Deferred Exchange: Business Property Sales (2025 IRS Guide)

This guide covers “Deferred Exchange” within business property sales. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 544 (2025), Sales and Other Dispositions of Assets, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

Generally, if you exchange real property you hold for use in a trade or business or hold for investment solely for other like-kind real property held for use in a trade or business or investment, you do not recognize the gain or loss from the exchange. However, if you receive non-like-kind property or money as part of the exchange, you recognize gain to the extent of the value of the other property or money you received in the exchange. See Qualifying Property, later, for details on property that qualifies and for exceptions.

The exchange of property for the same kind of property is the most common type of nontaxable exchange. To be a like-kind exchange, the property given up (relinquished property) and the property received (replacement property) must be both of the following.

• Qualifying property.

• Like-kind property.

Additional requirements apply to exchanges in which the property received as like-kind property is not received immediately upon the transfer of the property given up. See Deferred Exchange, later.

If the like-kind exchange involves the receipt of money or unlike property or the assumption of your liabilities, see Partially Nontaxable Exchanges, later.

If the like-kind exchange involves a portion of a MACRS asset and gain is not recognized in whole or in part, the partial disposition rules in Regulations section 1.168(i)-8 apply. See Partial Dispositions of MACRS Property, earlier.

Deferred Exchange

A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. The property you receive is the replacement property. The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. In addition, the replacement property will not be treated as like-kind property unless the identification and the receipt requirements (discussed later) are met.

If, before you receive the replacement property, you actually or constructively receive money or non-like-kind property in full consideration for the property you transfer, the transaction will be treated as a sale rather than a deferred exchange. In that case, you must recognize gain or loss on the transaction, even if you later receive the replacement property. It would be treated as if you bought the replacement property instead of having acquired it through a like-kind exchange.

If, before you receive the replacement property, you actually or constructively receive money or non-like-kind property in less than full consideration for the property you transfer, the transaction will be treated as a partially taxable exchange. See Partially Nontaxable Exchanges, later.

Actual and constructive receipt.

For purposes of a deferred exchange, you actually receive money or non-like-kind property when you receive the money or non-like-kind property or receive the economic benefit of the money or non-like-kind property. You constructively receive money or non-like-kind property when the money or non-like-kind property is credited to your account, set apart for you, or otherwise made available for you so that you can draw upon it at any time or so that you can draw upon it if you give notice of intention to do so. You do not constructively receive money or non-like-kind property if your control of receiving it is subject to substantial limitations or restrictions. However, you constructively receive money or non-like-kind property when the limitations or restrictions lapse, expire, or are waived.

The following rules also apply.

• Whether you actually or constructively receive money or non-like-kind property is determined without regard to your method of accounting.

• Actual or constructive receipt of money or non-like-kind property by your agent is actual or constructive receipt by you.

• Whether you actually or constructively receive money or non-like-kind property is determined without regard to certain arrangements you make to ensure the other party carries out its obligations to transfer the replacement property to you. See Safe Harbors Against Actual and Constructive Receipt in Deferred Exchanges, later.

Identification requirement.

You must identify the property to be received within 45 days after the date you transfer the property given up in the exchange. This period of time is called the identification period. Any property received during the identification period is considered to have been identified.

If you transfer more than one property (as part of the same transaction) and the properties are transferred on different dates, the identification period and the exchange period begin on the date of the earliest transfer.

Identifying replacement property.

You must identify the replacement property in a signed written document and deliver it to the person obligated to transfer the replacement property or any other person involved in the exchange other than you or a disqualified person. See Disqualified persons, later. You must clearly describe the replacement property in the written document. For example, use the legal description or street address for real property. In the same manner, you can cancel an identification of replacement property at any time before the end of the identification period.

Identifying alternative and multiple properties.

You can identify more than one replacement property. However, regardless of the number of properties you give up, the maximum number of replacement properties you can identify is:

• Three properties regardless of their FMV; or

• Any number of properties whose total FMV at the end of the identification period is not more than double the total FMV, on the date of transfer, of all properties you give up.

If, as of the end of the identification period, you have identified more properties than permitted under this rule, the only property that will be considered identified is:

• Any replacement property you received before the end of the identification period; and

• Any replacement property identified before the end of the identification period and received before the end of the exchange period, but only if the FMV of the property is at least 95% of the total FMV of all identified replacement properties. FMV is determined on the earlier of the date you received the property or the last day of the exchange period. See Receipt requirement, later.

Disregard incidental property.

For purposes of the identification requirement, do not treat property incidental to a larger item of property as separate from the larger item when you identify replacement property. Property is incidental if it meets both of the following tests.

• If, in a standard commercial transaction, it is typically transferred with the larger item; and

• The total FMV of all the incidental property is not more than 15% of the total FMV of the larger item of property.

For example, furniture, laundry machines, and other miscellaneous items of personal property will not be treated as separate property from an apartment building with an FMV of $1,000,000 if the total FMV of the furniture, laundry machines, and other personal property does not exceed $150,000.

Note:

This rule applies only for purposes of determining whether the identification requirement is met. It does not apply for purposes of determining whether the incidental property is like-kind or non-like-kind for purposes of any gain recognized on the exchange. See Partially Nontaxable Exchanges, later, for information on gain recognition relating to the non-like-kind property received in a like-kind exchange.

Replacement property to be produced.

Gain or loss from a deferred exchange can qualify for nonrecognition even if the replacement property is not in existence or is being produced at the time you identify it as replacement property. If you need to know the FMV of the replacement property to identify it, estimate its FMV as of the date you expect to receive it.

Receipt requirement.

The property must be received by the earlier of the following dates.

• The 180th day after the date on which you transfer the property given up in the exchange.

• The due date, including extensions, for your tax return for the tax year in which the transfer of the property given up occurs.

This period of time is called the exchange period. You must receive substantially the same property that met the identification requirement, discussed earlier.

Replacement property produced after identification.

In some cases, the replacement property may have been produced after you identified it (as described earlier under Replacement property to be produced). In that case, to determine whether the property you received was substantially the same property that met the identification requirement, the property will be considered substantially the same property as identified only if, had production been completed on or before the date you received the replacement property:

• The property received would have been considered substantially the same property as identified, and

• To the extent the property is considered real property under local law.

Do not take into account any variations due to usual production changes. Substantial changes in the property to be produced, however, will disqualify it.

Any additional production on the replacement property after you receive it does not qualify as like-kind property. To this extent, the transaction is treated as a taxable exchange of property for services.

Interest income.

Generally, in a deferred exchange, if the amount of money or property you are entitled to receive depends upon the length of time between when you transfer the property given up and when you receive the replacement property, you are treated as being entitled to receive interest or a growth factor. The interest or growth factor will be treated as interest, regardless of whether it is paid in like-kind property, money, or non-like-kind property. Include this interest in your gross income according to your method of accounting.

If you transferred property in a deferred exchange and an exchange facilitator holds exchange funds for you and pays you all the earnings on the exchange funds according to an escrow agreement, trust agreement, or exchange agreement, you must take into account all items of income, deduction, and credit attributable to the exchange funds.

If, in accordance with an escrow agreement, trust agreement, or exchange agreement, an exchange facilitator holds exchange funds for you and keeps some or all of the earnings on the exchange funds in accordance with the escrow agreement, trust agreement, or exchange agreement, you will be treated as if you had loaned the exchange funds to the exchange facilitator. You must include in income any interest that you receive and, if the loan is a below-market loan, you must include in income any imputed interest.

Exchange funds include relinquished property, cash, or cash equivalent that secures an obligation of a transferee to transfer replacement property or proceeds from a transfer of relinquished property held in a qualified escrow account, qualified trust, or other escrow account, trust, or fund in a deferred exchange.

An exchange facilitator is a qualified intermediary, transferee, escrow holder, trustee, or other person that holds exchange funds for you in a deferred exchange under the terms of an escrow agreement, trust agreement, or exchange agreement.

For more information relating to the current taxation of qualified escrow accounts, qualified trusts, and other escrow accounts, trusts, and funds used during deferred exchanges of like-kind property, see Regulations sections 1.468B-6 and 1.7872-16. If the exchange facilitator is a qualified intermediary, see Safe Harbors Against Actual and Constructive Receipt in Deferred Exchanges, later.

Disqualified persons.

A disqualified person is a person who is any of the following.

1. Your agent at the time of the transaction.

2. A person who is related to you under the rules discussed in chapter 2 under Nondeductible loss, substituting “10%” for “50%.”

3. A person who is related to a person who is your agent at the time of the transaction under the rules discussed in chapter 2 under Nondeductible Loss, substituting “10%” for “50%.”

For purposes of (1) above, a person who has acted as your employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the 2-year period ending on the date of the transfer of the first of the relinquished properties is your agent at the time of the transaction. However, solely for purposes of whether a person is a disqualified person as your agent, the following services for you are not taken into account.

• Services with respect to exchanges of property intended to qualify for nonrecognition of gain or loss as like-kind exchanges.

• Routine financial, title insurance, escrow, or trust services by a financial institution, title insurance company, or escrow company.

The rule in (3) above does not apply to a bank or a bank affiliate if it would otherwise be a disqualified person under the rule in (3) solely because it is a member of the same controlled group (as determined under section 267(f) of the Internal Revenue Code, substituting “10%” for “50%”) as a person that has provided investment banking or brokerage services to the taxpayer within the 2-year period ending on the date of the transfer of the first of the relinquished properties. For this purpose, a bank affiliate is a corporation whose principal activity is rendering services to facilitate exchanges of property intended to qualify for nonrecognition of gain under section 1031 of the Internal Revenue Code and all of whose stock is owned by either a bank or a bank-holding company.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 544 (2025), Sales and Other Dispositions of Assets: Gain or Loss — Nontaxable Exchanges — Like-Kind Exchanges — Deferred Exchange — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.