What a 1031 exchange does for an Ohio landlord
A 1031 exchange defers federal tax on a rental’s gain by rolling it into replacement real estate, rather than cashing out. The name comes from Section 1031 of the Internal Revenue Code. The tax isn’t forgiven. It carries forward into the new property’s basis and comes due when you eventually sell without exchanging.
Since 2018, the IRS says like-kind treatment applies only to real property. Personal property, such as appliances or vehicles, no longer qualifies on its own.
Which properties qualify
Both the property you sell and the one you buy must be real property “held for use in a trade or business or for investment,” in the words of the Form 8824 instructions. Typical Northeast Ohio examples:
| Usually qualifies | Usually does not |
|---|---|
| A single-family rental in Akron | Your own home, used solely as your residence |
| A duplex or fourplex in Canton | A house you bought to fix and flip |
| Vacant land held for investment | Property held primarily for sale |
| A small commercial building | Foreign real estate swapped for U.S. real estate |
Like-kind is broad for real estate. The IRS gives the example that an apartment building and undeveloped land are generally like-kind. So a Summit County rental house can be exchanged for land in Medina County or a building in another state.
The 45-day and 180-day deadlines
The two deadlines are the part of a 1031 exchange that trips people up most. Both run from the day you transfer the rental you sold:
- Identification, 45 days: you must identify the replacement property in writing within 45 days.
- Receipt, 180 days: you must receive the replacement within 180 days, or by the due date of your tax return for that year including extensions, whichever is earlier.
Example: you close on your Barberton rental on October 1. Day 45 falls in mid-November. Day 180 falls in late March. Your return would normally be due April 15, so the 180-day date controls. If you sold in late December, the return due date could come before day 180 unless you file an extension, which is why the IRS ties the deadline to whichever comes first.
Missing either deadline turns the sale into a regular taxable sale, so put both dates on a calendar the day you close.
The qualified intermediary
Most exchanges are deferred exchanges run through a qualified intermediary. The intermediary signs an exchange agreement with you before closing, receives the sale proceeds from the title company, and uses them to buy the replacement for you.
Why it matters: if the money reaches your account, it is treated as cash received. The Form 8824 instructions note that related parties and your agents generally can’t serve as the intermediary. That usually rules out your relatives, and often your regular attorney, accountant or real estate agent, depending on the relationship.
Set the intermediary up before you sign the closing papers. The title company needs its instructions in advance.
Boot, debt and depreciation recapture
Anything you receive that isn’t like-kind property is called boot, and it is taxable. The IRS says gain is recognized up to the value of the cash or other property received, and losses are not recognized.
Common sources of boot in a rental exchange:
- Cash left over because the replacement costs less than the sale price.
- A smaller mortgage on the replacement than the one paid off on the old rental, unless you add cash.
- Proceeds used for things that aren’t exchange expenses.
The instructions also warn that depreciation recapture may apply, so part of the gain can be ordinary income. Landlords who have depreciated a house for many years should have a tax professional run the numbers before choosing between an exchange and a plain sale.
Reporting and the related-party rule
You report the exchange on Form 8824 with your return for the year you transferred the old property. The form calculates the deferred gain and the basis of the replacement.
If you exchange with a related party and either of you disposes of the property within two years, the deferred gain generally becomes taxable, unless an exception applies. That rule is aimed at family swaps used to shift basis.
Questions to settle before you sell
An exchange is easier to plan before the rental is under contract than after. Work through these with your tax adviser first:
- Is the gain big enough to justify it? Intermediary fees and a tighter purchase timeline cost money. On a small gain, paying the tax may be simpler.
- Do you want to stay a landlord? An exchange keeps you in real estate. If you are selling to get out of renting altogether, a 1031 only postpones that decision.
- Can you find a replacement in 45 days? In a tight market, that window is short. Some investors start looking before they list.
- Will the replacement carry equal or greater debt? If not, plan the extra cash so it doesn’t become boot.
- Who holds title? The same taxpayer that sells generally needs to buy. An LLC selling and a person buying can cause problems.
Write the answers down and give them to the intermediary and the title company with your instructions.
How a 1031 fits a sale to a direct buyer
The kind of buyer doesn’t change the exchange rules. A cash buyer can be useful when the deadlines are tight, because the closing date can be set to match your replacement purchase. Tell the buyer and the title company at the start that the sale is part of an exchange, so the intermediary’s documents are in the file.
A 1031 is a tax decision, not just a sales one. If you are selling because the property needs too much work to keep renting, compare the exchange with the after-tax result of a plain sale, using our guide to capital gains tax on a home sale. Our pages on selling a rental property and selling a duplex or multi-family property cover the sale itself, and the state’s transfer cost is explained in the Ohio conveyance fee guide. A CPA or tax attorney should confirm the plan for your situation.
