A 1031 exchange — named for Section 1031 of the Internal Revenue Code — lets you sell an investment or business-use property and roll the proceeds into a new one without paying capital gains tax on the sale, as long as you follow a strict set of federal rules. For commercial real estate investors in Louisville and Southern Indiana, it's one of the most powerful tools available for repositioning a portfolio, trading out of a management-heavy asset, or moving up into a larger deal — all without a tax bill interrupting the move.
How a 1031 exchange actually works
You sell your relinquished property, but you never touch the proceeds directly. A qualified intermediary (QI) holds the funds in escrow between the sale and the purchase of your replacement property. From there, two deadlines run at the same time, both starting on the day your relinquished property closes.
The 45-day identification window
You have 45 calendar days to identify, in writing, the replacement property or properties you intend to buy. Identification has to be unambiguous — a street address or legal description, not "a warehouse somewhere in Jeffersontown." Miss the deadline and the exchange fails outright; there's no extension for a slow closing on your end.
The 180-day closing deadline
You then have until the earlier of 180 calendar days after the sale or your tax return due date (including extensions) to close on the replacement property. That "earlier of" clause catches people on late-year sales — a September or October closing can leave less than 180 days if you don't file an extension.
The qualified intermediary requirement
An independent third party has to receive and hold your sale proceeds for the exchange to qualify. Your CPA, attorney, or real estate agent can't serve as your QI if they've represented you in that capacity within the prior two years — the IRS wants genuine independence, not a favor from someone already on your team.
What counts as "like-kind" for commercial real estate
Since 2018, Section 1031 has applied only to real property — the personal-property exchanges (equipment, vehicles) that used to qualify were dropped. But for real estate itself, "like-kind" is interpreted broadly: any real property held for investment or business use can exchange into any other, regardless of asset class. An apartment building for a warehouse, raw land for a retail strip, an office building for a net-lease pharmacy — all qualify, as long as both properties are held for investment or business use rather than as a primary residence or inventory (a flip).
2026 update: permanent 100% bonus depreciation changes the math
Section 1031 itself wasn't amended for 2026 — a Treasury and IRS notice issued January 14, 2026 confirmed the exchange mechanics are unchanged. What did change, under the One Big Beautiful Bill Act (OBBBA) signed July 4, 2025, is bonus depreciation: it's now permanently 100% for qualifying property placed in service after January 19, 2025, reversing what had been a scheduled phase-down (100% in 2022, 80% in 2023, 60% in 2024, and briefly just 40% in the first weeks of 2025).
That matters directly for exchange strategy: a replacement property acquired through a 1031 exchange is still eligible for a fresh cost segregation study, and with 100% bonus depreciation restored, the personal-property and land-improvement components that study identifies can be fully expensed in year one instead of spread out over decades. Pairing an exchange with a cost segregation study on the replacement property is a stronger combination in 2026 than it's been since 2022.
Common CRE exchange moves
A few patterns show up often in this market. Investors sell a small multifamily property they're tired of self-managing and exchange into a single-tenant net-lease property for more passive income — see our triple net (NNN) lease guide for what that trade actually looks like. Others exchange across asset classes entirely to chase a better cap rate in a sector where pricing has compressed less. And some investors use a Delaware Statutory Trust (DST) as replacement property to get real estate exposure without operational responsibility at all — a more specialized structure worth discussing with a 1031 attorney or QI directly.
The Kentucky and Southern Indiana angle
A 1031 exchange defers your federal (and typically state) capital gains tax, but it doesn't touch local closing costs. Kentucky's real estate transfer tax (a state and county deed tax based on the sale price) still applies on the relinquished property's sale regardless of the exchange, and your replacement property purchase in Kentucky or Indiana still runs through normal state closing customs. None of this changes the exchange math in a meaningful way — it just means "tax-deferred" isn't "cost-free," and it's worth having a Kentucky-licensed CPA confirm the state filing treatment of your specific exchange alongside your qualified intermediary.
What we look at with you
Before your relinquished property even goes under contract, we look at your 45-day identification runway against realistic closing timelines in this market, whether trading into a different asset class actually improves your risk-adjusted return or just moves the same risk somewhere else, and whether current inventory in your target class (industrial, multifamily, office, retail, or Southern Indiana) can realistically close inside your window. We coordinate with your qualified intermediary and CPA rather than replacing either one — financing the replacement property is its own step, covered in our commercial real estate loans guide.
Frequently asked questions
What qualifies as "like-kind" property for a 1031 exchange?
Any real property held for investment or business use, exchanged for any other real property held for investment or business use. Asset class doesn't matter — an apartment building can exchange into a warehouse, land into a retail building, and so on. It has to be real property (not personal property, which lost 1031 eligibility in 2018) and it can't be a primary residence or property held primarily for resale, like a flip.
What happens if I miss the 45-day identification deadline?
The exchange fails and the sale is treated as a normal taxable transaction. There's no extension available for a slow search — the safest approach is lining up realistic replacement candidates before your relinquished property even closes.
Can I 1031 exchange into a different asset class, like an apartment building into a retail property?
Yes. Since real property is broadly like-kind to other real property under current rules, switching asset classes entirely — say, exchanging a multifamily property into a net-lease retail building — is a common and fully qualifying move, not an exception that needs special approval.
Do I need a qualified intermediary, and can my CPA or attorney serve as mine?
Yes, a QI is required — you cannot receive or control the sale proceeds yourself at any point. Your own CPA, attorney, or broker generally cannot serve as your QI if they've acted in that capacity for you within the two years before the exchange; the role has to go to an independent third party.
How does the permanent 100% bonus depreciation change 1031 strategy in 2026?
It makes pairing an exchange with a cost segregation study on the replacement property more valuable, since the components that study reclassifies into shorter depreciation schedules can now be fully expensed in the first year rather than phased in at a reduced percentage. See our cost segregation guide for the full mechanics.
Does Kentucky have its own 1031 exchange rules separate from the federal ones?
The exchange mechanics themselves — the 45-day and 180-day deadlines, the qualified intermediary requirement — are federal, not state-imposed. Kentucky's own transfer tax and closing customs still apply to the properties involved regardless of the exchange. Confirm the specific state income tax filing treatment of your exchange with a Kentucky-licensed CPA.