Oklahoma Bar Journal

The Basics of a 1031 Like-Kind Exchange

By J. Max Nowakowski 

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Oklahoma has emerged as an increasingly attractive destination for real estate investors, both foreign and domestic. With diverse economic sectors and a favorable business climate, our state offers a wealth of investment opportunities across various asset classes. It is important for legal professionals who counsel real estate investors to understand the unique dynamics of the Oklahoma real estate market and the intricacies of popular tactics and methods, such as a Section 1031[1] like-kind exchange (1031 exchange).

Section 1031 is a key provision of federal tax law that can drive investment strategy. At a high level, it offers a valuable opportunity for taxpayers to defer capital gains taxes on the exchange of like-kind properties; this is not a tax savings loophole but an indefinite tax deferral procedure that incentivizes taxpayers to reinvest their real estate sale proceeds.

Section 1031 states, in part, “No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.”[2]

The modern-day definition and framework for the tax-deferred like-kind exchange has evolved from its inception in 1921 through multiple amendments to the Internal Revenue Code and numerous Internal Revenue Service (IRS) rules and regulations. Taxpayers in an exchange will sell a “relinquished property” and obtain a “replacement property” using some or all of the proceeds from the relinquished property sale that would otherwise be subject to capital gains tax. Exchanges are reported on IRS Form 8824.[3]


The beneficial property owners, meaning buyers and sellers, are the primary individuals and entities in an exchange.

A qualified intermediary (QI) is used in the vast majority of exchanges, even if just for safe harbor protection. QIs are third-party fiduciaries who receive relinquished property sale proceeds, secure funds in escrow and help inform parties of relevant deadlines.[4] Attorneys can be QIs but cannot provide any other advisory or representation service to the same client on the same transaction.

Professionals and agents are the final group of exchange facilitators. Any number of various professionals may be involved in an exchange: real estate agents and brokers, bankers, surveyors, accountants and attorneys.

If not acting as a QI, attorney services in 1031 exchanges are comparable to other real estate transactions: drafting letters of intent and written agreements, conducting title reviews and curing title issues, obtaining and reviewing tenant leases, facilitating physical and environmental inspections and reviewing reports, maintaining contract deadlines and generally assisting with the transaction through closing.


Simultaneous exchanges involve a same-day closing such that the taxpayer never actually receives relinquished property proceeds, which are not strictly required to be deposited with a QI (except in the cases of deferred or reverse exchanges, which are discussed later). However, IRS regulations expressly state that using a QI provides safe harbor for a simultaneous exchange.[5]

Deferred exchanges, sometimes called delayed exchanges, are what most investors and clients will have in mind when considering a 1031 exchange; a relinquished property is sold and proceeds are held by the QI, the taxpayer identifies potential suitable replacement properties within 45 days, and closing on the replacement property must occur within 180 days of the relinquished property closing.[6]

Reverse exchanges are simply a deferred exchange conducted in reverse order. In a reverse exchange, the replacement property is obtained and title is held by the taxpayer before closing on a relinquished property divestiture.[7]


  • Line up the QI and set terms for how funds will be held, managed and protected.[8]
  • Close on the relinquished sale and escrow sale proceeds with the QI. Do not allow the taxpayer entity to directly hold sale proceeds or the sale will be deemed a transfer without exchange.
  • Use one of the three possible replacement property identification methods (three property rule, 200% rule or 95% rule), and formally identify the target replacement properties to the IRS within 45 days of the relinquished property closing.[9]
  • Contract to acquire the target replacement property(ies) and perform appropriate due diligence.
  • Close the replacement property sale(s) using the QI-held funds, with additional funds or financing as necessary, within 180 days of the relinquished property closing.[10]


There are two common exchange failures. First, capital gains tax may be assessed because the taxpayer is unable to meet exchange deadlines or fails to close on replacement properties. Second, a partial exchange can occur whereby a portion of relinquished property proceeds are not reinvested and are, therefore, subject to capital gains tax.


Counsel can advise exchange clients to consider identifying potential replacement properties prior to selling the relinquished property. This can alleviate the crunch of a tight 45-day identification deadline. Parties can also consider using nonbinding letters of intent or inquiry letters to expedite the acquisition of a replacement property. There is no rule that an exchange must take the full 180 days. Be wary of new builds – construction delays may push a taxpayer beyond the 180-day deadline. Keep detailed information about each exchange to ensure a successful audit, including all material transaction documents and independent third-party valuations of each property.


  • Replacement properties must be obtained in the same manner as the relinquished property. The same individual or legal entity (g., LLC, trust, etc.) must divest the relinquished property and acquire the replacement property.[11]
  • Replacement properties must be a like-kind property. This typically includes any property held for investment purposes or used for trade or business purposes. Real property located in the United States is not like-kind with property located outside the United States.[12] However, improved land and unimproved land may be like-kind.[13]
  • Taxpayers can exchange one property for multiple properties or vice versa.[14] This means clients can expand from lower to higher property values or from one asset class to another.
  • Clients may wish to explore other tax-deferral strategies in addition to the 1031 exchange. Consider two strong alternatives: the Deferred Sales Trust, discussed by attorney Dawn D. Hallman in the February 2019 Oklahoma Bar Journal, or the Delaware Statutory Trust, which can help exchangers quickly place QI-held funds into pooled real estate investments if time is running out for a successful 1031 exchange.[15]


Property valuations in the state have increased quickly as of late, meaning more property owners have equity that will be subject to capital gains tax in an eventual sale. The need for a working knowledge of 1031 exchanges may prove to be increasingly important for Oklahoma attorneys in the coming years.


J. Max Nowakowski is the principal attorney and founder of Avenue Legal Group, a full-service firm focused on real estate transactions and disputes, estate planning, probate and business matters. Mr. Nowakowski represents clients in 1031 exchanges across Oklahoma and serves as local counsel for clients and firms outside the state.





[1] All section references contained herein are to the Internal Revenue Code of 1986, as amended (the “Code”), unless otherwise indicated.

[2] Section 1031(a)(1). See also Treas. Reg. §1.1031(a)-1.

[3] www.irs.gov/forms-pubs/about-form-8824.

[4] https://bit.ly/4baRery.

[5] Treas. Reg. §1.1031(b)-2.

[6] Treas. Reg. §1.1031(k)-1.

[7] IRS Fact Sheet No. FS-2008-18.

[8] Rev. Proc. 2022-43. 2022-52 I.R.B. 570.

[9] Treas. Reg. §1.1031(k)-1(4). See also Section 1031(a)(3)(A).

[10] Section 1031(a)(3)(B).

[11] IRS Fact Sheet No. FS-2008-18.

[12] Section 1031(h). See also 26 CFR §1.1031(a)-1(b) and (c).

[13] Treas. Reg. §1.1031(a)-3(a).

[14] Treas. Reg. §1.1031(j)-1.

[15] https://bit.ly/3y4gO2C.

Originally published in the Oklahoma Bar JournalOBJ 95 No. 6 (June 2024)

Statements or opinions expressed in the Oklahoma Bar Journal are those of the authors and do not necessarily reflect those of the Oklahoma Bar Association, its officers, Board of Governors, Board of Editors or staff.