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22.1 Section 1031 Like-Kind Exchanges (Real Property Only, 45-Day/180-Day Deadlines)

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EA Part 2 — Businesses: Free Study Guide 2026 Exam

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1 Chapter 1: Exam Cycle & Preparation

1.1 Current Exam Cycle, Blueprint & Study Decisions

2 Chapter 2: Business Entity Choices & Classification

2.1 Business Structures & Liability: Sole Proprietorship, Partnership, LLC, and Corporation 2.2 Entity Classification & Check-the-Box Rules (Form 8832) 2.3 Classification Elections, Default Rules & the 60-Month Limitation 2.4 EINs, Entity Changes & Closing a Business

3 Chapter 3: Sole Proprietorships

3.1 Schedule C Gross Income & Allowable Business Expenses 3.2 Self-Employment Tax (Schedule SE) & Statutory Employees 3.3 Business Use of Home (Simplified vs. Actual Method)

4 Chapter 4: Partnership Formation & Basis

4.1 Formation & Property Contributions under Section 721 4.2 Partner Liabilities under Section 752 (Recourse vs. Nonrecourse) 4.3 Partnership Tax Year, Accounting Periods & Form 1065 Filing 4.4 Family Partnerships, Gifted Interests & Income Allocations

5 Chapter 5: Partnership Basis & Loss Limitations

5.1 Outside Basis Calculations & Ordering Rules 5.2 Basis, At-Risk (§465) & Passive Loss (§469) Limitations 5.3 Excess Business Losses (§461(l)) & Related-Party Transactions (§707) 5.4 Debt Discharge: Partnership vs. S Corporation

6 Chapter 6: Partnership Operations & Distributions

6.1 Form 1065, Schedule K & Schedule K-1 Separately Stated Items 6.2 Guaranteed Payments vs. Distributive Shares 6.3 Nonliquidating & Liquidating Distributions & Section 751 Hot Assets 6.4 Centralized Partnership Audits, Notices & Opting Out

7 Chapter 7: Partnership Dispositions & Basis Adjustments

7.1 Sale or Exchange of a Partnership Interest 7.2 Optional Basis Adjustments (Section 754, 743(b) & 734(b)) 7.3 Partnership Terminations, Mergers & Divisions

8 Chapter 8: C Corporation Formation & Structure

8.1 Corporate Formation & Section 351 Transfer Requirements 8.2 Boot, Section 357 Liabilities in Excess of Basis & Section 1244 Stock 8.3 Capital Structure: Debt vs. Equity & Section 385 Principles 8.4 Controlled Groups & Closely Held Corporations

9 Chapter 9: C Corporation Operations & E&P

9.1 Form 1120 Gross Income, Corporate Deductions & 21% Flat Tax Rate 9.2 Book-Tax Differences (Schedule M-1 vs. Schedule M-3) 9.3 Current vs. Accumulated Earnings & Profits (E&P) 9.4 Accumulated Earnings & Personal Holding Company Taxes 9.5 Corporate Minimum Tax & Foreign Tax Credits

10 Chapter 10: C Corporation Distributions & Liquidations

10.1 Property Distributions, Dividends & Constructive Distributions 10.2 Stock Redemptions (§302) & Corporate Liquidations (§331/§336)

11 Chapter 11: S Corporation Eligibility & Operations

11.1 S Corporation Requirements & Form 2553 Election Rules 11.2 Election Deadlines, Late Election Relief (Rev. Proc. 2013-30) 11.3 Form 1120-S Operations, Reasonable Compensation & 2% Shareholder Fringes

12 Chapter 12: S Corporation Basis, Distributions & Taxes

12.1 Stock & Debt Basis Calculations, Ordering Rules & Form 7203 12.2 S Corp Distributions, Accumulated Adjustments Account (AAA) & E&P Tiers 12.3 Entity-Level Taxes (BIG §1374 & Passive Income §1375) & Termination

13 Chapter 13: Accounting Periods & Methods

13.1 Tax Years: Calendar, Fiscal, and 52-53 Week Years 13.2 Cash vs. Accrual Method & Section 448 Gross Receipts Test 13.3 Changes in Accounting Method (Form 3115) & Section 481(a) Adjustments 13.4 2025 Domestic Research Expensing & Foreign Research

14 Chapter 14: Business Gross Income & Inventory

14.1 Gross Receipts & Inclusions in Business Gross Income 14.2 Cost of Goods Sold (COGS) & Inventory Valuation (Cost, LCM, FIFO, LIFO) 14.3 Section 263A Uniform Capitalization (UNICAP) & Small Business Exemption

15 Chapter 15: General Business Deductions & Limits

15.1 Ordinary & Necessary Business Expenses (§162) & Disallowances 15.2 Business Meals, Gifts & Travel 15.3 Vehicle Expenses, Mileage & Substantiation 15.4 Business Interest Expense Limitation (§163(j)) & Business Taxes

16 Chapter 16: Business Losses & Net Operating Losses

16.1 Net Operating Losses (NOLs) 80% Taxable Income Cap & Carryforward Rules 16.2 Business Casualty, Theft & Disaster Losses 16.3 Business vs. Nonbusiness Bad Debts (Direct Write-Off Method §166)

17 Chapter 17: Section 199A Qualified Business Income Deduction

17.1 Section 199A Overview: 20% Deduction & Qualified Trades or Businesses 17.2 Specified Service Trades or Businesses (SSTBs) & Threshold Phase-Outs 17.3 W-2 Wage & UBIA Limitations Calculation & Aggregation Rules

18 Chapter 18: Depreciation Principles & MACRS

18.1 Depreciable Property, Cost Basis & Capitalization vs. Repair Regulations 18.2 MACRS Property Classes (3, 5, 7, 15, 27.5, 39-Year) & Depreciation Methods 18.3 Depreciation Conventions: Half-Year, Mid-Quarter (40% Rule) & Mid-Month

19 Chapter 19: Section 179 Expensing & Bonus Depreciation

19.1 Section 179 Expensing: $2.5M Limit, $4M Phase-Out & Taxable Income Limitation 19.2 2025 Bifurcated Bonus Depreciation: Pre-Jan 20 (40%) vs. Post-Jan 19 (100% OBBBA) 19.3 Listed Property Rules, >50% Business Use & Section 280F Luxury Auto Limits

20 Chapter 20: Amortization & Intangible Assets

20.1 Section 197 Intangibles & 15-Year Straight-Line Amortization 20.2 Start-Up (§195) & Organizational (§248/§709) Expenditures: $5,000 Rule & 180-Month Amortization 20.3 Depletion: Cost Depletion vs. Percentage Depletion for Natural Resources

21 Chapter 21: Business Property Dispositions & Recapture

21.1 Sale of Business Property & Reporting on Form 4797 21.2 Section 1231 Netting Process & 5-Year Lookback Recapture Rule 21.3 Section 1245 (Full Personal Property Recapture) & Section 1250 / Unrecaptured §1250 Gain

22 Chapter 22: Like-Kind Exchanges & Involuntary Conversions

22.1 Section 1031 Like-Kind Exchanges (Real Property Only, 45-Day/180-Day Deadlines) 22.2 Boot Recognition & Basis Calculation for Replacement Property 22.3 Section 1033 Involuntary Conversions & Replacement Periods

23 Chapter 23: Business Tax Credits

23.1 General Business Credit (Form 3800), Net Income Tax Limit & Carryback/Carryforward 23.2 Key Business Tax Credits: Research Credit (§41), WOTC (§51), Small Employer Health (§45R)

24 Chapter 24: Worker Classification & Information Reporting

24.1 Employee vs. Independent Contractor: Common Law Control & Form SS-8 24.2 Section 530 Relief Requirements & Consequences of Misclassification 24.3 Information Returns: Form 1099-NEC vs. 1099-MISC, Form W-2/W-3 & Backup Withholding

25 Chapter 25: Employment Taxes & Compliance

25.1 Form 941 (Quarterly Payroll Tax Return) & Federal Income Tax / FICA Withholding 25.2 Federal Unemployment Tax (Form 940) & State Unemployment Credit 25.3 Payroll Tax Deposit Schedules (Monthly vs. Semi-Weekly, $100K Rule) & Trust Fund Penalty (§6672)

26 Chapter 26: Fiduciary Income Taxation (Trusts & Estates)

26.1 Principles of Fiduciary Income Taxation & Form 1041 Filing Requirements 26.2 Fiduciary Tax Years, Exemptions & Estimated Payments 26.3 Simple and Complex Trusts, Tiers & Distribution Timing 26.4 DNI Computation & Fiduciary Expense Allocation 26.5 Income Distribution Deduction & Schedule K-1 (Form 1041) Flow-Through 26.6 Foreign Trusts, Grantor Control & Abusive Schemes

27 Chapter 27: Tax-Exempt Organizations & Farm Taxation

27.1 Recognition of Tax Exemption (Form 1023/1024) & §501(c)(3) Standards 27.2 Maintaining Exemption, Political Activity & Excess Benefits 27.3 Form 990 Series Annual Returns & Unrelated Business Taxable Income (UBTI / Form 990-T) 27.4 Unrelated Business Income & Debt-Financed Property 27.5 Farm Income, Schedule F & Conservation Costs 27.6 Farm Income Averaging & Conservation Deductions 27.7 Farm Disaster Elections & Livestock Replacement 27.8 Farm Rentals, Estimated Tax & Farm Depreciation

28 Chapter 28: Business Records, Reporting & ACA

28.1 Financial Statements, Records & Owner Transactions 28.2 Filing Extensions, International Forms & Cash Reporting 28.3 ACA Employer Size, Coverage & Reporting

29 Chapter 29: Employer & Self-Employed Retirement Plans

29.1 Qualified Plans, 401(k) Limits & Nondiscrimination 29.2 SEPs, Self-Employed Contributions & Owner Compensation 29.3 SIMPLE IRAs & Small-Employer Contribution Choices 29.4 Plan Reporting, Loans & Prohibited Transactions

30 Chapter 30: Rental Property & Passive Activities

30.1 Rental Income, Expenses & Conversion Basis 30.2 Rental Losses, Active Participation & Real Estate Professionals 30.3 Vacation Homes, Personal Days & Rental Allocations

22.1 Section 1031 Like-Kind Exchanges (Real Property Only, 45-Day/180-Day Deadlines)

Key Takeaways Explain This Topic AI

Under IRC §1031, tax-deferred like-kind exchange treatment applies EXCLUSIVELY to real property held for productive use in a trade or business or for investment; all personal property (equipment, machinery, vehicles, livestock, artwork) and intangible assets are statutorily excluded.

The statutory definition of 'like-kind' for real estate is broad, referring to the nature or character of the property rather than its grade or quality, allowing unimproved vacant land, commercial office buildings, industrial warehouses, multi-family apartment complexes, and 30-year leaseholds to be exchanged interchangeably.

Under IRC §1031(h), real property located within the United States and real property located outside the United States are statutorily NOT like-kind; a domestic parcel can never be exchanged for foreign real estate on a tax-deferred basis.

In a deferred (Starker) exchange under §1031(a)(3), the taxpayer must meet two ordinary calendar deadlines (subject to applicable statutory disaster postponements): replacement property must be identified in writing within 45 days, and replacement property must be received by the earlier of 180 days or the tax return due date (including extensions).

The 45-day identification and 180-day exchange periods run on strict calendar days with NO extension for weekends or legal holidays under IRC §7503; failing to file a Form 4868 tax return extension on April 15 can prematurely cut short the 180-day window.

Last updated: October 2026

Statutory Framework of IRC §1031 Post-TCJA

Under IRC §1031(a)(1) , no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment if such property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.

Historically, Section 1031 applied to tangible personal property, including corporate aircraft, heavy construction machinery, vehicle fleets, and agricultural equipment. However, the Tax Cuts and Jobs Act (TCJA) fundamentally altered the statute by restricting Section 1031 exclusively to real property for transfers completed after December 31, 2017. For Tax Year 2025 and on the Special Enrollment Examination (SEE), any exchange of personal property, intangible property, or financial instruments is treated as a fully taxable sale and purchase. IRC §1031 Qualifying Scope:

  • [YES] Commercial office buildings, warehouses, retail storefronts
  • [YES] Multi-family residential rental apartments and residential rental homes
  • [YES] Agricultural land, timberland, and unimproved vacant lots held for investment
  • [YES] 30-year or longer leasehold interests in real property
  • [YES] Oil, gas, and mineral interests classified as real property under state law
  • -------------------------------------------------------------------------------
  • [NO] Tangible personal property (machinery, equipment, vehicles, furnishings)
  • [NO] Real property held primarily for sale (dealer inventory, fix-and-flip properties)
  • [NO] Personal-use property (taxpayer's primary residence, personal vacation home)
  • [NO] Partnership interests, LLC membership interests, corporate stocks, bonds, notes
  • [NO] Domestic real property exchanged for foreign real property (§1031(h))
  • Statutorily Excluded Real Property

Even within the realm of real estate, specific property classes are statutorily barred from Section 1031 nonrecognition under IRC §1031(a)(2) :

Property Held Primarily for Sale (Dealer Inventory) : Real estate developers, builders, and fix-and-flip investors who acquire land or buildings with the primary intent of reselling to customers in the ordinary course of business cannot utilize §1031. An investor must demonstrate an intent to hold the property for long-term productive business use or rental income.

Personal-Use Property : A taxpayer's principal residence (governed by IRC §121) or personal vacation home is disqualified. However, under Rev. Proc. 2008-16 , the IRS provides a safe harbor allowing a dwelling unit to qualify for §1031 if, in each of the two 12-month periods immediately before and after the exchange: (a) the unit is rented to an unrelated person at fair rental value for at least 14 days, and (b) the taxpayer's personal use does not exceed the greater of 14 days or 10% of the days rented.

Partnership & Multi-Member LLC Interests (§1031(a)(2)(D)) : A partner cannot exchange an interest in a partnership for an interest in another partnership, nor can a partner exchange a partnership interest for direct fee-simple real estate. To achieve deferral when individual partners desire different outcomes, partnerships frequently execute a "drop and swap" (liquidating partnership interests into direct tenancy-in-common (TIC) interests under Rev. Proc. 2002-22 ) prior to the exchange.

The Broad "Like-Kind" Standard for Real Estate

Under Treas. Reg. §1.1031(a)-1(b) , the phrase like-kind refers to the nature or character of the property and not to its grade or quality . One kind or class of property may not be exchanged for property of a different kind or class; however, the fact that any real estate involved is improved or unimproved is not material, because that fact relates only to its grade or quality, not to its nature.

Consequently, the like-kind test for domestic real estate is exceptionally broad. An investor may exchange almost any parcel of business or investment real estate for any other parcel of business or investment real estate:

Relinquished Real Property Proposed Replacement Property Section 1031 Qualified? Statutory Rationale

Unimproved Raw Land (held for investment) Commercial Office Building (held for rental) Yes Both are real property held for investment or business; improvement status affects grade, not character.

Industrial Warehouse (light manufacturing) Residential Apartment Complex (multi-family) Yes Trade or business real property can be exchanged for rental investment real estate.

30-Year Leasehold Interest Fee Simple Farmland Yes Under Treas. Reg. §1.1031(a)-1(c), a leasehold with 30 or more years remaining (including renewal options) is like-kind to fee simple real estate.

U.S. Commercial Retail Store Foreign Commercial Retail Store (London, UK) No Under IRC §1031(h)(1), real property in the United States and real property outside the United States are statutorily NOT like-kind.

Apartment Building Heavy Construction Cranes No Post-TCJA, personal property is completely excluded from Section 1031.

Commercial Rental Building Subdivided Lots Held for Sale No Subdivided lots held primarily for sale constitute dealer inventory under §1031(a)(2).

Important

The Foreign Real Property Exclusion (§1031(h)) :

Under IRC §1031(h), real property located within the United States and real property located outside the United States are statutorily distinct classes of property. Domestic real property exchanged for foreign real property triggers immediate gain recognition. While foreign real estate exchanged for other foreign real estate can qualify under §1031(h)(2), cross-border domestic/foreign exchanges are strictly barred.

Deferred (Starker) Exchanges Under IRC §1031(a)(3)

In the real estate market, simultaneous two-party exchanges (where Party A transfers Property X to Party B at the exact instant Party B transfers Property Y to Party A) are extraordinarily rare. The vast majority of transactions are structured as deferred (non-simultaneous) exchanges , authorized under IRC §1031(a)(3) following the landmark Starker v. United States decision.

In a deferred exchange, the taxpayer transfers the relinquished property first and subsequently identifies and acquires one or more replacement properties . To qualify for nonrecognition, the transaction must satisfy two strict, statutory deadlines: Deferred Exchange Timeline (Both clocks start on Day 0 = Date of Transfer):

  • Day 0: Taxpayer transfers Relinquished Property to Qualified Intermediary (QI)
  • │
  • ├─────────────────────────────► Day 45: Identification Window Closes (Midnight)

│ Must identify replacement property in writing.

  • │
  • └──────────────────────────────────────────────────────────► Day 180: Exchange Window Closes
  • Earlier of 180 calendar days OR

tax return due date (+ extensions).

1. The 45-Day Identification Period (§1031(a)(3)(A))

Deadline : The replacement property must be unambiguously identified in writing on or before midnight of the 45th calendar day following the date the taxpayer transferred the relinquished property.

Written Notice : The identification must be signed by the taxpayer and hand-delivered, mailed, faxed, or electronically transmitted to a qualified party involved in the exchange (typically the Qualified Intermediary), but never to the taxpayer's own agent .

Legal Identification Rules : The taxpayer must identify potential replacement properties under one of three exclusive statutory safe harbors:

The 3-Property Rule : The taxpayer may identify up to three (3) replacement properties , regardless of their aggregate fair market value (FMV). The taxpayer may acquire one, two, or all three properties.

The 200% Rule : The taxpayer may identify any number of replacement properties , provided that their aggregate fair market value at the end of the 45-day period does not exceed 200% of the aggregate fair market value of all relinquished properties on the date of transfer.

The 95% Rule : If the taxpayer identifies more than 3 properties and their aggregate FMV exceeds 200% of the relinquished property's FMV, the identification is invalid unless the taxpayer actually acquires identified replacement properties whose aggregate FMV equals at least 95% of the aggregate FMV of all properties identified.

Caution

The Strict Calendar Day Rule vs. IRC §7503 :

Unlike general tax return filing deadlines governed by IRC §7503, the 45-day and 180-day deadlines are strict calendar deadlines . If the 45th day or 180th day falls on a Saturday, Sunday, or legal holiday, the deadline is NOT extended to the next business day! The identification or closing must occur on or before that exact weekend or holiday date, or the entire exchange is disqualified.

2. The 180-Day Exchange Period (§1031(a)(3)(B))

Under IRC §1031(a)(3)(B), the replacement property must be received by the taxpayer by the earlier of :

180 calendar days after the date on which the taxpayer transferred the relinquished property; OR

The due date (including extensions) of the taxpayer's federal income tax return for the taxable year in which the transfer of the relinquished property occurred.

The Tax Return Due Date Trap on the EA Exam

A frequent exam scenario tests a transfer occurring late in the calendar year:

Scenario : Taxpayer transfers relinquished property on November 1, 2025 .

180 calendar days from November 1, 2025 is April 30, 2026 .

However, the taxpayer's 2025 Form 1040 is due on April 15, 2026 .

If the taxpayer does not file an extension, the exchange period terminates prematurely on April 15, 2026 (the return due date), cutting the exchange window to only 165 days! Any property acquired between April 16 and April 30 is fully taxable.

The Remedy : The taxpayer must timely file Form 4868 (automatic 6-month extension to October 15, 2026) before April 15, 2026. This extends the tax return due date, preserving the full 180-day window through April 30, 2026.

The Qualified Intermediary (QI) & Constructive Receipt

Under Treas. Reg. §1.1031(k)-1(g)(4) , the taxpayer must avoid actual or constructive receipt of the sales proceeds from the relinquished property. If at any time during the exchange period the taxpayer possesses the unrestricted legal right to receive, pledge, borrow, or control the escrowed funds, the exchange fails immediately, and the full realized gain is taxed.

To preserve tax deferral, the parties engage a Qualified Intermediary (QI) :

The QI enters into a written exchange agreement with the taxpayer.

The QI takes title to (or assigns contracts for) the relinquished property, transfers it to the ultimate buyer, holds the net sale proceeds in a segregated qualified escrow account, and uses the funds to purchase the replacement property from the seller.

The "(g)(6) Restrictions" : The exchange agreement must expressly provide that the taxpayer has no right to receive, pledge, borrow, or obtain the benefits of the cash or other property held by the QI before the expiration of the 45-day or 180-day period.

Disqualified Persons Under Treas. Reg. §1.1031(k)-1(k)

A person cannot serve as a Qualified Intermediary if they are a disqualified person . A disqualified person is:

The taxpayer's employee, attorney, accountant/CPA, investment banker, or real estate broker/agent who has performed professional services for the taxpayer within the two-year period ending on the date of the transfer of the relinquished property (routine routine escrow or closing services do not taint eligibility);

Any related person defined under IRC §267(b) or §707(b) (e.g., spouse, siblings, ancestors, lineal descendants, or controlled corporations/partnerships with >50% ownership).

Reverse Exchanges Under Rev. Proc. 2000-37

In a reverse exchange , a taxpayer must acquire the replacement property before transferring the relinquished property (e.g., in a competitive commercial bidding environment). Because a taxpayer cannot exchange property with themselves, the IRS established a safe harbor in Rev. Proc. 2000-37 using an Exchange Accommodation Titleholder (EAT) :

The EAT takes qualified indicia of ownership (parks title) to either the replacement property or the relinquished property under a written Qualified Exchange Accommodation Arrangement (QEAA) .

The taxpayer must identify the relinquished property within 45 days of the EAT taking title.

The entire transaction must be fully closed within 180 days of the EAT acquiring the parked title.

Comprehensive Worked Numerical Example: Identification & Timeline Coordination

On October 15, 2025 , Horizon Logistics Inc. (a calendar-year C corporation) closes the transfer of an industrial terminal (relinquished property) for a fair market value of $2,000,000 through a Qualified Intermediary. Step 1: Calculate the 45-Day Identification Deadline

  • Transfer Date: October 15, 2025 (Day 0)
  • October has 31 days (16 remaining days in October)
  • November has 30 days (Day 45 falls on November 29, 2025)

- Identification Deadline: Midnight, November 29, 2025 (Saturday).

- Rule: Strict calendar days apply! No weekend rollover. Identification must be sent by Nov 29.

Step 2: Evaluate Proposed Identification Lists under Statutory Safe Harbors

Relinquished Property FMV = \$2,000,000.

Option A: Horizon identifies 3 commercial properties valued at \$1.5M, \$2.2M, and \$3.1M.

-> Total identified: 3 properties (Aggregate FMV = \$6,800,000).

-> Test: Meets the 3-Property Rule! Value is irrelevant when 3 or fewer properties are named.

Option B: Horizon identifies 5 distribution hubs valued at \$700,000 each (Total FMV = \$3,500,000).

-> Total identified: 5 properties (> 3 properties, so 3-Property Rule is failed).

-> Test 200% Rule: 200% x \$2,000,000 = \$4,000,000.

-> Total FMV (\$3,500,000) <= \$4,000,000. Valid identification under the 200% Rule!

Option C: Horizon identifies 6 properties valued at \$900,000 each (Total FMV = \$5,400,000).

-> Total identified: 6 properties (> 3 properties).

-> Test 200% Rule: \$5,400,000 exceeds \$4,000,000 ceiling. Disqualified under 200% Rule.

-> Test 95% Rule: Valid ONLY IF Horizon actually acquires at least 95% of \$5,400,000 (\$5,130,000).

Step 3: Calculate the 180-Day Exchange Period Deadline

- Transfer Date: October 15, 2025.

- 180 calendar days from October 15, 2025 is April 13, 2026.

- Corporate Tax Return Due Date (Form 1120): April 15, 2026.

- The earlier of 180 days (April 13, 2026) or return due date (April 15, 2026) is April 13, 2026.

- Horizon must close on the replacement property by April 13, 2026.

Disaster postponements

The ordinary 45-day and 180-day periods do not roll forward merely because their last day is a weekend or holiday. Nevertheless, specific federally declared disaster relief can postpone deadlines for affected taxpayers. Apply an announced postponement when the facts qualify; do not interpret the ordinary calendar-day rule as a ban on statutory disaster relief.