On this page
- Since the Tax Cuts and Jobs Act of 2017 only real property qualifies, and an apartment building can go into any real property you will hold for business or investment.
- The replacement must be identified in writing within 45 days of your closing and acquired within 180 days, or by your return's due date with extensions if that comes first.
- You may identify up to three properties of any value, or any number whose combined value stays within 200 percent of what you sold.
- Cash you receive and debt you shed without replacing it can both make part of the gain taxable.
- The qualified intermediary has to be under contract before your sale closes, because the proceeds go to it and never to you.
Sell a Los Angeles apartment building through a 1031 exchange and the tax on your gain is deferred, as long as you buy other real property to hold for business or investment, name it within 45 days of closing and own it within 180. The proceeds go to a qualified intermediary instead of to you, so the exchange has to be set up while your sale is still in escrow.
California adds its own layer. Escrow withholds nothing for the state at the first closing of a properly set up exchange, and a replacement outside California brings a state form every year you own it.
What can an apartment building be exchanged for?
An apartment building can be exchanged for other real property that you will hold for use in a business or for investment. The IRS page on like-kind exchanges of real estate says that since the Tax Cuts and Jobs Act, section 1031 applies only to real property, and that real properties are generally like-kind to one another, improved or unimproved. A fourplex can go into a larger building, a commercial building or a lot held for investment.
The instructions for Form 8824, the form that reports the exchange, leave out property held primarily for sale, and the IRS fact sheet on section 1031 says a home you live in does not qualify either. The statute itself is 26 U.S.C. section 1031.
When are the 45-day and 180-day deadlines?
Both periods start when the building you are selling is transferred to your buyer, which is your closing. By the 45th day you must identify the replacement in a writing you sign and deliver to someone involved in the exchange, such as the qualified intermediary, and the IRS fact sheet on section 1031 has you describe a building by its legal description, street address or a name that sets it apart. The regulation lets that writing go to an escrow agent or a title company as well. It may not go to you, or to anyone the regulation calls a disqualified person.
By the 180th day you must own the replacement. The period ends sooner if your tax return for the year of the sale, extensions included, is due first. A sale that closes on November 15, 2026 has its identification deadline on December 30, 2026 and its 180th day on May 14, 2027. If your 2026 return is due before May 14, only an extension keeps the full exchange period, so put the extension on your CPA's calendar the week escrow opens.
How many replacement properties can you identify?
Treasury Regulation section 1.1031(k)-1 caps the list. Under the three-property rule you may name up to three buildings, whatever each is worth. Under the 200-percent rule you may name any number, provided their combined fair market value at the end of the 45 days is no more than 200 percent of what the property you sold was worth on the day you transferred it.
Take a made-up sale at $3,000,000. The 200-percent rule lets you name any number of buildings worth up to $6,000,000 together. Three at $1,500,000 each come to $4,500,000 and pass both tests. Add a fourth worth $2,000,000 and the list reaches $6,500,000, which fails the three-property rule on count and the 200-percent rule on value.
A list that breaks both rules leaves you, in the regulation's words, treated as if no replacement property had been identified, with exceptions written into the same paragraph. The text is section 1.1031(k)-1, listed in the eCFR part on common nontaxable exchanges, and your CPA should read it before you name a fourth property. Name your backups inside a limit.
Why does a qualified intermediary hold the money?
An exchange fails if the money is yours to take. The IRS says a seller in a like-kind exchange cannot take actual or constructive receipt of the proceeds, and its answer on sales and exchanges of rental property names a qualified intermediary holding them as one of the safe harbors. Constructive receipt reaches further than a check in your name, which is why the regulation requires the exchange agreement to expressly limit your rights to receive, pledge, borrow or otherwise obtain the benefits of the money the intermediary holds.
The regulation also describes the intermediary's job. Under a written exchange agreement it acquires the building you are selling from you and transfers it, then acquires the replacement and transfers it to you, and for section 1031 it is not treated as your agent.
That description carries a rule with it. The taxpayer who hands over the old building has to be the taxpayer who receives the new one. If a trust or an LLC holds title to the building you are selling, ask your CPA and your attorney before escrow opens whether the entity you plan to buy through counts as the same taxpayer, because the answer decides how the replacement's deed has to read.
What is boot, and how does debt count?
Anything you receive other than like-kind real property is called boot. The IRS lists cash, relief from debt and property that is not like-kind as things that can make part of your gain taxable in the year of the exchange, while the rest stays deferred.
Debt relief counts even when no cash reaches you. In a made-up case with selling costs left out, you sell for $3,000,000, $900,000 of it pays off your loan, and the intermediary holds $2,100,000. You buy a $2,500,000 building with all of that cash and a new $400,000 loan. You were relieved of $900,000 of debt and took on $400,000, and the $500,000 difference is boot. It is the exchange for property of lesser value that the IRS describes, with part of the gain deferred and part taxed.
The Form 8824 instructions figure the debt on a net basis: the liabilities, mortgages included, that the other side takes over, less any liabilities you take on, cash you pay and other property you give up. Buy a replacement worth at least the $3,000,000 you sold, pay for it with the $2,100,000 plus $900,000 of new debt or your own cash, and the net comes to zero.
How does an exchange change your closing?
- Choose the intermediary and sign the exchange agreement before your sale closes. The intermediary acquires the building from you under that agreement, so it cannot be added after the deed records.
- Write the exchange into the purchase agreement, with a sentence that the buyer will cooperate at no cost to the buyer, and tell the escrow officer the day escrow opens.
- At closing, escrow sends your net proceeds to the intermediary. Under the 2026 Form 593 instructions, a deferred exchange owes no California withholding at this first transfer, and the intermediary withholds later if you receive more than $1,500 in money or other property, or if the exchange does not take place or does not qualify.
- Count 45 days from your closing and deliver the signed identification to the intermediary before the last one ends.
- Close on the replacement inside the exchange period, with the intermediary sending the money to that escrow and the deed naming the same owner that sold.
- Report the exchange on Form 8824. If the replacement sits outside California, the Franchise Tax Board requires Form FTB 3840 for the year of the exchange and every year after, until you sell it.
Shaya can time the listing and negotiate a closing date that suits your search for a replacement, but he is not a CPA or an attorney. Take the exchange agreement to your attorney, and the identification, the extension and the boot arithmetic to your CPA, before you sign the purchase agreement. If the exchange is the reason you are selling now, the tax it defers is worth working out first.