Section 1031 Exchanges in Florida: How Real Estate Investors Defer Capital Gains Tax

One of the most valuable provisions available to a real estate investor, and one of the least forgiving. The structures, the deadlines, and the points at which exchanges most often fail.

You bought a rental property years ago. It has appreciated, you have depreciated it, and a buyer has now made an offer you are inclined to take. Then you run the numbers on the tax and the offer starts to look smaller. A significant share of what you built is about to leave the table.

There may be an alternative. Section 1031 of the Internal Revenue Code allows an investor to exchange investment real estate for other investment real estate without recognizing gain on the transaction. The capital stays in real estate and keeps working. It is one of the most valuable provisions available to a real estate investor, and one of the least forgiving, because it depends on doing things in a particular order, by particular dates, that cannot be moved once they pass.

This article explains what an exchange does, the forms it can take, the deadlines that govern it, and the points at which exchanges most often fail.

What a Like-Kind Exchange Actually Does

If you exchange real property held for productive use in a trade or business or for investment solely for real property of like kind that you will also hold for one of those purposes, no gain or loss is recognized. Since 2018 the provision applies only to real property; exchanges of equipment and other personal property no longer qualify.

Two words in that sentence carry most of the weight.

“Exchange.” Selling a property, taking the proceeds, and buying another one later is not an exchange, however fast you move. It is a taxable sale followed by a purchase. The transaction has to be structured as an exchange from the beginning.

“Like kind.” Within real property, this standard is broad and generous. Raw land is like-kind to an apartment building. A Broward County strip center is like-kind to a Tennessee warehouse. Grade, quality, and use do not have to match. Regulations finalized in December 2020 define real property for this purpose to include land, improvements, inherently permanent structures, and intangible interests such as leaseholds, easements, and options.

It is equally important to understand what the provision does not do. It defers tax; it does not forgive it. The gain you do not recognize reduces your basis in the replacement property, so the deferred gain follows you into the new asset. Two practical consequences: depreciation deductions on the new property are based on that carried-over basis rather than on the purchase price, and depreciation already claimed remains embedded in the gain, taxable at a higher rate than ordinary long-term capital gain when the gain is eventually recognized.

Why the Proceeds Can Never Reach You

The mechanism that turns a sale into an exchange is a qualified intermediary. The intermediary stands between the investor and the money. Under a written agreement, it acquires and transfers the relinquished property and acquires and transfers the replacement property to the investor, usually not by taking title, but by having the investor's rights under the purchase contracts assigned to it, with written notice to all parties.

Three rules follow, and none of them bends.

• The intermediary must be engaged before the closing. Once the proceeds are payable to the seller, there is no exchange left to structure.
• The intermediary cannot be a disqualified person. That category includes anyone who has served as the taxpayer's employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the previous two years, along with persons related to the taxpayer. An investor's own professionals are generally unavailable for this role, which surprises people, because those are precisely the people they trust.
• The taxpayer cannot have access to the funds. The exchange agreement must expressly deny the right to receive, pledge, borrow against, or otherwise obtain the benefit of the money before the exchange period ends.

One further point that the tax rules do not address: the intermediary is holding a very large sum of the investor's money. Intermediaries have failed, and taxpayers have lost both their proceeds and their deferral. Points commonly confirmed before engaging one include whether funds are held in a segregated account rather than a commingled operating account, whether the fidelity bond and errors-and-omissions coverage are adequate against the size of the proceeds, and whether independent callback verification is required for every wire.

The Two Deadlines

Both run from the date the relinquished property is transferred, not from the contract, and not from the last of several closings.

Day 45. The replacement property must be identified in a signed writing delivered to the intermediary by midnight of the forty-fifth day. Up to three properties may be identified without regard to value, or any number of properties whose combined value does not exceed twice the value of what was sold. Each property must be described unambiguously; the legal description from the title commitment, rather than an improvised description, is the safer identification.

Day 180. The replacement property must be received by midnight of the earlier of the one-hundred-eightieth day or the due date, including extensions, of the tax return for the year of the transfer.

Neither deadline can be extended for hardship, illness, a failed financing, or a seller who backs out. The only relief available is the postponement the IRS may grant after a federally declared disaster, which operates by notice and by county and has its own conditions.

The Forms an Exchange Can Take

“1031 exchange” describes a result, not a single transaction shape.

The forward exchange is the standard structure: the investor sells, the intermediary holds the proceeds, and the investor identifies and closes on replacement property within the deadlines.

A reverse exchange solves the opposite problem: the investor has found the property they want but has not yet sold what they own. An exchange accommodation titleholder acquires and parks the replacement property while the sale proceeds. The safe harbor permits parking for up to 180 days. The Tax Court has approved a parking arrangement lasting far longer than that, but the IRS formally declined to follow that decision, so arrangements outside the safe harbor carry meaningful risk.

An improvement or build-to-suit exchange is used when the available replacement property is worth less than what was sold and construction will close the gap. The critical limitation: only what is actually received within the exchange period counts. Construction completed after title passes is money spent improving property the investor already owns; it earns no exchange credit.

Partnership and LLC situations arise where property is held in an entity and the owners want different things: one wants to exchange, another wants cash. Several structures exist to separate them, because an individual cannot exchange out of a partnership interest. These are the most technically demanding exchanges and the ones where outcomes most often turn on sequence and documentation, and they are generally not attempted without tax counsel.

Exchanges with related parties are permitted but closely policed. Where an exchange occurs with a related party, both sides must generally hold what they received for two years, and a separate rule denies deferral where the arrangement is structured so that the related party effectively takes cash.

An Example, With Numbers

Consider a hypothetical. An investor bought a duplex for $400,000, added $60,000 of improvements, and claimed $150,000 of depreciation, leaving an adjusted basis of $310,000. She sells for $1,100,000, subject to a $300,000 mortgage, and her realized gain is $790,000.

If she exchanges into a $1,300,000 property using all $800,000 of her equity and a new $500,000 mortgage, she recognizes no gain. She defers roughly $165,500 of federal tax, and her basis in the new building is $510,000.

If instead she buys a $750,000 property for cash, takes on no new debt, and receives $50,000 back at the end, the arithmetic changes sharply. The $50,000 of cash is taxable, and so is the $300,000 mortgage she walked away from; relief from debt counts as boot exactly as cash does. She recognizes $350,000 of gain and owes roughly $77,500 in tax, on a transaction that put $50,000 in her pocket.

Common Misconceptions

• That the exchange eliminates the tax. It postpones it. The deferred gain reduces basis in the replacement property.
• That reinvesting the proceeds is enough. Reinvestment is not an exchange. The structure has to be in place before the closing.
• That the money can be held briefly. Access to the proceeds at any point in the exchange period defeats the deferral.
• That a flip can be exchanged. Property held primarily for sale is excluded by the statute, and buying replacement property does not cure it.
• That the deadlines can be extended for good cause. They cannot, outside a federally declared disaster.
• That an accountant or attorney can serve as the intermediary. Ordinarily they cannot, because of the two-year look-back for disqualified persons.
• That federal deferral affects Florida transfer taxes. It does not. Documentary stamp tax on the deed and on any new mortgage, along with Florida's execution and recording requirements, apply regardless.

Frequently Asked Questions

Can I take some cash out of the sale and still do an exchange?

Yes, but the cash is taxable. An exchange can be partial. Gain is recognized to the extent of the cash and other non-like-kind consideration received, up to the amount of the realized gain, with the rest deferred. A reduction in mortgage debt counts the same way, even though no cash changes hands.

What happens if I cannot find a replacement property within 45 days?

The exchange fails and the sale is taxable in the year of the transfer. There is no extension. This is the strongest argument for identifying candidate properties before the relinquished property closes, and for using the three-property rule to preserve alternatives rather than identifying a single property and hoping the contract holds.

Can I buy the replacement property before I sell?

Yes, through a reverse exchange, in which an accommodation titleholder acquires and holds the replacement property until the sale closes. Reverse exchanges are more expensive and more document-intensive than forward exchanges, and the safe harbor limits the parking period to 180 days, so they need to be set up before going to contract on the new property.

My rental is owned by an LLC with two other members. Can I exchange and let them cash out?

Possibly, but this is the hardest version of the problem, because the LLC, not the individual member, is the taxpayer, and a partnership interest is not real property. Several structures address it, and the right one depends on the entity's history, the buyer's requirements, the lender, and how much time remains before closing. This is a conversation typically had well before the property is listed, not after a contract is signed.

Do I still have to report the exchange if no tax is due?

Yes. The exchange is reported on IRS Form 8824 with the return for the year the relinquished property was transferred, whether or not any gain is recognized. If the exchange involved a related party, Form 8824 must also be filed for each of the two following years.

When Counsel Typically Gets Involved

Before the sale contract is signed, where that is still possible. Nearly every structure described in this article is available at that point, and several of them disappear the moment the relinquished property closes.

Other circumstances that tend to warrant review: the property is held in an LLC, partnership, or trust, or by more than one owner with different objectives; the plan is to buy before selling; the replacement property requires construction; the seller of the replacement property is a related party; several properties are being sold on different dates; the closing falls late in the calendar year; or the property has been used partly as a residence or partly for personal purposes.

About AnidjarLaw

AnidjarLaw advises real estate investors, business owners, and families on federal tax and transactional matters, including like-kind exchanges. The firm is led by Michael A. Anidjar, an attorney and certified public accountant with an LL.M. in taxation, which allows a single advisor to evaluate the tax analysis and draft and negotiate the documents that carry it out, rather than dividing a transaction that has to be decided as one thing among several professionals who each see only part of it.

Primary Sources

• 26 U.S.C. § 1031 (Internal Revenue Code section 1031), including subsections (f) and (g) on exchanges between related persons
• Treas. Reg. § 1.1031(k)-1 (deferred exchanges: identification and exchange periods, identification rules, qualified intermediary safe harbor, disqualified persons)
• Treas. Reg. § 1.1031(a)-3 (definition of real property; T.D. 9935, December 2, 2020)
• Rev. Proc. 2000-37 (safe harbor for reverse exchanges)
• Rev. Proc. 2018-58 (postponement of deadlines for federally declared disasters)
• Rev. Rul. 2002-83 (related-party exchanges)
• Estate of Bartell v. Commissioner, 147 T.C. 140 (2016), nonacq., A.O.D. 2017-06
• IRS Form 8824, Like-Kind Exchanges, and instructions
• Fla. Stat. §§ 689.01, 695.01, 201.02, 201.08 (Florida execution, recording, and documentary stamp tax)

This article is general information about federal tax law and is current as of September 17, 2026. It is not legal or tax advice, does not address any particular set of facts, and does not create an attorney-client relationship. Reading it does not make you a client of the firm. Section 1031 outcomes depend heavily on specific facts, documents, and dates, and the deadlines described cannot be extended once missed. Obtain advice on your own transaction before acting.