The rules that matter
| Rule | What it means |
|---|---|
| Like-kind real property | Almost any U.S. investment or business real estate can be exchanged for any other: a flex building for land, an IOS yard for a net-leased retail building. Personal residences and property held mainly for resale do not qualify. |
| Qualified intermediary (QI) | You cannot touch the sale proceeds. The QI must be engaged before the sale closes and holds the funds until the replacement purchase. |
| 45-day identification | Identify replacement property in writing within 45 calendar days of closing. No extensions for weekends or holidays. |
| 180-day acquisition | Close on replacement property within 180 days of the sale, or by your tax return due date (with extensions) if that comes first. |
| Same taxpayer | The entity that sells must be the entity that buys, with limited exceptions such as single-member disregarded LLCs. |
Identification rules
Within the 45 days you can identify replacement properties under one of these tests:
- Three-property rule: up to three properties of any value.
- 200% rule: any number of properties as long as their combined value does not exceed 200% of the property sold.
- 95% rule: any number and value, but you must acquire at least 95% of the total identified value. Rarely practical.
In practice, the 45-day window is the hardest part. In a market with limited good inventory, sellers who start looking for replacement property after they close often end up overpaying or failing the exchange.
Boot: what triggers tax
Anything you receive that is not like-kind real property is boot and is taxable to the extent of your gain:
- Cash boot: proceeds you take out or do not reinvest.
- Mortgage boot: paying off more debt on the sale than you take on in the purchase, unless you offset it with additional cash.
Example: you sell a building for $2,500,000 with a $1,000,000 loan, so net equity is $1,500,000. To fully defer, buy replacement property for at least $2,500,000, put in the full $1,500,000, and finance at least $1,000,000 (or add cash to cover any shortfall in debt).
Exchange structures
- Forward (delayed) exchange: the standard structure. Sell first, buy within the deadlines.
- Reverse exchange: buy the replacement first through an exchange accommodation titleholder, then sell the relinquished property within 180 days. Useful when you find the right building before you have a buyer, but it costs more and requires financing or cash up front.
- Improvement (build-to-suit) exchange: use exchange funds to improve the replacement property while it is held by an accommodator, so the improvements count toward the value you need to reinvest.
- Partial exchange: reinvest some proceeds and take the rest as taxable boot.
Planning a 1031 exchange in Texas
- Start the replacement search before you list. Ideally have two or three targets underwritten before you sign a sale contract.
- Engage the QI early and make sure the sale contract includes exchange cooperation language.
- Line up financing for the replacement property, since the debt-replacement rule often requires a loan.
- Match the asset to your next ten years. Many owners trade a management-intensive multi-tenant flex building for a single-tenant net-leased property, or trade land for income-producing property.
- Coordinate with your CPA and attorney. Texas has no state personal income tax, but federal capital gains, depreciation recapture, and net investment income tax still apply if the exchange fails.
Frequently asked questions
What are the 45-day and 180-day rules?
You must identify replacement property in writing within 45 days of selling, and close on it within 180 days of selling (or by your tax return due date, if earlier). Both deadlines run at the same time, from the same closing date.
Can I do a 1031 exchange from land into a building?
Yes. Land held for investment and a commercial building held for investment are like-kind real property.
Can I buy the replacement property before I sell?
Yes, through a reverse exchange using an exchange accommodation titleholder. You generally have 180 days to sell the old property.
Does Roesinger act as a qualified intermediary?
No. Roesinger helps identify, underwrite, and negotiate replacement property and coordinates timing with your qualified intermediary, CPA, and attorney. We do not give tax or legal advice.
This guide is general information based on federal tax law as of its update date. It is not tax or legal advice. Consult your CPA, tax attorney, and qualified intermediary before selling. Roesinger LLC is a licensed Texas real estate broker.
About the author
Zach Roesinger is the designated broker of Roesinger LLC, an Austin commercial real estate brokerage focused on flex-industrial, industrial outdoor storage, land, and investment sales across the Texas Triangle. He also buys value-add flex-industrial property as a principal, so the underwriting in these guides is the same screen he runs on his own acquisitions.
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