Definition
Replacement property is the like-kind real estate an investor acquires to complete a 1031 exchange. By reinvesting the proceeds from the sale of the relinquished property into qualifying replacement property — within strict deadlines and value requirements — the investor defers the capital gains tax that would otherwise be due. The replacement property must meet the like-kind standard and be held for business or investment use.
How Replacement Property Works
Acquiring valid replacement property is the second half of an exchange and is governed by timing and value rules:
- 45-day identification. The investor must identify candidate replacement property in writing within 45 days of the sale.
- 180-day closing. The investor must close on the replacement property within 180 days of the sale.
- Equal or greater value. To fully defer gain, the replacement property should be of equal or greater value, with all equity reinvested and debt replaced.
- Held through a QI. A qualified intermediary acquires the property using the proceeds it holds.
Identification Rules
The IRS provides specific rules for how much can be identified within the 45-day window. The three-property rule lets an investor name up to three properties of any value. The 200% rule allows more than three, provided their combined fair market value does not exceed 200% of the relinquished property’s value. A 95% rule applies if those limits are exceeded. Identification must be written and unambiguous. Because closing on a whole property in time is hard, fractional interests like a Delaware Statutory Trust or tenants-in-common structure are sometimes identified as closing-ready replacement property.
Key Characteristics
| Feature | Replacement Property |
|---|---|
| Standard | Like-kind real property, business/investment use |
| Identification deadline | 45 days |
| Closing deadline | 180 days |
| Value rule | Equal or greater to fully defer |
| ID rules | 3-property / 200% / 95% |
| Fractional options | DST, TIC interests |
Important Considerations
The replacement-property rules are strict and time-sensitive; a missed deadline, ambiguous identification, or under-reinvestment can create taxable boot or unwind the deferral entirely. Any real estate acquired carries market, tenant, and financing risk, including possible loss of principal, and fractional replacement options are typically illiquid private placements for accredited investors. Coordinate identification and closing carefully with your qualified intermediary, CPA, and a qualified advisor.
Related Terms
- 1031 Exchange — the transaction replacement property completes
- Like-Kind Property — the qualifying standard for the acquisition
- Qualified Intermediary — the party that acquires the property
This definition is educational only and is not investment, tax, or legal advice. 1031 exchanges involve strict IRS deadlines, and real estate investments carry risk including possible loss of principal. Confirm current rules and your specific treatment with your CPA and a qualified advisor.
See How Replacement Property Fits Your Sale
Estimate the capital gains you could defer by reinvesting into like-kind replacement property.