Thinking about selling a Denver rental but want to keep your capital working for you? A 1031 exchange can defer taxes so more of your equity rolls into your next deal. If you are building a portfolio in Denver or across Colorado, understanding the rules will help you move fast and avoid expensive mistakes. In this guide, you will learn the key deadlines, eligible property types, how replacement options like DSTs work, and Denver-specific steps to stay on track. Let’s dive in.

What a 1031 exchange does

A 1031 exchange lets you defer federal capital gains tax and depreciation recapture when you sell one investment or business property and buy another like-kind property. The key benefit is deferral, not elimination. You keep more cash in play for your next acquisition, which can improve long-term returns.

Personal residences generally do not qualify. The property you sell and the property you buy must be held for investment or for productive use in a trade or business. After 2017 reforms, exchanges are limited to real property. Foreign real estate is not like-kind to U.S. real property.

Who qualifies and what counts as like-kind

For real estate, like-kind refers to the nature or character of the property, not quality. Most U.S. investment real estate is like-kind to other U.S. investment real estate. You can exchange a single-family rental for a commercial building, land for an apartment building, or small multifamily for larger multifamily.

The same taxpayer who sells must buy the replacement property. Title and ownership must match from relinquished property to replacement property. If you plan to use an entity, align this early so the exchange is not disqualified by a title mismatch.

Critical 45/180 day timelines

Two deadlines define your exchange. These are strict and not extendable.

• Identification period: You have 45 calendar days from the closing of the sale to identify replacement properties in writing to your Qualified Intermediary.
• Exchange period: You have 180 calendar days from the sale closing to acquire the replacement property, or the due date of your tax return including extensions, whichever is earlier.

You can identify properties under one of three rules:

• Three-property rule: Identify up to three properties of any value.
• 200 percent rule: Identify any number of properties, as long as their combined value does not exceed 200 percent of what you sold.
• 95 percent rule: Identify more than the above, but you must acquire at least 95 percent of the total value identified. This is uncommon and requires careful planning with your advisors.

The Qualified Intermediary’s role

A Qualified Intermediary, sometimes called an accommodator, holds your sale proceeds and facilitates the exchange. Do not receive or control the proceeds yourself. If you touch the funds, you create a taxable event.

Engage your QI before the sale closes. They will prepare the exchange agreement and receive your 45-day identification notice. Choose an experienced, reputable firm and coordinate their requirements with your title company and lender.

Types of exchanges you can use

Most Denver investors use a delayed or forward exchange, where you sell first and then buy within the 45/180 timeline. Other structures can fit certain situations:

• Simultaneous exchange: Sell and buy on the same day. Less common due to logistics.
• Reverse exchange: Buy the replacement property first while an exchange accommodation titleholder temporarily parks title. This can help in hot markets when you must move quickly.
• Improvement exchange: Use exchange funds to improve the replacement property during the 180-day window. Strict documentation and timing apply.
• DSTs and TICs: Delaware Statutory Trusts and tenancy-in-common interests can qualify as replacement property. DSTs are popular for passive ownership and diversification but come with sponsor-driven decisions and limited control.

Debt, boot, and full deferral

To fully defer tax, your replacement property value should be equal to or greater than what you sold, and your new debt should be equal to or greater than your old debt. If you reduce debt or take cash out, you may receive boot, which is taxable to the extent received.

Debt relief can count as boot. The rules around liability allocation can be complex, especially with multiple properties or creative financing. Coordinate early with your QI and a tax advisor so your financing plan supports full deferral.

Taxes and reporting basics

In a valid exchange, your basis carries over to the replacement property. Unrecognized gain and unrecaptured depreciation are deferred and will be recognized if you later sell in a taxable transaction.

You will file IRS Form 8824 with your tax return for the year of the exchange. Keep meticulous records, including purchase and sale contracts, settlement statements, the QI agreement, your written identification notice, and any appraisals or valuation support.

Colorado generally conforms to federal 1031 treatment for state income tax, but you should confirm current rules and any filing requirements with a Colorado CPA. State conformity can change over time, and administrative steps may be required.

Colorado and Denver specifics to know

Denver transactions layer on local procedures beyond your federal and state filings.

• Recording and transfer costs: Denver may have local recording fees or documentary transfer taxes due when deeds are recorded. These are separate from income tax and are paid at transfer.
• Property tax reassessment: Buying a replacement property can trigger reassessment. A 1031 exchange does not shield you from future assessed value changes.
• Lender and title coordination: Lenders may have specific requirements for using QI-held funds and for reverse or improvement exchanges. Confirm these early to avoid delays.
• Permits and construction timing: If you plan an improvement exchange, local permits and contractor schedules in Denver can impact your 180-day timeline. Build buffer into your plan.

Step-by-step plan for Denver investors

Use this simple sequence to reduce risk and keep your exchange on time.

1. Pre-sale planning

• Meet with a Colorado-licensed CPA and a real estate attorney who understand 1031 exchanges.
• Select your Qualified Intermediary before listing or signing sale contracts. Execute the exchange agreement before closing.
• Confirm the ownership structure you will use on both sides. Keep the same taxpayer through the exchange.
• Build a target list of replacement property types and markets. Prepare to identify quickly within 45 days.
• Line up financing and verify lender policies on QI escrow and exchange timelines.

2. At the sale and during the exchange

• Direct all sale proceeds to the QI. Do not deposit the funds yourself.
• Deliver your written identification of replacement properties to the QI within 45 days using the identification rules that fit your plan.
• Schedule inspections, appraisals, financing, and closing milestones with calendar reminders. Aim to close well before day 180 to allow for recording delays.

3. Post-exchange reporting

• Gather all closing statements and QI documentation for your CPA.
• File IRS Form 8824 for the year you completed the exchange.
• Update your basis records and depreciation schedules for the new property.

Smart strategies in the Denver market

Denver’s competitive environment often rewards planning and speed. Consider these approaches:

• Consolidation: Exchange several small rentals into a larger multifamily asset to simplify management and pursue scale.
• Diversification: Swap one property into multiple smaller assets using the 200 percent rule, or consider a DST for passive exposure to different markets or asset classes.
• Reverse exchange readiness: If a prime property appears before you sell, a reverse exchange can protect your opportunity. It is more complex and can cost more, so plan ahead.
• Improvement exchange: Acquire a property and deploy funds into targeted improvements to meet your investment goals within the exchange window. Align scopes of work with permit timing.

Common pitfalls to avoid

• Missing the 45-day or 180-day deadlines. These dates are hard stops and cannot be extended.
• Receiving or controlling proceeds. Constructive receipt will make your sale taxable.
• Title mismatch. The entity that sells must buy. Plan ownership early.
• Underestimating costs. QI fees, legal, reverse or improvement exchange costs, and lender requirements can add up.
• Debt reduction without planning. Paying down loans or changing liability allocation can create boot.
• Dealer classification. Properties held primarily for sale, like frequent flips, generally do not qualify.

Is a 1031 right for you

A 1031 exchange can be a powerful tool if you plan to reinvest quickly, want to scale into larger assets, reduce hands-on management, or rebalance your portfolio. It is less helpful if you need cash from the sale, plan to exit real estate soon, or cannot source a suitable replacement on time.

If you are considering a future move into a home you might live in, know that primary residences are not like-kind investment property. Complex strategies that combine different tax provisions exist, but you should work closely with a tax professional before attempting them.

How Good Neighbor helps Denver investors

You deserve a team that treats your exchange like a time-sensitive project with clear checkpoints. Our investor-first approach pairs local deal flow and underwriting with hands-on coordination of the QI, title, and lender timeline. We help you source and vet replacement options across Denver and Colorado resort markets, including multifamily, commercial, land, and DST pathways for passive ownership.

Ready to map your next move and keep more capital compounding in Denver real estate? Connect with Good Neighbor Realty for a tailored plan, deal sourcing, and a clean execution from sale to close.

FAQs

What is a 1031 exchange and how does it help Denver investors

• A 1031 exchange lets you defer federal capital gains and depreciation recapture by selling an investment property and buying like-kind real estate within strict 45 and 180 day deadlines.

Which properties qualify as like-kind in the United States

• Most U.S. investment real estate is like-kind to other U.S. investment real estate, including rentals, commercial buildings, and land when held for investment or business use.

What are the key 45 day and 180 day deadlines I must meet

• You must identify replacement properties in writing to your Qualified Intermediary within 45 days and close on your replacement within 180 days of your sale closing.

How do debt and cash boot affect my tax deferral

• To fully defer tax, buy equal or greater value and replace equal or greater debt; taking cash or reducing debt can create taxable boot to the extent received.

Do Colorado and Denver have special 1031 rules I should know

• Colorado generally follows federal 1031 treatment for state income tax, while Denver may impose recording or transfer costs at closing, so confirm current procedures with local professionals.

Can I use a DST as my replacement property in a 1031 exchange

• Yes, interests in a Delaware Statutory Trust that owns real property can qualify, though DSTs are passive and require careful due diligence and sponsor review.

What happens if I miss the 45 day identification or 180 day closing window

• Missing either deadline usually causes the exchange to fail, making the sale taxable; consider reverse exchanges or early preparation to meet the timeline.

Can I exchange a Denver rental into a property in another state

• Yes, replacement property can be located anywhere in the United States, but foreign real estate does not qualify as like-kind to U.S. property.