The Two Clocks of a Like-Kind Exchange: 45 Days, 180 Days, and What Boot Costs

The clocks run together, and the second one has a hidden ceiling

Both periods begin on the date you transfer the property you are giving up. Close on 15 March and day 45 is 29 April; day 180 is 11 September. Once the identification window closes you have 135 days left to complete, not 180, and the difference is exactly the 45 you already spent. People read the two numbers as a sequence because that is how deadlines usually behave, and they arrive at 29 October — six and a half weeks after the exchange has already failed. There is no extension mechanism for either period, no hardship relief in the statute, and no partial credit: a closing on day 181 is a sale, taxed in full.

The second clock has a limb almost nobody quotes. Section 1031(a)(3)(B) says the replacement must not be received after the earlier of day 180 or the due date of the transferor's return for the year of the transfer, determined with regard to extensions. Transfer on 20 November 2027 and day 180 lands on 18 May 2028 — but the return for 2027 is due in mid-April 2028. Unless you file for an extension, the exchange period ends in April and about a month of your 180 days evaporates. The fix is trivial and the failure is not: file the extension before the deadline, and file it even if you expect the exchange to close early, because the extension is what buys back the calendar.

Three ways to identify, and you only get one of them

Identification is a written document, signed by you, delivered before the end of day 45 to someone involved in the exchange who is not you and not a disqualified person — typically the qualified intermediary. A note to your own file is not identification. Within that writing the regulation gives you three mutually exclusive limits. The three-property rule lets you name up to three properties of any value whatsoever. The 200-percent rule lets you name any number, provided their aggregate fair market value at the end of the identification period does not exceed twice the aggregate value of everything you relinquished — on a $700,000 sale that is a $1.4 million ceiling. Blow both and there is a rescue: the 95-percent exception saves the exchange if you actually receive identified property worth at least 95 percent of everything you identified, which in practice means you close on nearly all of it.

The practical reading is that the three-property rule is the one to use and the 200-percent rule is a trap for the ambitious. Naming eight buildings feels prudent — more shots on goal — until you notice that their combined value has to stay under the ceiling, which forces you to name cheap options you do not actually want, and that a failed 200-percent test throws you onto a 95-percent rescue you can only pass by buying nearly everything on the list. Name three, rank them, and negotiate on all three in parallel. And because the identification is a signed document with a date on it, keep the delivery receipt: in a dispute the question will not be what you decided but what you can prove you sent, and to whom, before midnight on day 45.

Boot is anything that is not the new building, and depreciation comes home first

Boot is the general name for value you receive that is not like-kind property: cash you keep, a net reduction in the debt you carry, personal property thrown into the deal, even a seller credit at closing. Gain is recognised to the extent of the boot received, and never beyond the gain you actually realised — so boot can make an exchange partly taxable but never more than a plain sale would have been. In our example, buying back at $640,000 out of $700,000 leaves $60,000 of boot against a $400,000 realised gain, so $60,000 is taxed and $340,000 is deferred. Basis behaves exactly as the statute says: old basis of $300,000, minus the $60,000 taken out, plus the $60,000 recognised, which lands back on $300,000 — the same answer you get from the other direction, $640,000 of cost minus $340,000 of deferred gain.

What makes the boot expensive is its character rather than its size. Ten years of depreciation on the building took $120,000 out of your basis and reduced your taxable income by that much along the way. When gain is recognised, the part attributable to that depreciation is picked up first and taxed at a higher ceiling than an ordinary long-term gain — in the United States it is unrecaptured section 1250 gain with a maximum federal rate of 25 percent. So the whole $60,000 of boot lands in the 25 percent bucket, a federal bill of $15,000, before any state tax and before the 3.8 percent net investment income tax that would take it to $17,280. Compare that with the position if you had simply sold: at 25 percent on the $120,000 of depreciation and 20 percent on the remaining $280,000, the federal bill is $86,000. Deferral is worth having; a small trade-down is a surprisingly expensive way to lose part of it.

The depreciation schedule splits in two, and only half of it is new

The most common surprise after a successful exchange is that the new building does not depreciate like a new building. Under the regulation the basis in the replacement is split. The exchanged basis — the part carried over from the old property — keeps running on the old property's recovery period, method and convention, as if nothing had happened. Only the excess basis, the money you put in over and above that carryover, is treated as newly placed in service. Trading up to $900,000 in our example gives a total basis of $500,000: $300,000 of exchanged basis still grinding through what remains of a 27.5-year residential schedule, and $200,000 of excess basis starting a fresh 27.5 years at about $7,273 a year.

This is why an exchange is not a way to reset the depreciation clock, and why chains of exchanges accumulate an increasingly awkward tail of low-basis, nearly-exhausted schedules riding on ever more expensive buildings. It is also why the arithmetic of a trade-up is worth doing before, not after. Putting $200,000 of new money into a $900,000 building buys you about $7,273 a year of new deduction; the $300,000 already carried buys nothing new at all. If your reason for exchanging is the deduction rather than the deferral, the numbers will not support you.

What the rest of the world does instead

Section 1031 is unusually generous by international standards, and the 2017 Act made it narrower rather than broader: since exchanges completed after 31 December 2017 it covers real property only. Machinery, vehicles, aircraft, livestock, artwork and cryptocurrency are all out, which is why an equipment dealer's 2016 playbook is now a trap. Two further limits are easy to miss. Real property located in the United States and real property located outside the United States are not of like kind, so an exchange cannot cross the border. And exchanges with a related person unwind if either side disposes of the property within two years, which turns a family restructuring into a two-year holding commitment.

The comparison is worth making carefully because the two designs solve different problems. A rollover of the American kind assumes you will keep transacting and simply refuses to tax the churn, pushing the whole gain into the basis of whatever you hold at the end — and in the United States that end can be a death, at which point the basis steps up and the deferred gain is never taxed at all. A holding-period taper of the continental kind assumes you will stop transacting and rewards you for it, but taxes you fully if you move. Neither is more generous in the abstract; they reward opposite behaviours. If you are comparing jurisdictions, the question to ask is not which rate is lower but which one taxes the thing you actually intend to do.

Frequently asked questions

Do the 45 and 180 days run one after the other?

No. Both are measured from the same event — the day you transfer the property you are giving up — so they overlap. Transfer on 15 March and identification closes on 29 April while completion closes on 11 September; using the whole identification window leaves 135 days, not 180. Reading them as a sequence puts the deadline on 29 October, which is six and a half weeks after the exchange has failed and long after the intermediary has been obliged to release the money. There is a second, subtler ceiling on the 180: the statute stops the exchange period at the earlier of day 180 and the due date of your return for the year of the transfer, extensions included. A transfer on 20 November 2027 gives a nominal day 180 of 18 May 2028, but the 2027 return falls due in mid-April, so without an extension request you lose about a month. File the extension.

Can I exchange a machine, a truck or a crypto holding?

Not since 2018. The Tax Cuts and Jobs Act narrowed section 1031 to real property for exchanges completed after 31 December 2017, and the section is now titled accordingly. Equipment, vehicles, aircraft, livestock, collectibles, patents and cryptocurrency are all outside it, which matters because a great deal of pre-2018 guidance is still circulating and still describes trade-ins of machinery as like-kind exchanges. A final regulation issued in 2020 defines what counts as real property for this purpose and lets incidental personal property transferred with it be ignored, within a limit, so a building's fixtures do not break the exchange — but that is a tolerance for the trimmings, not a route back in for equipment. Two other statutory limits apply: property in the United States is never like-kind with property outside it, and an exchange with a related person is unwound if either party disposes of the property within two years.

If I take no cash at all, can I still owe tax?

Yes, and this is where most partial exchanges go wrong. Boot is not only cash. If the property you gave up carried a $250,000 mortgage that was paid off at closing and the replacement carries only $150,000, you have been relieved of $100,000 of debt, and debt relief is treated as value received. Nothing touched your bank account and $100,000 of gain is recognised anyway. The offsetting rule is that cash you put into the deal reduces net debt relief — so adding $100,000 of your own money to the purchase brings the boot back to zero. The practical instruction is therefore to replace both sides of the balance sheet, not just the asset side: match or exceed the price, and match or exceed the debt, or bring the difference in cash.

Can I hold the sale proceeds myself while I look for a replacement?

No, and touching the money is the single most common way a well-planned exchange dies. If you have actual or constructive receipt of the proceeds — if you can reach them, direct them, or pledge them — the transaction becomes a sale in the year of the sale, whatever the paperwork says afterwards. The regulation provides a safe harbour: a qualified intermediary holds the funds under an agreement that expressly limits your right to receive, pledge, borrow or otherwise obtain benefit from them until the exchange period ends. Two consequences follow that catch people out. Your own lawyer, accountant, estate agent or banker who has served you in the past two years is a disqualified person and cannot act as intermediary. And you cannot take a partial draw mid-exchange to cover a deposit elsewhere; if you need cash, plan the boot deliberately and price the tax, rather than discovering it.

Is the deferred tax ever actually paid?

Only if you eventually sell without exchanging again. The gain sits inside the basis of the replacement, so a later sale recovers everything at once: sell the $900,000 replacement for $1.1 million with a $500,000 basis and the gain is $600,000, which includes the $400,000 you deferred. Chain three exchanges and the accumulated deferral is carried by whatever you hold at the end. The famous ending is that in the United States a property held until death receives a stepped-up basis, so heirs inherit at market value and the deferred gain is extinguished rather than paid — which is why the strategy is nicknamed for that outcome and why proposals to change it recur. Two cautions. The step-up rests on estate-tax rules that are themselves subject to change, and a rollover regime in another country may have no such exit: a German § 6b reserve, for instance, charges 6 percent a year on the amount rolled if it is released without a reinvestment, so there the deferral has an explicit price.

Does a holiday home or a property I sometimes use myself qualify?

Only if it is genuinely held for investment, and personal use is what decides that. The statute requires the property to be held for productive use in a trade or business or for investment; a home you live in is neither, and a holiday place you rent out occasionally sits in between. The tax authority has published a safe harbour setting out a period of ownership, a minimum number of days rented at a fair rent in each of the preceding years, and a cap on personal use — meet it on both the relinquished and the replacement property and the qualifying use will not be challenged. Falling outside the safe harbour is not fatal, but it moves you onto a facts-and-circumstances test in which your own calendar becomes the evidence. Because the same intent question governs the replacement, converting an exchanged rental into your own residence shortly after closing invites exactly the challenge you were trying to avoid.