What is a 1031 exchange and how does it work in Florida?

A 1031 exchange (named for IRC Section 1031) is a tax-deferral strategy that allows real estate investors to sell an investment property and reinvest the proceeds into a replacement investment property without recognizing capital gains at the time of sale. Florida has no additional state income tax, so the deferred gain is entirely federal (capital gains tax, plus depreciation recapture at 25%). The mechanics: you sell the relinquished property, the proceeds go directly to a qualified intermediary (not to you), you identify replacement property within 45 days, and you close on replacement property within 180 days.

What counts as 'like-kind' property in a 1031 exchange?

The IRS's definition of 'like-kind' is broader than most people realize for real estate: any U.S. real property held for investment or productive use in a trade or business qualifies for exchange with any other U.S. investment real property. You can exchange a single-family rental for an apartment building, a vacant lot for a commercial property, a Florida condo for a Texas duplex — the key requirement is that both properties are held for investment, not personal use. Primary residences and properties held primarily for sale (fix-and-flip) generally do not qualify.

Can I do a 1031 exchange into multiple replacement properties?

Yes — you can identify up to three replacement properties under the Three-Property Rule (identify any three, purchase one or more), or more properties under the 200% Rule (identify any number of properties whose total value does not exceed 200% of the relinquished property's value). The most common approach is the Three-Property Rule. You can then close on one, two, or all three identified properties — but you must use all the exchange proceeds to avoid recognizing 'boot' (the taxable portion of the exchange).

What happens if I receive cash (boot) in a 1031 exchange?

Boot is any cash or non-like-kind property you receive in the exchange. Boot is taxable in the year received — you pay capital gains tax on it even if the rest of the exchange is deferred. Common sources of boot: not reinvesting all proceeds (buying a cheaper replacement property), receiving excess funds from the QI, or taking cash out for any reason. To fully defer all gain, you must reinvest all proceeds and acquire replacement property of equal or greater value than the relinquished property.

Florida 1031 Exchange Guide: How to Defer Capital Gains When Selling Investment Property

The 1031 exchange is one of the most powerful tax strategies available to real estate investors — and one of the most frequently misunderstood. This guide covers how it works in Florida, the rules that matter, and the mistakes that turn deferred gains into immediately taxable events.

The core concept

When you sell an investment property, you owe federal capital gains tax on the gain (15% or 20% depending on your income bracket) plus depreciation recapture at 25% on any depreciation claimed. Florida has no state income tax, so there's no Florida tax layer.

A 1031 exchange lets you defer all of this by reinvesting the proceeds into a replacement investment property. You pay no tax at the time of the exchange — the deferred gain carries into your new property's cost basis. Eventually, when you sell the replacement property without exchanging, you pay the accumulated deferred tax.

The benefit: your entire pre-tax equity continues working in real estate rather than being reduced by 20–35% in taxes before reinvestment.

The timeline rules — these are strict

45-day identification window

From the closing date of your relinquished property (the property you sold), you have exactly 45 calendar days to identify replacement properties in writing to your qualified intermediary.

No extensions. No exceptions. If day 45 falls on a Saturday, your identification is due Friday or Saturday — not Monday. The IRS has rejected exchanges where investors missed this deadline by one day.

Identification rules:

Three-Property Rule: You may identify up to three properties of any value
200% Rule: You may identify any number of properties whose combined value does not exceed 200% of the relinquished property's sale price
95% Rule: You may identify any number of properties if you actually acquire 95%+ of the total identified value (rare in practice)

Most investors use the Three-Property Rule. Your identification must be in writing, signed, and delivered to your QI before midnight on day 45.

180-day close window

You must close on your replacement property within 180 calendar days of the relinquished property closing — or by the due date of your tax return for the year of the sale (including extensions), whichever is earlier.

The tax return caveat catches investors off-guard: if you sold in November or December, your exchange may need to close before April 15 (or October 15 with extension) rather than 180 days. File for a tax extension if you need the full 180 days.

The qualified intermediary requirement

You cannot touch the sale proceeds. If you receive even a single dollar from the sale of your relinquished property, the exchange is disqualified — all deferred gain becomes immediately taxable.

A qualified intermediary (QI) — also called an exchange accommodator or exchange facilitator — holds the sale proceeds between the relinquished sale and the replacement purchase. The QI is not your attorney, CPA, real estate agent, or anyone who has had a financial relationship with you in the past 2 years.

Selecting a QI:

Use a QI with bonding and insurance — QI funds have been lost when intermediaries went bankrupt or committed fraud
Confirm the QI deposits funds in a segregated account or qualified trust
Your real estate attorney or CPA can recommend established QIs in Florida

Setup timing: Contact your QI before closing on the relinquished property. The assignment of the purchase contract to the QI must happen before closing — you cannot add the QI after you've already closed.

What qualifies and what doesn't

Qualifies for 1031 exchange:

Single-family rental homes
Multi-family residential (duplex, triplex, apartment building)
Vacation rental property (with documented rental history and investment intent)
Commercial real estate (office, retail, industrial)
Raw land held for investment
Net lease (NNN) properties

Does NOT qualify:

Primary residence: Your home is not investment property. (However, see the 121/1031 combination below.)
Fix-and-flip properties: Property held primarily for sale, not for investment, fails the "held for investment" requirement
Foreign property: U.S. properties only — you cannot exchange into foreign real estate
Personal property: The Tax Cuts and Jobs Act (2017) eliminated 1031 exchanges for personal property; only real property qualifies

Gray areas:

Vacation property: Can qualify if you can demonstrate investment intent — documented rental activity, rental income reported on taxes, and use of the property for personal use within IRS safe harbor limits (the lesser of 14 days or 10% of the days it was rented at fair market value). Properties converted from personal use to rental use need a documented "holding period" before exchange (typically 12+ months of rental use).

Reverse exchanges and build-to-suit exchanges

Reverse exchange

A reverse exchange lets you buy replacement property before selling the relinquished property — useful when you find the right replacement before your current property sells.

Reverse exchanges require an Exchange Accommodation Titleholder (EAT) to hold title to one of the properties during the exchange, and they're significantly more complex and expensive. The same 45/180-day rules apply in reverse. Work with a QI experienced in reverse exchanges — not all QIs offer this product.

Build-to-suit (improvement) exchange

You can use exchange funds to build improvements on replacement property, as long as all exchange funds are spent and the improvements are complete within the 180-day exchange period. Improvements not completed within 180 days are not counted toward the exchange. Build-to-suit exchanges require careful QI management and realistic construction timelines.

The 121/1031 combination

If you've owned a primary residence that you converted to a rental property, you may be able to combine the IRC Section 121 primary residence exclusion ($250,000 single / $500,000 married) with a 1031 exchange for the gain above the exclusion.

The mechanics are complex and require specific holding periods (must have owned 5+ years, lived in it as primary residence for 2+ of the last 5 years, and held it as rental for at least 12 months before the exchange). This strategy has been used effectively in Florida markets where longtime homeowners converted their residences to rentals after relocation.

Get specific advice from a CPA on this combination — the rules are strict and the consequences of misapplication are significant.

Common mistakes that blow up 1031 exchanges

1. Missing the 45-day deadline by any amount. No extensions. Set the deadline in your calendar the moment you close.

2. Receiving proceeds before the QI is set up. Contact your QI before listing the relinquished property, and definitely before accepting an offer.

3. Identifying vague property. Your identification must be specific: legal description, address, or other description that uniquely identifies the property. "Three-bedroom home in Orlando" is not valid.

4. Boot from a lower-priced replacement. If you sell for $600,000 and buy replacement for $500,000, the $100,000 difference is taxable boot.

5. Taking back a mortgage note. If the buyer of your relinquished property gives you a seller-financed note, that note may be treated as boot.

6. Using 1031 proceeds for closing costs on replacement. Some closing costs can be paid from exchange funds; others cannot. Your QI should walk you through what's allowable.

7. Related-party exchanges. Exchanges between related parties (family members, entities you control) have special rules and holding period requirements. These require careful structuring.

The Florida-specific picture

Florida's no-income-tax status means 1031 exchanges eliminate the entire state-level tax that investors in California, New York, or Massachusetts would owe. In Florida, the entire deferred liability is federal:

Long-term capital gains: 15% (income under ~$583K) or 20% (above)
Depreciation recapture: 25% on accumulated depreciation
Net Investment Income Tax (NIIT): 3.8% if applicable

On a Florida rental property sold for $600,000 with $200,000 of accumulated depreciation and $250,000 of capital gain: rough federal tax without a 1031 would be approximately $87,500. A properly executed 1031 defers all of it until you eventually sell without exchanging.

Ryan Solberg works with investors across Central Florida on both the relinquished and replacement sides of 1031 exchanges. If you're planning a 1031 exchange, contact Ryan early — the QI setup and property identification timeline requires coordinating well before your relinquished property closes.