How to Use a 1031 Exchange in Real Estate Investing
A 1031 exchange can be one of the most useful tax-planning tools in real estate investing because it can let you defer capital gains taxes when you sell an investment property and reinvest into another qualifying property. The tradeoff is complexity: you have strict deadlines, strict handling of funds, and specific rules about what qualifies. Miss one step and you can blow the deferral.
This 2026 guide covers how 1031 exchanges actually work in practice, the rules that matter most, and the question investors keep asking: can you 1031 into a real estate fund?
A 1031 exchange (often called a like-kind exchange) generally allows you to defer recognition of gain when you exchange real property held for investment or business use for other like-kind real property held for investment or business use. The IRS has a plain-language overview here: https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips
It is usually tax deferral, not tax forgiveness. The deferred gain is embedded into the basis of the replacement property and may be recognized later if you sell without doing another exchange. Many long-term investors use 1031 exchanges to keep more capital compounding and to reposition portfolios over time.
To qualify, both the relinquished property (the one you sell) and the replacement property (the one you buy) must be held for investment or business use. Personal-use property (like a primary residence) does not qualify. For real estate, like-kind is broad: it is generally real property for real property, as long as it is held for investment or business purposes. The IRS summary of core rules and timing is in FS-08-18: https://www.irs.gov/pub/irs-news/fs-08-18.pdf
In the real world, that means investors commonly exchange between different types of real property: single-family rentals into multifamily, multifamily into retail, land into industrial, and so on, assuming the hold intent and facts support investment use.
Most failed exchanges fail because the calendar was underestimated.
Those timing requirements are summarized in FS-08-18 and reinforced in the Form 8824 instructions. FS-08-18: https://www.irs.gov/pub/irs-news/fs-08-18.pdf and Instructions for Form 8824: https://www.irs.gov/pub/irs-pdf/i8824.pdf
Within the 45-day identification window, you must identify replacement property in writing. In practice, most investors follow one of these common identification rules described in IRS guidance:
These rules exist so an exchange cannot be used as an open-ended “option” on unlimited properties while still deferring tax. If you are unsure how to draft a compliant identification, ask your qualified intermediary and tax advisor before day 45, not on day 44.
In a standard deferred exchange, you generally cannot touch the sale proceeds. If you take receipt of funds (even briefly), you can trigger constructive receipt and disqualify the exchange. A qualified intermediary (QI) is typically used to hold the sale proceeds and facilitate the exchange steps so you do not receive the funds directly. The IRS discusses qualified intermediaries in its 1031 guidance and educational materials: https://www.irs.gov/pub/irs-news/fs-08-18.pdf
Practical 2026 tip: choose your QI before you close your sale. Do not wait until the week of closing, because the exchange paperwork and settlement instructions need to be correct from the start.
Here is a realistic workflow that keeps investors out of trouble:
1) Decide early if the sale will be a 1031 exchange and confirm the property qualifies as investment/business real estate.
2) Select your qualified intermediary before closing the sale. Coordinate settlement instructions so proceeds go to the QI, not to you.
3) Close the sale of the relinquished property.
4) Identify replacement property(ies) in writing by day 45.
5) Underwrite and conduct due diligence fast and conservatively. In 2026, lenders, insurers, and tax reassessments can change the economics quickly. Verify what is real, not what is projected.
6) Close on the replacement property by day 180. Make sure closing docs match the exchange structure and that the QI is involved appropriately.
7) Report the exchange on your tax return (commonly using Form 8824) and retain documentation. Form 8824 is here: https://www.irs.gov/pub/irs-pdf/f8824.pdf
If you want full tax deferral, many investors aim to follow these general principles:
If you receive cash back, reduce debt without replacing it, or receive non-like-kind property, that can create taxable boot. This is where strong coordination between your CPA, lender, closing agent, and QI matters.
This is one of the most common questions investors ask: can you 1031 into a real estate fund?
Most of the time, not directly. Many “real estate funds” sell interests in an entity (an LLC or partnership). Partnership interests are generally excluded from Section 1031 treatment, and most fund interests are treated as securities or entity interests rather than direct ownership of real property. The IRS fact sheet summarizing the framework and common exclusions is FS-08-18: https://www.irs.gov/pub/irs-news/fs-08-18.pdf
That said, investors sometimes mean “fund” in a looser way: they want diversification and professional management instead of buying a single property. In that context, there are structures that can feel fund-like but are designed so the investor is acquiring an interest that is treated as real property for 1031 purposes.
The most common example is a Delaware Statutory Trust (DST). IRS Revenue Ruling 2004-86 is often cited in DST-related discussions because it addresses tax treatment of certain DST arrangements in a way that can support 1031 exchange use when structured properly. Rev. Rul. 2004-86: https://www.irs.gov/pub/irs-drop/rr-04-86.pdf
Some investors also explore tenant-in-common (TIC) structures. A TIC interest is considered a qualifying real property interest based on how it is set up and managed. This is not a DIY decision. If your goal is “1031 into a real estate fund,” you should ask your advisors to confirm what you are buying: a qualifying real property interest, or an entity interest that does not qualify.
If you want a deeper walkthrough tailored to investors, Rod’s 1031 exchange FAQ covers the basics and common pitfalls in plain English.
Generally, a 1031 exchange is for real property, not for REIT shares, because shares are securities rather than like-kind real property. Some investors discuss longer-term planning strategies involving a later Section 721 exchange (often called an UPREIT strategy), but that is not the same as a 1031 exchange and it changes what you own and how you exit. Treat any “1031 to REIT” path as advanced planning that requires specialized tax and legal advice.
If you find the right replacement property before you sell your current property, you may be able to use a reverse exchange. The IRS provided a safe harbor framework in Revenue Procedure 2000-37: https://www.irs.gov/pub/irs-drop/rp-00-37.pdf
Reverse exchanges can be useful in competitive markets, but they are more complex, usually more expensive, and require tight coordination among your QI, counsel, lender, and closing team.
It is easy to get so focused on completing the exchange that you rush the replacement property. That is how investors defer taxes and buy a problem.
In 2026, a careful approach is essential. First, check income and collections. Next, verify expenses, especially for insurance and taxes. Then, confirm capital expenditure needs with real bids. Finally, assess debt terms realistically. If you are investing in multifamily properties, strong buying fundamentals are more important than a perfect tax strategy.
If you’re buying apartments as your replacement property, Rod’s complete guide to buying an apartment building is a solid companion resource for the operational and underwriting side of the decision.
For a plain-English example of how deferral can keep more capital working, Rod’s article on how a 1031 exchange can save you thousands helps frame the practical upside.
A 1031 exchange can be a powerful portfolio tool because it can keep more capital compounding and allow you to reposition holdings without an immediate tax hit. The way to use it effectively in 2026 is process discipline: decide early, use a qualified intermediary, respect the 45-day and 180-day deadlines, avoid boot surprises, and do conservative due diligence on the replacement property.
And if you are asking “can you 1031 into a real estate fund,” remember the key distinction: most funds sell entity interests that do not qualify, but certain structures that feel fund-like may be designed to provide a qualifying real property interest when structured and vetted correctly with professional advice.
Disclaimer: This article is for educational purposes only and is not tax, legal, or investment advice. Consult qualified professionals for guidance on your specific situation. This article was written with the help of AI and reviewed by Rod and his team.
Can I do a 1031 exchange on my primary residence?
Usually no. A 1031 exchange is generally for real property held for investment or business use. Primary residences typically don’t qualify.
What is the 45-day rule in a 1031 exchange?
After you sell your relinquished property, you generally have 45 calendar days to identify your replacement property(ies) in writing. Missing this deadline can disqualify the exchange.
What is the 180-day rule in a 1031 exchange?
You generally have 180 calendar days from the sale of the relinquished property to close on the replacement property (or by your tax return due date including extensions, whichever is earlier).
How many replacement properties can I identify?
Most investors use the three-property rule (up to three properties regardless of value) or the 200% rule (any number of properties as long as total value is no more than 200% of what you sold). There’s also a 95% rule for specific situations.
Do I need a qualified intermediary (QI)?
In most standard deferred exchanges, yes. A QI helps prevent you from taking receipt of the sale proceeds, which can disqualify the exchange.
What does “like-kind” mean for real estate in 2026?
For real property, like-kind is broad. It generally means exchanging investment/business real property for other investment/business real property, even if the property types differ (for example, rental house into multifamily), as long as the intent and use qualify.
What is “boot,” and how do I avoid it?
Boot is value you receive that isn’t like-kind real estate (often cash back or debt reduction that isn’t replaced). Boot can be taxable. Many investors aim to reinvest all proceeds and purchase equal-or-greater value while replacing debt (or adding cash) to minimize boot.
Can you 1031 into a real estate fund?
Most of the time, not directly, because many “funds” sell partnership or LLC interests, which generally don’t qualify for 1031 treatment. Some fund-like options (often structured as DSTs or certain TIC arrangements) may qualify if they are treated as real property interests, but this is highly structure-dependent and should be confirmed with tax/legal professionals.
Can I 1031 into a REIT?
Generally no. REIT shares are securities, not like-kind real property for 1031 purposes. Some investors explore other strategies (like a later 721/UPREIT approach), but that is different from a 1031 exchange and requires specialized advice.
What is a reverse 1031 exchange?
A reverse exchange is when you acquire the replacement property before selling the relinquished property. It can help when a great opportunity shows up first, but it’s more complex and usually more expensive to execute.
What are the biggest mistakes investors make with 1031 exchanges?
Waiting too long to set up the exchange, missing the 45-day identification deadline, receiving funds directly, identifying properties incorrectly, assuming a “fund” qualifies without verifying structure, and failing to close within the 180-day deadline.
What should I do first if I’m considering a 1031 exchange in 2026?
Decide early, choose your qualified intermediary before closing, confirm your replacement plan, and line up your CPA/attorney so you can move quickly within the deadlines while still doing real due diligence.
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