A 1031 exchange is an IRS tax provision (Section 1031 of the Internal Revenue Code) that allows real estate investors to defer capital gains taxes by selling an investment property and reinvesting the proceeds into a "like-kind" replacement property. Utah investors must identify potential replacement properties within 45 days of selling and close on the replacement within 180 days. A qualified intermediary must hold the funds—investors cannot touch the money directly. When executed correctly, a 1031 exchange can defer hundreds of thousands of dollars in taxes.
How Does a 1031 Exchange Work?
A 1031 exchange allows you to sell an investment property, use the proceeds to purchase another investment property, and defer paying capital gains taxes on the sale. The taxes aren't eliminated—they're postponed until you eventually sell without doing another exchange.
Basic 1031 exchange example:
You purchased a rental property in 2015 for $200,000. In 2026, it's worth $400,000. If you sell normally:
| Without 1031 Exchange | Amount |
|---|---|
| Sale price | $400,000 |
| Original purchase | $200,000 |
| Capital gain | $200,000 |
| Federal tax (15-20%) | $30,000–$40,000 |
| Utah state tax (4.65%) | $9,300 |
| Total tax owed | $39,300–$49,300 |
With a 1031 exchange, you reinvest the entire $400,000 into a new property and pay $0 in taxes now. The tax obligation transfers to the new property.
Key Concept
1031 Exchange Requirements
Not every real estate transaction qualifies for 1031 exchange treatment. The IRS has specific requirements that must be met.
Requirement 1: Like-Kind Property
Both the property you sell (relinquished property) and the property you buy (replacement property) must be "like-kind." For real estate, this is broadly interpreted:
Like-kind examples that qualify:
- Rental house → Apartment building
- Commercial building → Vacant land
- Industrial property → Retail strip mall
- Vacation rental → Office building
- Farm land → Residential rental
What does NOT qualify:
- Primary residence (your home)
- Second home used personally (unless converted to rental)
- Property held primarily for resale (fix-and-flips)
- Foreign real estate (must be U.S. to U.S.)
- Partnership interests
Critical Rule
Requirement 2: Equal or Greater Value
To defer 100% of your capital gains tax, your replacement property must be:
- Equal or greater in value than your sold property
- Equal or greater in equity (your cash investment)
- Equal or greater in debt (mortgage amount)
If you purchase a less expensive property or take cash out, you'll owe taxes on the difference (called "boot").
Requirement 3: Qualified Intermediary (QI)
You cannot handle 1031 exchange funds yourself. The IRS requires a qualified intermediary—a neutral third party who:
- Holds the sale proceeds in escrow
- Transfers funds directly to purchase the replacement property
- Ensures you never have "constructive receipt" of the money
Who cannot be your QI:
- Your attorney
- Your accountant
- Your real estate agent
- Your employee
- Anyone who has worked for you in the past 2 years
Requirement 4: Same Taxpayer
The same taxpayer who sells the relinquished property must acquire the replacement property. The names on both deeds must match exactly.
The 1031 Exchange Timeline: Critical Deadlines
The 1031 exchange has two strict deadlines that cannot be extended—even for weekends, holidays, or unforeseen circumstances.
The 45-Day Identification Period
Starting from the day you close on selling your relinquished property, you have exactly 45 calendar days to identify potential replacement properties in writing.
Identification rules:
- Three-Property Rule: You can identify up to 3 properties regardless of their total value
- 200% Rule: You can identify more than 3 properties if their combined value doesn't exceed 200% of the sold property's value
- 95% Rule: You can identify any number of properties if you acquire at least 95% of their combined value
Most investors use the three-property rule—identify your top choice plus two backups.
Identification must be:
- In writing
- Signed by you
- Delivered to the QI or seller of replacement property
- Received by midnight on day 45
Warning
The 180-Day Exchange Period
You must close on your replacement property within 180 calendar days of selling your relinquished property (or by your tax return due date, if earlier).
Important notes:
- The 180 days runs concurrently with the 45-day identification period—not after it
- If day 180 falls after your tax return deadline, you must file an extension
- You can only purchase properties you identified during the 45-day window
Example timeline:
| Event | Date | Days |
|---|---|---|
| Sell relinquished property | March 1 | Day 0 |
| Identification deadline | April 15 | Day 45 |
| Exchange deadline | August 28 | Day 180 |
Types of 1031 Exchanges
Delayed Exchange (Most Common)
The standard 1031 exchange where you sell first, then buy. This is what most investors use.
Timeline: Sell → QI holds funds → Identify within 45 days → Close within 180 days
Simultaneous Exchange
Both properties close on the same day. Rare in practice because it requires perfect timing.
Reverse Exchange
You buy the replacement property before selling your current property. Useful in competitive markets where you might lose a property while waiting for yours to sell.
Reverse exchange requirements:
- An Exchange Accommodation Titleholder (EAT) must hold title to one property
- More expensive (additional fees for the EAT)
- Same 45/180 day deadlines apply (in reverse)
Build-to-Suit Exchange (Improvement Exchange)
Use exchange funds to build or improve the replacement property before taking title.
Requirements:
- Property must be identified within 45 days
- Improvements must be completed within 180 days
- You receive title only after improvements are complete
1031 Exchange Costs
A 1031 exchange involves additional costs beyond a standard sale:
| Cost | Typical Amount |
|---|---|
| Qualified intermediary fee | $750–$1,500 |
| Title insurance (both properties) | $2,000–$5,000 |
| Legal review (recommended) | $500–$1,500 |
| Closing costs (both properties) | 1–3% each |
Total additional cost: Approximately $3,000–$8,000
Cost-benefit analysis: On a $200,000 capital gain, you'd defer $40,000–$50,000 in taxes. The $5,000 exchange cost is well worth the deferral.
Common 1031 Exchange Mistakes
Mistake 1: Missing Deadlines
The 45-day and 180-day deadlines are absolute. Many exchanges fail because investors forget to send identification in writing, miscalculate calendar days, or can't close on time due to financing issues.
Solution: Build a 10-day buffer into your timeline. Identify properties by day 35. Aim to close by day 160.
Mistake 2: Taking Possession of Funds
If you receive exchange proceeds—even temporarily—the exchange is disqualified. All funds must go through the QI.
Solution: Set up your QI before listing your property. Direct the title company to send proceeds directly to the QI.
Mistake 3: Using a Related Party as QI
Your attorney, CPA, real estate agent, or anyone who has provided services to you in the past two years cannot serve as your qualified intermediary.
Solution: Use an established, independent 1031 exchange company.
Mistake 4: Not Reinvesting Enough
To defer all taxes, you must reinvest 100% of the sale proceeds and acquire equal or greater debt.
Solution: Work with your CPA to calculate exact reinvestment requirements before identifying properties.
Mistake 5: Exchanging Personal Property
Your primary residence and vacation homes used personally don't qualify.
Solution: If you want to exchange a vacation home, convert it to a rental property for at least 1-2 years before selling.
Frequently Asked Questions
The 45-day rule requires you to identify potential replacement properties in writing within 45 calendar days of selling your original property. You can identify up to three properties regardless of value (three-property rule), or more properties if their total value doesn't exceed 200% of the sold property. This deadline is strict—no extensions are granted for any reason, including weekends or holidays.
Key Takeaways
- 11031 exchanges defer capital gains taxes by reinvesting sale proceeds into like-kind investment property
- 245-day identification deadline — You must identify replacement properties in writing within 45 days
- 3180-day exchange deadline — You must close on the replacement property within 180 days
- 4Qualified intermediary required — You cannot handle exchange funds yourself
- 5Like-kind means investment to investment — Primary residences don't qualify
- 6Same taxpayer — The person/entity selling must be the same person/entity buying
1031 Exchange Services in Utah
Successfully completing a 1031 exchange requires coordination between your qualified intermediary, title company, and real estate professionals. At Prospect Title Insurance Agency, we work with 1031 exchange facilitators throughout Utah to ensure smooth closings on both relinquished and replacement properties.
Discuss Your 1031 Exchange