The 1031 Exchange in Plain English: How Florida Investors Sell One Property, Buy the Next, and Defer the Tax
For investors selling one rental or investment property to buy the next, with a South Dade example and the tax math shown.
What qualifies, and what doesn't
A 1031 exchange is not a loophole, and the tax is not erased; the IRS calls it "deferred, but not forgiven." What it does is keep your whole equity working in the next property instead of sending a slice of it to the IRS at every sale. Plan it before you list: the most common way to lose an exchange is to close the sale first and call about 1031 afterward.
| Qualifies | Does not qualify |
|---|---|
| Rental homes, townhomes and condos held for investment | Your primary residence (it has its own exclusion) |
| Commercial buildings, land held for investment, farmland | A second or vacation home you mainly use yourself |
| One property into several, or several into one | Property bought to fix and flip quickly |
| Any US real property for any US real property | Equipment, vehicles or other personal property (real property only since 2018) |
The vacation-home exception. The IRS says a second home used mainly for personal use does not qualify. A narrow safe harbor (Rev. Proc. 2008-16) covers one owned at least 24 months, rented at a fair rent at least 14 days in each 12-month period, and personally used no more than the greater of 14 days or 10% of the rented days.
The Florida note. Florida has no state personal income tax, so the tax an exchange defers here is federal. Documentary stamp tax on the deed still applies to both the sale and the purchase: $0.70 per $100 in most of Florida; in Miami-Dade, $0.60 for a single-family residence and $1.05 for other property such as multifamily, commercial or land.
The clock: 45 days and 180 days
Both clocks start the day your sale closes and run at the same time. Weekends and holidays count, and there are no routine extensions.
- Before closing: sign the qualified intermediary agreement.
- Day 0: the sale closes and the intermediary holds the money.
- Day 45: identify the replacement property in a written document you sign, delivered to the intermediary.
- Day 180: close on it, or by that year's tax return due date including extensions, whichever comes first.
- Tax time: report the exchange on IRS Form 8824.
A sale in late fall can hit the April due date before day 180, so file an extension if you need the full window.
How many properties you can identify
| Rule | What you can identify | Example: $420,000 sale |
|---|---|---|
| Three-property rule (most common) | Up to 3 properties of any value | Three homes at $450K, $525K and $600K |
| 200% rule | Any number, if their total value is no more than 200% of what you sold | Five properties totaling up to $840,000 |
| 95% exception | Any number and value, but you must buy at least 95% of the total identified | Rarely practical |
Identify backups. If the first choice falls through on day 60, you can only buy what you identified by day 45 (Treas. Reg. 1.1031(k)-1).
The qualified intermediary: never touch the money
The sale money must go from the closing to a qualified intermediary and from the intermediary to the purchase closing. If the money reaches you or your own account, even for a day, the exchange fails.
You cannot act as your own intermediary, and neither can your real estate agent or broker, attorney, accountant or employee, or anyone who worked for you in those roles in the past 2 years. That includes us: we work alongside the intermediary you choose. Sign its agreement before the sale closes and give the title company the assignment documents.
"Boot": the part that gets taxed
Anything you receive that is not like-kind real property is "boot," and it is taxed.
- Cash boot: cash you keep from the sale. Keep $40,000 and roughly $40,000 of your gain becomes taxable that year.
- Mortgage boot: taking on less debt on the new property than you paid off on the old one, unless you add the same amount of your own cash.
Rule of thumb for a full deferral: buy property worth at least as much as your net sale price, reinvest all of the cash, and replace the old debt with new debt or extra cash.
Related parties. Buying from or selling to a family member or a company you control is possible, but if either side sells within 2 years, the deferred tax comes due.
A South Dade example, with the math
An investor bought a Homestead rental in 2012 for $180,000 ($140,000 of it the building, $40,000 the land) and sells it in 2026 for $420,000, with about 7% in selling costs and $150,000 left on the mortgage.
| Line | Amount |
|---|---|
| Sale price | $420,000 |
| Selling costs (about 7%) | −$29,400 |
| Depreciation taken, 14 years at $140,000 ÷ 27.5 | $71,273 |
| Adjusted basis ($180,000 − $71,273) | $108,727 |
| Gain | $281,873 |
| Cash after paying off the $150,000 mortgage | $240,600 |
If they simply sell, the federal tax is roughly:
| Piece of the gain | Rate | Tax |
|---|---|---|
| Depreciation recapture ($71,273) | up to 25% | $17,818 |
| The rest of the gain ($210,600) | 15% (most filers) | $31,590 |
| Net investment income tax, above $200,000 single / $250,000 joint income | 3.8% | up to $10,711 |
| Total | about $49,400 to $60,100 (about $70,600 in the 20% bracket) |
With a 1031 exchange, all of that is deferred if they buy a replacement worth at least $390,600 (the net sale price), put the whole $240,600 into it, and carry at least $150,000 of new debt or add cash to make up the difference. That is $49,000 to $70,000 more of their own money working in the next property.
Florida adds no state income tax to either column. The figures are illustrative; your CPA will run your actual numbers. Want it on paper? Get the free PDF of this guide from the form on this page.
Frequently asked questions
Can I do a 1031 exchange on my primary home?
No. A primary residence does not qualify, but it has its own exclusion of up to $250,000 of gain ($500,000 for a married couple) if you meet the ownership and use tests.
What happens if I miss the 45-day or 180-day deadline?
The exchange fails and the sale is taxed normally. There are no routine extensions; only federally declared disasters can extend the dates.
Can I exchange an out-of-state rental for a Florida property?
Yes. Any US real property held for investment can be exchanged for any other US real property held for investment.
Can I take some cash out of a 1031 exchange?
Yes, but whatever you keep is boot and is taxed. Many investors keep a little and exchange the rest.
What happens to the deferred tax if I never sell?
Heirs generally take the property at its fair market value on the date of death, so the deferred gain is generally never taxed. Investors call this "swap till you drop." Ask your CPA and estate attorney.
Can a real estate broker be my qualified intermediary?
No. The IRS bars your real estate agent or broker, attorney, accountant or employee, or anyone who served you in those roles in the past 2 years, from acting as your qualified intermediary.
Planning to sell a rental?
Talk to us before you list. We will run a sale-and-replacement plan: what your property is worth, what the exchange needs to buy, and replacement options in South Dade, alongside your qualified intermediary and CPA.
Norman Hodge — Broker · CIPS · SRS. 15+ years closing cross-border Miami transactions. Certified International Property Specialist.
Consuelo Hodge — Co-Founder · Broker Associate. Specialist in international and luxury transactions.
