1031 Exchange Basics for Massachusetts Investors

When you sell an investment property for a profit, taxes can take a big bite: federal capital gains tax, depreciation recapture and Massachusetts income tax. A 1031 exchange, named after Section 1031 of the Internal Revenue Code, lets you put off (defer) those taxes if you reinvest in another investment property and follow strict rules. Many Greater Boston investors use it to trade a three-family for a larger building, or to move from residential into commercial property.

A 1031 exchange does not erase the tax. It moves it forward to a later sale. Below are the basics so you can have a clear conversation with your CPA, attorney and intermediary.

What qualifies

• Real property only. For exchanges in 2018 and later, Section 1031 applies only to real property. Equipment, vehicles and other personal property no longer qualify.
• Held for business or investment. Both the property you sell and the one you buy must be held for use in a business or as an investment. Rentals, commercial buildings and investment land usually qualify.
• “Like-kind” is broad. Real property is generally like-kind to other real property, whether improved or unimproved. A Chelsea two-family can be exchanged for a retail building in Worcester or land in New Hampshire.
• U.S. for U.S. U.S. real property and foreign real property are not like-kind. You cannot exchange a Boston rental for a property in Colombia or another country.

What does not qualify

• Your primary residence. A home used only as your personal residence does not qualify. Instead, the home sale exclusion (Section 121) may shelter part or all of your gain if you owned and lived in the home for at least 2 of the last 5 years. See our capital gains guide.
• Property held mainly for sale. Flips and inventory held by a developer are generally not eligible.
• Mixed-use situations need care. If you live in one unit of a multi-family and rent the others, part of the property may be personal and part investment. Your tax advisor can explain how a split sale might work.

The two deadlines you cannot miss

The clock starts the day you close on the sale. Weekends and holidays count. There is generally no extension for missing a deadline, so line up your search early. The rules also limit how many properties you can identify; your intermediary will explain the options, which commonly let you name up to three properties.

The qualified intermediary (QI)

In most exchanges you never touch the sale money. A qualified intermediary holds the funds between the sale and the purchase. If the cash comes to you, even briefly, the exchange can fail. Your agent, your attorney who has worked for you recently, your employee or a close relative generally cannot serve as your QI because the rules treat them as “disqualified persons.”

Choose your QI before you close the sale. The exchange agreement must be in place at closing, and your Massachusetts closing attorney will need to coordinate with the QI. Ask about the QI’s experience, how funds are held and protected, and the fees.

Boot: the part that gets taxed

“Boot” is anything you receive that is not like-kind property, such as cash left over from the sale. If you receive boot, you generally pay tax on gain up to the amount of that boot. Paying off a mortgage and taking on a smaller one can also create taxable boot. A common rule of thumb to fully defer tax is to:

1. Buy replacement property of equal or greater value than what you sold.
2. Reinvest all of the net cash from the sale.
3. Replace the debt you paid off with new debt or extra cash.

Your CPA can run the numbers for your situation. Exchange costs and closing costs can affect the calculation too.

Related parties

Exchanges with related parties, such as a spouse, child, parent or a company you control, have special limits. If either side sells the property received in the exchange within 2 years, the deferred gain generally becomes taxable, with a few exceptions. Talk to your advisor before doing a deal with family.

Massachusetts rules to know

Massachusetts generally follows the federal treatment, so a valid exchange can defer both federal and state tax on the gain. That matters here: for 2026, Massachusetts taxes long-term capital gains at 5% and short-term gains at 8.5%, and income above $1,107,750 is subject to an extra 4% surtax.

Massachusetts also has a claw-back provision. If you exchange a Massachusetts property for a property in another state and later sell that out-of-state property without doing another exchange, Massachusetts can seek the state tax it deferred on the original sale. Unlike California, Massachusetts does not require an annual claw-back filing, according to First American Exchange. Keep good records of your original exchange.

A simple timeline

1. Meet with your CPA and attorney before listing to confirm a 1031 fits your goals.
2. Hire a qualified intermediary and sign the exchange agreement before closing.
3. List and sell your property. See our guide to selling a tenant-occupied property.
4. Identify replacement property in writing by day 45.
5. Close on the replacement by day 180 (or your tax due date, if earlier).
6. Report the exchange on IRS Form 8824 with your tax return.

If you are trading up into a bigger building, review our guides on investing in multi-families and commercial real estate.

How Luis can help

Luis can help you plan the timing of your sale and search for replacement properties early, so the 45-day window is less stressful. He works in English or Spanish and can introduce you to intermediaries, CPAs and attorneys. Book a free 15-minute call on our investor page.