sell, and fees and sponsor terms vary. Read the offering documents with your CPA and attorney before you commit.

Questions to answer before you sign

A short list covers most of what we ask a seller to settle before the closing date is fixed:

  • What is being sold? Separate the company, each property, and anything else with value.
  • Who owns each property? Name the entity or person on title, and who the taxpayer is for income tax purposes.
  • When does each piece close? Write down the dates, because the 45 and 180 days start with the real estate.
  • Who will hold the money? Choose a qualified intermediary and sign the agreement before closing.
  • What will you buy? Begin looking early, and know how much debt and cash the replacement needs.
  • What happens in California? Confirm whether Form FTB 3840 will apply to you.
  • Is deferral worth the limits? Weigh the constraints of a long hold against the tax you would pay today.

If you exchange with a related person, the law generally requires both sides to hold the property for at least two years.2 Two years is a starting point, not a cure. A deal that brings in replacement property from a related party through an intermediary can fail if that party cashes out as part of the transaction.9 Tell your CPA early if a family member or an entity you control is on the other side, directly or through an intermediary.

Putting it in order

At O’Brien & Panchuk, we map these questions to the timeline of the sale before the letter of intent is signed. We look at the business, the real estate, your personal return, and your plans together, and we explain what each choice would mean for you in plain terms.

If a sale is on your horizon and real estate is part of it, an early conversation keeps open options that a rushed closing may close.

Sources and research notes

Sources reviewed October 13, 2026. This article describes federal and California rules in general terms and uses no client figures. Dollar thresholds, forms and procedures are those stated on the pages listed.

  1. Internal Revenue Service, Like-kind exchanges, real estate tax tips. Real property only since 2018, the exclusion for property held primarily for sale, boot, and the Form 8824 reporting rule. Page last reviewed May 1, 2026. ↩
  2. U.S. Code, 26 U.S.C. section 1031. The 45-day and 180-day rules in subsection (a)(3), liabilities treated as money received in subsection (d), and the two-year holding rule for related persons in subsection (f). ↩
  3. Treasury Regulations, 26 C.F.R. section 1.1031(k)-1. Identification rules for replacement property and the qualified intermediary safe harbor. ↩
  4. Internal Revenue Service, Instructions for Form 8824. How the exchange is reported, including the ordinary-income recapture of depreciation on section 1245 and 1250 property. ↩
  5. Internal Revenue Service, Topic no. 409, Capital gains and losses. How gain from a later taxable sale is treated, including depreciation recapture. ↩
  6. California Franchise Tax Board, 2025 Instructions for Form FTB 3840, California Like-Kind Exchanges. Who must file, the annual filing until the California gain is recognized, and how the source of the gain is preserved. ↩
  7. Internal Revenue Service, Revenue Ruling 2004-86. Treatment of beneficial interests in a Delaware statutory trust for like-kind exchange purposes. ↩
  8. Treasury Regulations, 26 C.F.R. section 301.7701-2. Business entities, including a single-owner entity that is disregarded as separate from its owner. ↩
  9. Internal Revenue Service, Revenue Ruling 2002-83. A related-party replacement acquired through a qualified intermediary does not qualify if the related party receives cash or other property that is not like-kind. ↩

Related: how we work with real estate investors.

This article provides general information, not individualized tax or legal advice. Rules, forms and procedures change, and the right answer depends on your facts. Speak with a qualified professional before you act.