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1031 Exchange Frequently Asked Questions

Every 1031 Exchange Question We Get, Answered

The complete reference for DFW retail and STNL investors evaluating a 1031 exchange. This page covers exchange mechanics, the 45-day and 180-day timeline rules, Qualified Intermediary requirements, identification methods, property and like-kind rules, tax treatment, and how Eureka Business Group works alongside investors on DFW exchange transactions.

Jump to Category: ► 1031 Basics ► Timeline Rules ► Qualified Intermediary ► Identification ► Property & Like-Kind ► Tax Treatment ► DFW & Working With EBG

1031 Exchange Basics

The fundamental mechanics of Section 1031, what types of property qualify, and the core purpose of the tax-deferral structure.

A 1031 exchange is a provision of U.S. tax code under Internal Revenue Code Section 1031 that allows real estate investors to defer capital gains taxes when selling an investment property and reinvesting the proceeds into a like-kind property of equal or greater value within strict time deadlines.

The mechanism preserves the investor’s capital that would otherwise be paid in taxes, allowing it to compound through subsequent acquisitions over the life of the investor’s real estate portfolio.

Related: The 1031 Exchange Hub

The name comes from Section 1031 of the Internal Revenue Code, which is the specific tax code provision that authorizes tax-deferred like-kind exchanges of investment property. The section has existed in U.S. tax law in some form since 1921.

The structure is also called a “like-kind exchange,” a “Starker exchange” (named after a 1979 court case that established delayed exchange procedures), or simply a “tax-deferred exchange.”

The 1031 exchange exists to encourage continued investment in real estate by removing the tax friction that would otherwise occur every time an investor sells one property to buy another. Without 1031, an investor would owe capital gains tax, depreciation recapture, and net investment income tax on every disposition, significantly reducing the capital available for reinvestment.

For active real estate investors, 1031 is the primary mechanism for repositioning a portfolio over time, trading up to larger assets, shifting between submarkets, restructuring across property types, and consolidating or diversifying holdings without triggering immediate tax liability.

No. A 1031 exchange is tax-deferred, not tax-free. Capital gains taxes, depreciation recapture, and net investment income tax that would have been owed on the relinquished property sale are deferred, meaning they carry forward as a basis adjustment on the replacement property.

When the replacement property is eventually sold in a non-exchange transaction, the deferred tax liability becomes due. Investors can continue to defer indefinitely through subsequent 1031 exchanges. Under current tax law, the tax basis steps up at death, which can eliminate the deferred liability entirely for heirs.

Yes. There is no limit on the number of 1031 exchanges an investor can complete. Many active commercial real estate investors execute multiple exchanges over their investing lifetime, continuously deferring tax while repositioning their portfolio.

Each exchange operates as its own independent transaction with its own 45-day and 180-day deadlines. The deferred tax basis carries forward from each relinquished property to its replacement property and continues across subsequent exchanges.

Jump to Category: ► 1031 Basics ► Timeline Rules ► Qualified Intermediary ► Identification ► Property & Like-Kind ► Tax Treatment ► DFW & Working With EBG

The 45-Day and 180-Day Timeline

How the IRS deadlines work, when they start, what happens if they are missed, and the limited circumstances in which they can be extended.

A 1031 exchange has two non-extendable deadlines from the day the relinquished property closes:

  • 45 days to formally identify replacement property candidates in writing to the Qualified Intermediary
  • 180 days total to close on the replacement property

Both clocks start on the same day, the day the relinquished property sale closes. They run concurrently, not sequentially.

Related: 1031 Timeline Calculator

The 45-day identification clock starts on the day the relinquished property closes, the day title transfers and the sale proceeds are delivered to the Qualified Intermediary. Day 0 is the closing day; Day 1 is the following calendar day.

The 45 days are counted as calendar days, not business days. Weekends and holidays count toward the deadline. If Day 45 falls on a weekend or federal holiday, the deadline does not get pushed to the next business day, the rule is calendar-day strict.

If the 45-day identification deadline is missed, the exchange fails. The proceeds held by the Qualified Intermediary are released to the investor, and the original transaction is treated as a taxable sale.

Capital gains tax, depreciation recapture, and net investment income tax become due on the relinquished property sale, calculated as of the original closing date. There is no partial-exchange remedy, missing Day 45 collapses the entire exchange.

The 45-day and 180-day deadlines cannot be extended for personal hardship, financing delays, business reasons, or unfavorable market conditions. The IRS treats these deadlines as strict.

The only recognized exception is a federally declared disaster. When the IRS issues disaster relief for a specific area, affected taxpayers may receive automatic deadline extensions. These extensions are issued via IRS notice and apply only to taxpayers in the designated disaster zone.

The 180-day replacement deadline is the earlier of 180 calendar days from the relinquished closing or the due date of the investor’s tax return for the year of the sale, including extensions.

For investors selling in the fourth quarter, the tax return due date often shortens the practical exchange window. For example, an investor closing a relinquished sale on November 1 would have a 180-day deadline of April 30, but the individual tax return due date of April 15 becomes the effective deadline unless an extension is filed.

Filing a tax return extension preserves the full 180 days. This should always be discussed with the investor’s CPA before the relinquished property closes.

Yes, this is called a reverse 1031 exchange. The investor acquires the replacement property before selling the relinquished property. The replacement property is held by an Exchange Accommodation Titleholder during the process.

In a reverse exchange, the timeline structure flips: the investor has 45 days from the replacement acquisition to identify the relinquished property and 180 days total to close the sale of the relinquished. Reverse exchanges are more complex and more expensive than standard delayed exchanges.

Jump to Category: ► 1031 Basics ► Timeline Rules ► Qualified Intermediary ► Identification ► Property & Like-Kind ► Tax Treatment ► DFW & Working With EBG

Qualified Intermediary (QI) Requirements

What a Qualified Intermediary is, why one is required, how to select one, and the distinction between the QI’s role and the broker’s role on a 1031 exchange.

A Qualified Intermediary (QI) is an independent third party who holds the sale proceeds from the relinquished property during the exchange period and uses those proceeds to acquire the replacement property.

The QI is required by IRS rules. The investor cannot take constructive receipt of the proceeds at any point during the exchange, doing so would invalidate the 1031 treatment and trigger immediate taxation of the relinquished sale.

IRS regulations require that the investor have no actual or constructive receipt of the sale proceeds during the exchange period. Taking direct control of the funds, even temporarily, would be treated as receiving the proceeds, which collapses the exchange and triggers immediate capital gains taxation.

The Qualified Intermediary holds the funds in a segregated account on the investor’s behalf. The QI is contractually limited in what it can do with the funds: receive them from the relinquished sale, hold them during the exchange period, and disburse them to acquire the replacement property at the investor’s written direction.

Key criteria when selecting a QI:

  • Fund segregation. Funds should be held in segregated qualified escrow or trust accounts, not commingled.
  • Fidelity bond and errors-and-omissions coverage. Confirm coverage limits are appropriate to the transaction size.
  • Experience with the asset type. Commercial exchanges have different mechanics than residential, choose a QI experienced in commercial real estate.
  • Responsiveness inside the 45-day window. The QI will be processing identification documents under time pressure. Confirm their service levels.
  • Independence from the investor and parties to the transaction. The QI cannot be a disqualified person under IRS rules — meaning they cannot be the investor’s attorney, CPA, broker, or other agent within the prior two-year period.

Eureka Business Group maintains active referral relationships with several DFW-area QIs and can recommend appropriate options based on the specific transaction.

No. Under IRS rules, the investor’s real estate broker is a disqualified person for purposes of acting as a Qualified Intermediary. The broker’s role in the transaction is structurally incompatible with the QI’s required independence.

Eureka Business Group does not act as a Qualified Intermediary on any client transaction. The firm works alongside the investor’s chosen QI as the real estate advisor on the exchange.

The QI’s role is structural and administrative:

  • Receives and holds exchange proceeds from the relinquished sale
  • Provides exchange documentation and assignment agreements
  • Accepts the investor’s written identification of replacement properties
  • Disburses funds to acquire the replacement property at investor direction
  • Provides final exchange documentation for the investor’s tax filing

The QI does not evaluate replacement properties, provide investment advice, perform underwriting, or advise on the merits of any specific transaction. That accountability gap is where most 1031 exchange mistakes occur, and it is the gap Eureka Business Group fills as the real estate advisor on a DFW exchange.

Jump to Category: ► 1031 Basics ► Timeline Rules ► Qualified Intermediary ► Identification ► Property & Like-Kind ► Tax Treatment ► DFW & Working With EBG

Replacement Property Identification Rules

The three IRS-recognized identification methods, how identification works mechanically, and the strategic considerations behind each approach.

The IRS allows three methods for identifying replacement properties within the 45-day window:

  • The 3-Property Rule. Identify up to three potential replacement properties of any value. Most commonly used method.
  • The 200% Rule. Identify any number of properties as long as their aggregate fair market value does not exceed 200% of the relinquished property’s sale price.
  • The 95% Rule. Identify any number of properties without value limitation, but the investor must actually acquire at least 95% of the total identified value.

The investor chooses which rule to use; the choice is implicitly made by what gets identified on Day 45.

The 3-Property Rule allows an investor to identify up to three potential replacement properties of any value within the 45-day window. The investor can acquire any or all of the three identified properties, but cannot substitute new properties after Day 45.

This is the most commonly used rule because it provides flexibility (multiple options) without value restrictions. Most DFW retail and STNL exchanges use the 3-Property Rule with a primary target and two backups.

The 200% Rule allows an investor to identify any number of potential replacement properties as long as their aggregate fair market value does not exceed 200% of the relinquished property’s sale price.

Used when the investor wants more than three options without value restriction on any individual property. For example, an investor selling a $5M relinquished property could identify ten properties as long as their combined value stays under $10M.

The 200% Rule is most useful when the investor expects to acquire multiple smaller replacement properties or when there is significant uncertainty about which deals will reach closing inside the window.

The 95% Rule allows an investor to identify any number of properties without aggregate value limitation, but the investor must actually acquire at least 95% of the total identified value within the 180-day window.

This rule is rarely used because failure to meet the 95% acquisition threshold causes the entire exchange to fail. It is occasionally used in portfolio exchanges where the investor has high certainty of acquiring most of the identified inventory.

Identification must be made in writing, signed by the investor, and delivered to the Qualified Intermediary on or before Day 45. The identification document must describe each property with enough specificity that it is unambiguous, typically the legal description or street address.

Identification can be modified before Day 45, properties can be added, removed, or substituted. After Day 45, the identification list is locked. The IRS does not allow late identifications, partial identifications, or oral identifications.

Jump to Category: ► 1031 Basics ► Timeline Rules ► Qualified Intermediary ► Identification ► Property & Like-Kind ► Tax Treatment ► DFW & Working With EBG

Property & Like-Kind Rules

What qualifies as like-kind property, what types of real estate are eligible, and the holding-purpose requirement that determines exchange eligibility.

Real property held for investment or productive use in a trade or business qualifies for a 1031 exchange. This includes:

  • Shopping centers and other retail property
  • Single-tenant net lease properties
  • Industrial and warehouse buildings
  • Office buildings
  • Apartment buildings and other multifamily
  • Raw land held for investment
  • Mineral rights and certain other real property interests

Property held primarily for personal use, such as a primary residence or vacation home, does not qualify. Property held primarily for resale, such as fix-and-flip inventory, also does not qualify.

Like-kind for real estate 1031 exchanges means real property held for investment or business use. The properties do not need to be similar in type, quality, or grade.

A shopping center can be exchanged for an apartment building. A single-tenant net lease property can be exchanged for raw land. Industrial property can be exchanged for retail. The rule is broad on the real estate side, what matters is that both the relinquished and replacement property qualify as investment or business real estate under the IRS rules.

(Note: prior to 2017, like-kind exchanges were also available for personal property such as equipment and vehicles. The Tax Cuts and Jobs Act of 2017 limited 1031 exchanges to real property only.)

Yes. Shopping centers, single-tenant net lease properties, and other commercial real estate held for investment qualify for 1031 exchange treatment in any state, including Texas.

Eureka Business Group specifically advises DFW retail and STNL investors on 1031 exchange replacement strategy across the Dallas-Fort Worth market. The firm’s submarket depth in DFW retail is its primary differentiator on exchange engagements.

Related: Shopping Center Investment Sales

Yes. 1031 exchanges can cross state lines. The relinquished and replacement properties can be in different states as long as both qualify as like-kind investment real estate under federal IRS rules.

State income tax treatment of 1031 exchanges varies. Some states conform to federal treatment and defer state capital gains tax in parallel. Other states have specific rules that may require recognition of state-level gain. Because Texas has no state income tax, DFW-based investors selling in Texas have only federal tax considerations on the relinquished side. Investors selling out-of-state and exchanging into Texas should consult their CPA on the specific state’s treatment.

Related: The 1031 Exchange Hub

To achieve full tax deferral, the replacement property must be of equal or greater value to the relinquished property, AND all sale proceeds must be reinvested, AND any debt on the replacement property must equal or exceed the debt on the relinquished property (or be offset by additional cash equity).

If the replacement is less expensive, or if the investor takes cash out of the exchange, the difference is called “boot” and is taxable as a partial exchange. Boot can be received without invalidating the entire exchange, but the portion received is taxed immediately at applicable rates.

Related: The 1031 Exchange Hub

Jump to Category: ► 1031 Basics ► Timeline Rules ► Qualified Intermediary ► Identification ► Property & Like-Kind ► Tax Treatment ► DFW & Working With EBG

Tax Treatment

What taxes a 1031 exchange defers, how basis carries forward, and the implications of partial exchanges or eventual disposition of the replacement property.

A 1031 exchange defers three federal taxes:

  • Capital gains tax on the appreciated value of the relinquished property
  • Depreciation recapture tax on accumulated depreciation deductions (taxed at up to 25% under current law)
  • Net Investment Income Tax (3.8%) for investors above the income thresholds

State capital gains taxes are also deferred in states that conform to federal treatment.

Texas has no state income tax and no state capital gains tax. DFW real estate investors are primarily concerned with federal capital gains tax deferral through 1031 exchanges.

This is one reason DFW commercial real estate attracts significant 1031 capital from investors in high-tax states. An investor selling property in California, New York, or other high-tax jurisdictions can exchange into Texas property and benefit from the absence of state income tax on future operating income.

Boot is any non-like-kind value the investor receives in an exchange. The two most common forms are:

  • Cash boot. Cash received by the investor during the exchange — typically when the replacement property costs less than the relinquished property or when the investor pulls equity out.
  • Mortgage boot. A net reduction in liabilities, meaning the debt on the replacement property is less than the debt on the relinquished property, and the difference is not offset by additional cash equity.

Boot is taxable in the year of the exchange at applicable capital gains and recapture rates. Receiving boot does not invalidate the exchange ,it just creates partial taxation on the boot amount while the remainder of the gain continues to be deferred.

The investor’s carryover basis from the relinquished property transfers to the replacement property, adjusted for any cash invested above the relinquished value and reduced by any boot received.

This basis adjustment is what creates the deferral, the deferred gain is embedded in the lower basis of the replacement property. When the replacement is eventually sold in a non-exchange transaction, the deferred gain is recognized at that point. Subsequent depreciation on the replacement is calculated against the carryover basis rather than the acquisition price.

Basis calculations on exchange transactions can be complex. They should always be handled by the investor’s CPA and reflected on IRS Form 8824 in the year of the exchange.

No. Eureka Business Group provides real estate advisory services within a 1031 exchange, identifying, evaluating, and closing on replacement properties. The firm does not provide tax or legal advice.

Every 1031 exchange should be reviewed by the investor’s CPA and tax counsel before execution. Eureka Business Group works alongside the investor’s Qualified Intermediary, tax advisor, and legal counsel as the real estate advisor on the engagement. All transaction documentation is shared with the CPA in real time, and tax questions are deferred to the appropriate professional.

Jump to Category: ► 1031 Basics ► Timeline Rules ► Qualified Intermediary ► Identification ► Property & Like-Kind ► Tax Treatment ► DFW & Working With EBG

DFW-Specific Exchange Strategy & Working with Eureka Business Group

How DFW market dynamics affect 1031 exchange strategy, and how Eureka Business Group works alongside investors and their advisors on DFW retail and STNL exchanges.

Before the relinquished property closes, not after. The most common mistake in 1031 exchanges is starting the replacement property search after the 45-day clock has already begun. By Day 1, the investor should already have a defined replacement strategy, target submarkets, and an initial inventory of candidate properties.

Eureka Business Group’s 1031 advisory engagement begins in the pre-sale window. Replacement criteria are defined, target DFW submarkets are reviewed, and candidate inventory is built so the 45-day clock starts with an actionable plan in hand rather than a search starting from scratch under time pressure.

Eureka Business Group focuses on DFW retail and single-tenant net lease (STNL) properties. Replacement options typically include:

  • Multi-tenant retail shopping centers across DFW submarkets
  • Single-tenant net lease properties, both investment-grade and franchise/regional tenants
  • Industrial and flex properties where they align with investor strategy
  • Owner-user / value-add retail repositioning opportunities

The firm’s submarket depth covers the Dallas – Fort Worth metroplex (Dallas, Tarrant, Collin, Denton counties to name a few). Each candidate property is underwritten with our investor-operator perspective leveraging our real-world, hands-on, experience 

Yes. Eureka Business Group operates as the real estate advisor within the investor’s existing professional team. The firm coordinates with the investor’s CPA, tax counsel, attorney, and Qualified Intermediary throughout the engagement.

All transaction documentation is shared in real time with the appropriate advisors. Tax questions are routed to the CPA. Legal questions are routed to counsel. The QI handles the structural and administrative components of the exchange. Eureka Business Group’s responsibility is the real estate analysis, identification strategy, and transaction execution.

The right first step is a direct conversation. A 20 to 30-minute call covers the investor’s situation:

  • Current property holdings or target criteria
  • Exchange timeline and any pre-sale activity already in progress
  • Replacement preferences, submarkets, property types, return parameters
  • Existing professional team (CPA, attorney, QI)

From there, Eureka Business Group can scope the engagement, recommend appropriate next steps, and, if the firm is the right fit for the situation, begin pre-sale replacement strategy work.

SCHEDULE A CONVERSATION →
Jump to Category: ► 1031 Basics ► Timeline Rules ► Qualified Intermediary ► Identification ► Property & Like-Kind ► Tax Treatment ► DFW & Working With EBG

Did not find your question?

The 1031 exchange landscape is complex and every situation is different. If you have a specific question this page did not answer, Eureka Business Group is happy to discuss it directly.

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Important: Eureka Business Group provides real estate advisory services within a 1031 exchange. Eureka Business Group does not provide tax or legal advice. All information on this page is for educational and informational purposes only and is not a substitute for professional tax, legal, or accounting advice. Every 1031 exchange should be reviewed by the investor’s CPA and tax counsel before execution. IRS rules governing 1031 exchanges are subject to change. Information current as of the last updated date shown at the top of this page.