What’s in This Article
Key Takeaways
- A 1031 exchange, under IRC Section 1031, defers gain on the sale of investment or business real property by reinvesting proceeds into like-kind property. It doesn’t eliminate the tax.
- An investor has 45 days to identify replacement property in writing to a qualified intermediary, and 180 days total to close on it.
- Since the 2018 Tax Cuts and Jobs Act, only real property qualifies. Personal property and equipment no longer do.
- The exchange is reported on IRS Form 8824.
- Connecticut’s real estate conveyance tax, 1.25% on commercial property plus a 0.25% municipal rate, applies to each conveyance in an exchange regardless of the exchange structure. There’s no state conveyance tax exemption for 1031 exchanges.
A 1031 exchange defers federal capital gains tax on investment real estate, not eliminates it, and Connecticut’s own conveyance tax doesn’t care that an exchange is happening at all. Here’s how the mechanics actually work.
What a 1031 Exchange Actually Does
Internal Revenue Code Section 1031 allows an investor to defer capital gains tax on the sale of real property held for business or investment use, by reinvesting the proceeds into like-kind replacement real property. The gain isn’t eliminated, it’s deferred, carried forward into the replacement property’s tax basis until that property is eventually sold without a further exchange.
The 45-Day and 180-Day Deadlines
The exchange runs on two strict deadlines, both measured from the closing date on the relinquished property.
| Milestone | Deadline | What’s required |
|---|---|---|
| Day 0 | Closing on relinquished property | Proceeds go to a qualified intermediary, not directly to the seller |
| Day 45 | Identification deadline | Replacement property must be identified in writing to the qualified intermediary |
| Day 180 | Closing deadline | The exchange must close on the identified replacement property |
Missing either deadline disqualifies the exchange. There’s no extension mechanism built into the standard process, so these dates need to be tracked precisely from day one.
What Qualifies Since 2018
Since the 2018 Tax Cuts and Jobs Act, only real property qualifies for a 1031 exchange. Personal property and equipment, which used to qualify under the same section, no longer do. The exchange is reported on IRS Form 8824, filed with the tax return for the year the exchange occurred.
Boot: When Part of the Gain Still Gets Taxed
“Boot” is the fair market value of cash or non-like-kind property, including debt relief, an exchanger receives in an otherwise qualifying exchange. Receiving boot doesn’t disqualify the exchange, but it does trigger recognized gain, specifically, the lesser of the boot received or the total realized gain on the sale.
Cash boot shows up two ways: taking cash out of the deal directly, or buying a replacement property for less than the relinquished property sold for. Sell for $1,000,000 and buy for $900,000, and that $100,000 gap is taxable cash boot. Mortgage boot works the same way on the debt side: if the debt on the replacement property is lower than the debt that was on the relinquished property, that reduction is treated as if the exchanger received cash, even if none actually changed hands. The rule of thumb to avoid boot entirely: the replacement property’s value and debt both need to be equal to or greater than the relinquished property’s.
The Same-Taxpayer Rule
The taxpayer that sells the relinquished property must be the identical taxpayer that acquires the replacement property. Title on both deeds has to match. This trips up more exchanges than it should.
Reverse Exchanges: Buying Before You Sell
Sometimes the replacement property becomes available before the relinquished property sells. The standard 45-day and 180-day deferred-exchange rules don’t apply to this kind of “reverse” exchange on their own, so IRS Revenue Procedure 2000-37 created a separate safe harbor to make them workable.
Under that safe harbor, an Exchange Accommodation Titleholder, a separate special-purpose entity, “parks” title to either the replacement or the relinquished property for up to the exchange period while the rest of the transaction catches up. This arrangement is called a Qualified Exchange Accommodation Arrangement. It solves a real timing problem, but it adds cost and complexity: a separate entity has to be formed and engaged, additional legal and accommodation fees apply, and financing can get more complicated if the titleholder entity needs to hold debt. A reverse exchange is a real option when timing demands it, not a default choice.
Delaware Statutory Trusts as Replacement Property
A Delaware Statutory Trust is a trust structure that, under IRS Revenue Ruling 2004-86, can qualify as 1031 replacement property when its governing documents meet the IRS’s requirements. A beneficial interest in a properly structured DST is treated as a direct fractional interest in the underlying real estate, making it like-kind.
In practice, a sponsor structures the deal, a trustee holds title, and investors buy fractional beneficial interests in institutional-grade property without taking on direct landlord responsibilities. This appeals to exchangers who want to stay in real estate for tax purposes without managing a building. One thing to know going in: DST interests are legally treated as securities, typically limited to accredited investors, and have to be purchased through a licensed securities representative, a meaningfully different process than a direct property purchase.
Connecticut’s Conveyance Tax Still Applies
Connecticut imposes a real estate conveyance tax on recording any property transfer: 1.25% on nonresidential, meaning commercial, property, plus a flat 0.25% municipal rate and a $2 recording fee, filed on Form OP-236.
Connecticut General Statutes Section 12-498 lists 22 specific categories of deeds exempt from conveyance tax, mortgage releases, interspousal transfers, sub-$2,000 consideration, corporate mergers, and similar situations, and none of them cover a like-kind exchange. The closest conceptually adjacent exemption covers a “mere change of identity or form of ownership” with no change in beneficial ownership, which a 1031 exchange is not: it’s a genuine change in the underlying property. That’s consistent with Ruling 89-207’s holding and worth knowing before assuming any exemption on the list might apply.
Frequently Asked Questions
How long do I have to identify a replacement property?
45 days from the closing date on the relinquished property, identified in writing to your qualified intermediary. You then have 180 days total from that same closing date to close on the replacement property.
Does a 1031 exchange avoid Connecticut’s conveyance tax?
No. Per CT Ruling 89-207, each conveyance in an exchange is separately subject to Connecticut’s state and municipal conveyance tax, based on the fair market value of the property conveyed. The federal tax deferral doesn’t change what’s owed on the state conveyance tax.
What property types no longer qualify since 2018?
Personal property and equipment no longer qualify for a 1031 exchange since the 2018 Tax Cuts and Jobs Act. Only real property held for business or investment use qualifies now.
What happens if I take some cash out of a 1031 exchange?
That cash is “boot,” and it’s taxable even though the rest of the exchange still qualifies. Recognized gain equals the lesser of the boot received or your total realized gain. The same rule applies to debt relief: buying a replacement property with a smaller mortgage than the one on the relinquished property creates mortgage boot, taxed the same way.
Can I buy the replacement property before I sell the relinquished one?
Yes, through a reverse exchange under IRS Revenue Procedure 2000-37. A separate Exchange Accommodation Titleholder temporarily holds title to one of the properties while the rest of the transaction catches up. It’s a real option when timing requires it, but it costs more and adds complexity compared to a standard forward exchange.
Investment sales
Considering a 1031 Exchange?
Finding the right replacement property inside a 45-day window takes preparation before the clock starts. Commercial Connection can help you line up options in advance.
Commercial Connection has commercial and industrial properties across Connecticut and represents buyers and tenants looking for them. Licensed in CT and MA, established 2001.
Official sources and where to check
- IRS, Like-Kind Exchanges Real Estate Tax Tips. Federal 1031 exchange rules and timing.
- CT DRS, Real Estate Conveyance Tax Information. Current CT conveyance tax rates and Form OP-236.
- CT Ruling 89-207. Confirms conveyance tax applies to each conveyance in an exchange.
- CGS Section 12-498, Chapter 223. The full list of conveyance tax exemptions, none of which cover a like-kind exchange.
- IRS, About Form 8824. The form used to report a 1031 exchange.
Related reading on this site
- Cap rate explained: how investors value commercial property
- How to sell commercial property in Connecticut
- Commercial real estate closing costs in Connecticut
This article provides general commercial real estate information, not tax or legal advice. 1031 exchange rules are complex and strictly enforced. Work with a qualified intermediary and a tax professional before attempting one. Information current as of October 7, 2026.
