1031 Exchanges: A Fiduciary Guide

Fiduciary Counsel | Real Estate Tax Planning | 2026

^{If you’re sitting on a $500,000-plus investment property and considering a sale, the number you need to know before anything else is not the asking price. It’s your unrealized capital gain — and what the IRS will take from it the moment you close without a plan.}

^{Section 1031 of the tax code exists precisely for this situation. A properly executed like-kind exchange lets you defer federal capital gains taxes — potentially indefinitely — by rolling proceeds from one investment property into another. For investors who do it right, it’s one of the most powerful wealth-preservation tools in real estate.}

For investors who miss a deadline by a day, it collapses entirely.

^{A 1031 exchange has no margin for error on its two hard deadlines. Miss either one, and the full capital gain becomes taxable in the year of sale — no exceptions, no extensions.}

^{The Two Rules That Govern Everything}

^{The entire 1031 exchange framework runs on two sequential deadlines, both of which begin the moment you close on the sale of your relinquished property:}

45-Day Identification Rule

Within 45 calendar days of closing, you must formally identify potential replacement properties in writing to your Qualified Intermediary (QI). You can:

• Name up to three properties regardless of value (Three-Property Rule), or
• Name multiple properties under percentage-based rules (200% Rule or 95% Rule)

There are no extensions for illness, travel, market conditions, or slow property transactions. You can identify Delaware Statutory Trusts (DSTs) as backup options—they require zero due diligence and can be identified the day before the deadline if needed.

180-Day Closing Rule

^{You must close on one or more of your identified replacement properties within 180 calendar days of the original sale — or by your tax return due date if earlier.}

Both deadlines are statutory and run concurrently. Day 180 is not 180 days after your 45-day window closes. If your sale closed April 9, 2026, your replacement closing deadline is October 6, 2026—not later.

Planning your exchange means working backward from these dates before you list your property.

^{Timeline Example}

^{Assuming a sale closing on April 9, 2026:}

1031 Timeline	Action Required	2026 Example Deadline
Day 0	Close on relinquished (sold) property	Sale closes: April 9, 2026
Days 1–45	Identify replacement property in writing	Deadline: May 24, 2026
Days 1–180	Close on replacement property	Deadline: October 6, 2026
Ongoing	Document intermediary chain of title	No gaps in QI custody
Post-close	Integrate with estate & step-up basis plan	Annual review recommended

^{What Defers (And What Doesn’t)}

^{This distinction is critical and often misunderstood:}

^{What Defers (Capital Gains Tax)}

✓ Federal long-term capital gains tax (typically 15% or 20%, depending on income level)
✓ State capital gains tax (varies by state; some states 13%+, others none)

^{In a 1031 exchange, these taxes are deferred indefinitely — until you sell the replacement property without doing another 1031 exchange.}

^{✗ Depreciation recapture tax (25% federal tax on all depreciation you claimed)}

^{This is mandatory at closing and cannot be deferred in a 1031 exchange. It is due immediately.}

^Example:

^{You sell a rental property for a $500,000 capital gain. You claimed $200,000 in depreciation over 20 years.}

• Capital gains tax deferred: ~$75,000–$100,000+ (depending on your income and state) ✓
• Depreciation recapture tax due at closing: $50,000 ($200,000 × 25%) ✗

^{Plan for the recapture tax. Don’t be surprised by it at closing.}

^{What a Qualified Intermediary Does — And Doesn’t Do}

^{A Qualified Intermediary is legally required in any 1031 exchange. The QI holds your sale proceeds in escrow between transactions, ensuring you never take constructive receipt of the funds — which would immediately trigger taxes. Without a QI, there is no exchange.}

^{What a QI does NOT do: Advise you. A QI is a transaction facilitator, not a fiduciary. They won’t tell you whether the replacement property fits your financial plan, whether you’re over-leveraging, or whether a different tax strategy would serve you better. Some QIs maintain relationships with real estate brokers and may suggest properties — with commissions flowing accordingly.}

^{A fee-only fiduciary advisor fills the gap a QI cannot:}

Qualified Intermediary Only	Fee-Only Fiduciary Advisor + QI
Holds funds in escrow only	Coordinates QI + guides the full strategy
No investment or tax advice	Tax-optimized property selection guidance
May refer you to commission brokers	No property commissions — ever
Exchange closes; tax planning ends	Integrates with estate plan & step-up basis
Flat transaction fee, narrow scope	Flat-fee planning across your whole picture

^{Delaware Statutory Trusts (DSTs): The Backup Strategy}

^{Many investors miss the 45-day deadline because they start looking too late or their primary property deal stalls. This is where Delaware Statutory Trusts (DSTs) become invaluable.}

^{A DST is a professionally-managed fund of institutional real estate. Instead of owning a single property, you own a passive interest in a portfolio—apartment buildings, medical centers, office complexes. The sponsor handles all tenant issues, maintenance, repairs, and operational decisions. You receive quarterly distributions and manage nothing.}

^{Why DSTs matter for the 45-day deadline:}

✓ You can identify a DST by day 40 with zero due diligence pressure
✓ No inspections, appraisals, or financing delays
✓ If your direct property deal encounters problems, the DST keeps you compliant
✓ DSTs qualify as like-kind replacement property in a 1031 exchange
✓ You can use DSTs as your third backup property under the Three-Property Rule

Real-world example:

^{A family foundation in Vail, Colorado held multiple vacation rental properties worth over $1 million. The trustees wanted to execute a 1031 exchange but were exhausted by tenant issues and property management. They identified two direct properties as their primary options, but when negotiations stalled on both by day 35, they turned to Delaware Statutory Trust funds as their backup. They closed the DST by day 45, deployed 100% of proceeds, and now collect monthly distributions without any management burden. When the trustees eventually pass ownership to beneficiaries, the stepped-up basis eliminates the entire deferred gain.}

^{We also work with clients on depreciation recapture exposure, installment sale alternatives, and DST options for investors who want 1031 deferral without active property management.}

^{Beyond the Exchange: Step-Up Basis and Estate Planning}

^{The most underutilized aspect of 1031 planning isn’t the exchange itself — it’s what happens at death.}

^{Under current tax law, heirs who inherit appreciated real estate receive a stepped-up cost basis to the property’s fair market value at the date of inheritance. Decades of deferred capital gains can be wiped clean entirely.}

Example:

^{You execute a 1031 exchange today, deferring a $500,000 capital gain. You hold the property for 20 years. It appreciates another $300,000. At your death, your heirs inherit with a basis of $800,000 (the current fair market value). The entire $500,000 original deferred gain is forgiven. Never taxed.}

^{For investors who plan to hold and exchange through retirement, a 1031-to-death strategy is a legitimate and widely used approach:}

1. Defer taxes through a series of 1031 exchanges over 20–30 years
2. Hold the replacement property until death
3. Allow heirs to inherit with a clean stepped-up basis
4. The deferred tax liability becomes a permanent elimination

^{This transforms what looks like a deferred tax liability into a permanent tax elimination — but only if the estate plan is structured properly around it.}

^{Integrating your 1031 strategy with your estate plan requires coordinated advice across tax, investment, and legal domains. A fee-only fiduciary acts as the quarterback — not a product seller with a stake in which property you choose.}

^{Our Approach: Flat-Fee 1031 Coordination. No Property Commissions.}

^{We charge a flat fee for 1031 exchange planning and coordination. We don’t earn commissions on replacement properties. We don’t refer you to partners who do. Our only incentive is the outcome that’s best for your financial plan.}

^{We coordinate with your Qualified Intermediary, model the after-tax economics of an exchange against a taxable sale, help you evaluate both direct properties and DST backup options, and integrate your 1031 strategy with your broader estate and wealth plan.}

^{If you’re thinking about selling investment property in the next twelve months, the right conversation is the one you have before you list — not after.}

^{→ Learn more about our 1031 Exchange Planning Service}

^{Schedule a free consultation}

^{Craig Johnston, MBA
Fiduciary Counsel, Inc.
craig@fiduciary-counsel.com
fiduciary-counsel.com}

^Disclaimer:

^{This content is for educational purposes only and is not tax or investment advice. Consult with a qualified tax professional, your qualified intermediary, and a fee-only fiduciary advisor before executing any 1031 exchange. The treatment of 1031 exchanges depends on specific facts; professional guidance is essential.}