Phoenix 1031 Exchange Guide for Discerning Investors

You work hard for your returns. When you sell an investment property in Phoenix, a 1031 exchange can help you keep more working capital in the market by deferring capital gains taxes. The rules are strict, the timelines are short, and the paperwork must be precise. In this guide, you will learn the core rules, exact deadlines, local Phoenix considerations, and a simple step-by-step plan to move from sale to acquisition with confidence. Let’s dive in.

What a 1031 exchange does

A 1031 exchange lets you defer capital gains and depreciation recapture when you sell one U.S. investment or business real property and buy another of like kind. Only real property qualifies under current federal law. Personal property no longer qualifies for exchanges that occur after 2017.

To qualify, you must use the property for investment or in a trade or business. Second homes or primarily personal-use property generally do not qualify. The same taxpayer who sells the relinquished property must acquire the replacement property. If you plan to use an entity, make sure title and taxpayer identity align.

Exchange types you can use

Delayed exchange

This is the most common path. You sell the relinquished property, identify replacement options within 45 days, and close on your replacement within 180 days.

Simultaneous exchange

You sell and buy on the same day. This can work but is less common due to scheduling complexity.

Reverse exchange

You acquire the replacement property first. A specialized entity holds title until you sell the relinquished property. This is more complex and costly, and it still must fit within the 45- and 180-day timing framework.

Improvement exchange

You direct exchange funds to improve the replacement property during the exchange window. Title and funding require careful structuring to meet IRS rules.

Deadlines you cannot miss

Two firm deadlines start the day you transfer the relinquished property:

• 45-day identification period. You must identify potential replacement property in writing by day 45.
• 180-day exchange period. You must receive the replacement property by day 180.

These timelines run at the same time, and there are no extensions. Plan your sale and acquisition calendars around these dates from the start.

How to identify replacement property

You must identify in writing, sign it, and deliver it to your qualified intermediary, the seller of the replacement property, or another party named in your exchange documents by day 45. Your identification must clearly describe the property by address, legal description, or parcel number.

You can use these identification rules:

• Three-property rule. Identify up to three properties of any value.
• 200% rule. Identify any number of properties as long as their combined fair market value does not exceed 200% of the value of the relinquished property.
• 95% exception. If you identify more than three properties and exceed 200% of value, you must acquire at least 95% of the total value of the identified list.

Examples:

• Example A: If your relinquished property is worth $1,000,000, you can identify up to three replacements, including a single property worth $3,000,000.
• Example B: If your relinquished property is worth $1,000,000, you can identify multiple properties as long as their combined value is $2,000,000 or less.
• Example C: If you identify 10 properties worth $5,000,000 total against a $1,000,000 sale, you must acquire at least $4,750,000 of that list to qualify.

How the money flows and the QI’s role

A qualified intermediary is essential in a delayed exchange. You must sign an exchange agreement with the QI before closing your sale. The QI holds the proceeds so you do not receive them directly, which prevents constructive receipt that would trigger tax.

The QI then coordinates your identification notice, wiring, and closing on the replacement property. Choose an independent, experienced QI, confirm how funds are held, and review their insurance and controls.

Avoiding taxable boot

Boot is any cash or non-like-kind property you receive in the exchange. It is taxable up to your realized gain. Debt also matters. If you pay off a larger loan on the sale than the debt you place on the replacement, the net reduction is mortgage boot. To fully defer, match or exceed your relinquished debt or add cash to close.

Your basis in the replacement property carries over from the relinquished property with adjustments for any recognized gain, additional money invested, and boot received. Keep detailed records for depreciation and future planning.

Depreciation recapture explained

A 1031 exchange defers depreciation recapture. It does not erase it. If you later sell the replacement property in a taxable sale, you will face any deferred recapture and capital gains in that future year. Track your deferred amounts across exchanges so you and your tax advisor can plan ahead.

Phoenix and Maricopa specifics

Arizona income tax treatment

Arizona often conforms to federal treatment for like-kind exchanges. State-level rules can change, so confirm current Arizona Department of Revenue guidance to understand how deferred gain is treated at the state level.

No state transfer tax

Arizona does not impose a statewide real estate transfer tax, and Maricopa County does not add a separate transfer tax. You should still plan for recording fees and routine closing costs, and confirm current charges with your title company.

Short-term rental considerations

Phoenix regulates short-term and vacation rentals. Whether your property qualifies as held for investment depends on facts like rental use versus personal use. Check City of Phoenix requirements since registration, permits, or penalties can affect your investment position and timing.

Title, HOA, and municipal items

Start title work early to clear any issues within the 180-day window. Some HOAs have resale certificates or transfer fees that can slow scheduling. Confirm property tax prorations and county recording procedures with your title team at the outset.

Strategy in a competitive Phoenix market

Phoenix can move fast, especially in desirable neighborhoods where cash offers are common. If you need certainty on your replacement, a reverse exchange may help you secure the asset first. You can also structure back-up options under the identification rules to protect your exchange if a primary deal falls through.

Step-by-step checklist

1. Plan early. Before listing, consult a CPA with 1031 experience, consider legal counsel, and shortlist qualified intermediaries.
2. Engage the QI. Sign the exchange agreement before the sale closes, and notify your title and escrow teams.
3. Calendar the deadlines. Day 45 for written identification and day 180 for acquisition start on the day you transfer the relinquished property.
4. Identify clearly. Use legal descriptions or parcel numbers. Deliver your signed list to the QI or named party by day 45.
5. Coordinate debt. Match or exceed prior debt or add cash to avoid mortgage boot.
6. Keep the taxpayer the same. Align entities and title across both legs of the exchange.
7. Document everything. Keep exchange agreements, identification notices, settlement statements, deeds, and loan files.
8. Track after closing. Maintain records of deferred gain and adjusted basis for depreciation and future planning.
9. Confirm local items. Verify HOA requirements, county recording, and any Phoenix rental rules early so closings stay on schedule.

Common pitfalls to avoid

• Missing the 45-day identification or delivering it late or to the wrong party.
• Touching the sale proceeds instead of routing funds through the QI.
• Using an inexperienced or conflicted QI without proper safeguards.
• Reducing debt and creating mortgage boot by accident.
• Mismatching title or taxpayer identity between sale and purchase.
• Running afoul of related-party rules due to ownership or transfers within two years.
• Treating personal-use or vacation properties as investment when facts do not support it.
• Underestimating costs and timelines for reverse or improvement exchanges.

Who to involve and when

• Immediate: CPA or tax advisor and a qualified intermediary before your sale closes.
• Early: A real estate agent who understands 1031 timing, plus a title and escrow team fluent in exchanges.
• As needed: A 1031-focused tax attorney for reverse or improvement structures, an Arizona state tax advisor, and local counsel on municipal rental rules if applicable.

Next steps

A successful 1031 exchange is part tax plan, part project management. If you want a clear path from sale to acquisition in Phoenix, align the right team, lock in your deadlines, and give yourself multiple identification options. For investor-savvy guidance and local deal flow, connect with Dennis Salazar to map your exchange strategy and source replacement opportunities.

FAQs

What is a 1031 exchange for Phoenix investors?

• It is a federal tax-deferred exchange that lets you sell one U.S. investment or business real property and buy another like-kind property while deferring capital gains and depreciation recapture.

What are the 45- and 180-day deadlines in a 1031?

• You must identify replacement property in writing within 45 days and receive it within 180 days, both counted from the date you transfer the relinquished property.

How do I legally identify replacement property?

• Send a signed written notice to your qualified intermediary or other named party by day 45 that unambiguously describes the property by address, legal description, or parcel number.

Which identification rule should I use: three-property, 200%, or 95%?

• Many investors use the three-property rule for simplicity. If you want more options, use the 200% rule, and if you exceed it, the 95% exception requires you to acquire at least 95% of the total value identified.

What is “boot,” and how do I avoid it?

• Boot is taxable cash or non-like-kind value received, including mortgage relief. To fully defer, match or exceed your prior debt or add cash so the net does not drop.

Do short-term rentals in Phoenix qualify for a 1031 exchange?

• Properties primarily held for investment can qualify. Personal use versus rental use and compliance with Phoenix rules can affect eligibility, so confirm your facts with your tax advisor.

Does Arizona have a transfer tax that affects 1031s?

• No. Arizona does not impose a statewide real estate transfer tax, and Maricopa County does not add a separate transfer tax, though normal recording and closing fees still apply.