Selling · Tax

The one that has to be set up before you sell

Depreciation recapture, federal gains, the net investment income tax and the Massachusetts surtax can take a large share of a sale. A 1031 exchange defers all of it into the next property. It also has the shortest fuse of anything on this site, because the single most common way to lose it is to close first and ask about it afterwards.

Set it up before the closing, or not at all

You cannot take the money. If you receive the proceeds, or have actual or constructive control of them at any point, the transaction can become taxable. That is why a Qualified Intermediary has to be engaged and in place before your sale closes, so the funds move from the buyer to the intermediary and never through you.

You cannot be your own intermediary. Nor can your attorney, your accountant or your agent, if they have acted for you within the previous two years. It has to be an independent party engaged for the purpose.

The rest of this page is deadlines. This is the part that is not recoverable once the closing has happened.

Two clocks, both starting at your closing

They run at the same time rather than one after the other, so day 45 leaves you 135 days to close on what you named. Neither can be extended. Not for a weekend or a public holiday falling on the deadline, not for a natural disaster, not for a financing delay, a seller default or a title problem.

What it is worth on a South Shore sale

The exchange defers the whole stack rather than part of it: the 25% depreciation recapture, the federal capital gain, the 3.8% net investment income tax where it applies, the Massachusetts 5%, and the 4% surtax on income above the threshold. Our recapture page and surtax page work through what each of those costs on an ordinary rental.

Deferred is not forgiven. The basis carries into the replacement property, so the liability follows you and lands on a later sale that is not exchanged. What you gain is the use of the full proceeds now, which on a leveraged purchase is worth considerably more than the tax saved.

Where small landlords come unstuck

• Deciding after the offer. By then the closing is scheduled and engaging an intermediary becomes a race.
• Identifying loosely. The identification is a written, signed document naming specific property, delivered to the intermediary. A shortlist in your head is not an identification.
• Buying smaller. Taking cash out, or reducing the debt you carry, creates boot and boot is taxable.
• Selling in the autumn without filing an extension. See above.

Section 1031 remains available for qualifying real property under current federal law. Rules change, and this is a page about a tax provision rather than tax advice, so the exchange itself belongs with a qualified intermediary and your accountant.

Questions people ask

When do I have to set up a 1031 exchange?

Before your sale closes. If you receive the proceeds, or have actual or constructive control of them at any point, the transaction can become taxable. A Qualified Intermediary must be engaged in advance so the funds never pass through you.

How long do I have to identify a replacement property?

45 calendar days from the closing of the sale. The identification must be in writing, signed, and delivered to your Qualified Intermediary by midnight on day 45. The deadline does not move for weekends or public holidays.

How long do I have to complete the purchase?

180 calendar days from the closing of the sale, or the due date of your tax return for that year including extensions, whichever is earlier. Both clocks start at the same closing and run at the same time.

Can my accountant or lawyer act as my Qualified Intermediary?

No, if they have acted for you within the previous two years. You cannot act as your own intermediary either. It must be an independent party engaged for the purpose.

Does a 1031 exchange defer depreciation recapture as well as capital gains?

Yes. A properly completed exchange defers the whole liability, recapture included. Deferred is not forgiven: the basis carries into the replacement property and the liability lands on a later sale that is not exchanged.