1031 Exchanges in Missouri

For Missouri real estate investors, few tax strategies are as powerful — or as frequently misunderstood — as the 1031 exchange. Named after Section 1031 of the Internal Revenue Code, this provision allows investors to defer capital gains taxes when they sell an investment property and reinvest the proceeds into a like-kind replacement property. Used correctly, a 1031 exchange can preserve your equity, accelerate portfolio growth, and defer taxes for years or even decades.

Despite repeated federal proposals to cap or eliminate 1031 exchanges — including the Biden Administration's proposed $500,000 deferral cap in its FY2025 budget — Section 1031 remains fully intact as of 2026. The "One Big, Beautiful Bill Act" signed in July 2025 left like-kind exchanges untouched, and no legislative restrictions have been enacted.

But the rules are precise, the deadlines are strict, and a single misstep can disqualify the entire exchange — triggering an immediate tax liability you were trying to avoid. This guide explains how 1031 exchanges work, what Missouri investors need to know, and how to structure an exchange that holds up to IRS scrutiny.

The Basics of a 1031 Exchange

A 1031 exchange allows you to sell an investment property (the "relinquished property") and reinvest the proceeds into one or more replacement properties of like-kind — all while deferring the capital gains tax that would normally be due on the sale. The tax is not eliminated; it is deferred until you eventually sell the replacement property in a taxable transaction.

The term "like-kind" is broader than many investors realize. Under Treasury Regulation § 1.1031(a)-1(b), it does not mean the properties must be identical — a single-family rental can be exchanged for a commercial office building, a parcel of vacant land, or a multi-unit apartment complex. The IRS has also broadened the definition of eligible real estate to include renewable energy projects and mixed-use developments. The key requirement is that both properties must be held for productive use in a trade or business or for investment. Personal residences, vacation homes used primarily for personal enjoyment, and properties held primarily for resale (such as flipped houses) do not qualify.

The Timeline: 45 Days and 180 Days

The two most critical aspects of a 1031 exchange are the identification period and the exchange period.

45-day identification period. Starting from the date you close on the sale of your relinquished property, you have exactly 45 calendar days to identify potential replacement properties in writing. The identification must be specific — a general statement like "a commercial property in St. Louis County" is not sufficient. You must identify properties by legal description or street address.

There are three identification rules that limit how many properties you can identify: the three-property rule (identify up to three properties regardless of value), the 200% rule (identify any number of properties as long as their combined fair market value does not exceed 200% of the relinquished property's value), or the 95% rule (identify any number of properties if you acquire at least 95% of their total value).

Most investors use the three-property rule for simplicity.

180-day exchange period. You must close on the acquisition of the replacement property within 180 calendar days of the sale of the relinquished property, or by the due date of your tax return for the year of the sale (including extensions) — whichever comes first.

Both deadlines are absolute. There are no extensions, no hardship exceptions, and no grace periods — with one narrow exception: the IRS may grant deadline relief for taxpayers in a federally declared disaster area (as it did for the 2025 Southern California wildfires). Absent such relief, missing either deadline disqualifies the exchange.

The Role of the Qualified Intermediary

One of the most important rules in a 1031 exchange is that you cannot take constructive receipt of the sale proceeds at any point during the exchange. If the funds pass through your hands — even briefly — the exchange is disqualified.

To comply with this requirement, you must use a qualified intermediary (QI) to hold the sale proceeds during the exchange period. The QI is an independent third party who receives the proceeds from the sale of your relinquished property, holds them in a segregated account, and uses them to acquire the replacement property on your behalf.

Choosing a reputable, financially stable QI is critical. The QI will hold significant funds — potentially hundreds of thousands or millions of dollars — for up to 180 days. If the QI mismanages or misappropriates the funds, you bear the loss. OTT Law can recommend qualified intermediaries with strong track records and proper safeguards.

Missouri-Specific Considerations

Missouri conforms to the federal tax treatment of 1031 exchanges, which means Missouri investors do not face additional state-level hurdles or restrictions. The capital gains tax deferral applies for both federal and Missouri state income tax purposes.

Important 2025 change: Beginning with tax year 2025, Missouri allows individual taxpayers to deduct 100% of federally reported capital gains when calculating Missouri adjusted gross income. This means many individual sellers may now owe little or no Missouri state income tax on capital gains even without a 1031 exchange. However, a 1031 exchange remains valuable because it defers federal capital gains tax (currently up to 20%, plus the 3.8% net investment income tax) and preserves more reinvestment capital. Corporations do not receive the same state-level capital gains subtraction.

There are also several Missouri-specific practical considerations to keep in mind:

Transfer taxes and recording fees. Missouri imposes documentary stamp taxes on real estate transfers, and these apply to both the sale of the relinquished property and the purchase of the replacement property. These costs are not deferred by the 1031 exchange and should be factored into your analysis.

Property tax reassessment. When you acquire a replacement property in Missouri, it will be assessed at its current market value for property tax purposes — not at the tax basis of the relinquished property. This means your property tax bill on the replacement property may be higher than what you were paying on the property you sold.

Multi-state exchanges. Missouri investors who acquire replacement property in another state should be aware that not all states conform to the federal 1031 exchange rules. Some states — including California, Oregon, and Montana — may impose "clawback" taxes on the gain from the relinquished property even if the replacement property is located out of state. Consulting with a tax advisor who understands multi-state tax implications is essential.

Common 1031 Exchange Strategies

Delayed Exchange

The most common type of 1031 exchange is the delayed exchange, where you sell the relinquished property first and then acquire the replacement property within the 45/180-day windows. This is the structure described above and accounts for the vast majority of exchanges.

Reverse Exchange

In a reverse exchange, you acquire the replacement property before selling the relinquished property. This is useful when a desirable replacement property becomes available before you have sold your current investment. Reverse exchanges are more complex and expensive to structure because an exchange accommodation titleholder (EAT) must temporarily hold title to the replacement property.

Improvement Exchange

An improvement exchange (also called a build-to-suit exchange) allows you to use the exchange proceeds to make improvements to the replacement property before the exchange period expires. This can be useful when the replacement property needs renovation or construction to meet your investment objectives. The improvements must be completed within the 180-day exchange period.

Common Mistakes to Avoid

Taking receipt of funds. Even briefly holding the sale proceeds — such as depositing a check before transferring it to the QI — can disqualify the exchange. The QI must receive the funds directly from the closing.

Missing the 45-day identification deadline. This is the most common reason exchanges fail. Mark the date on your calendar, set multiple reminders, and work with your real estate broker to identify replacement properties well in advance.

Insufficient replacement value. To defer all capital gains, the replacement property must be equal to or greater in value than the relinquished property, and you must reinvest all of the net proceeds. If you receive cash or other non-like-kind property (called "boot"), that amount is taxable.

Using the wrong entity. The same taxpayer who sells the relinquished property must acquire the replacement property. If you sell through an LLC but acquire the replacement in your individual name, the exchange may be disqualified. Ensure your real estate contracts reflect the correct entity from the outset.

Ignoring state tax implications. As noted above, multi-state exchanges can create unexpected tax liabilities. Always consult a tax professional before structuring a cross-state exchange.

Failing to report properly. All completed 1031 exchanges must be reported on IRS Form 8824 with your federal income tax return. The IRS has enhanced reporting requirements, including property appraisals and transaction timelines. Incomplete or inaccurate reporting can trigger an audit.

How OTT Law Can Help

At OTT Law, we work with Missouri real estate investors to structure 1031 exchanges that comply with all IRS requirements and achieve their investment objectives. We coordinate with your qualified intermediary, real estate broker, and tax advisor to ensure that every deadline is met, every document is properly executed, and the exchange withstands scrutiny.

Whether you are executing your first 1031 exchange or managing a complex portfolio strategy involving multiple properties — including coordinating with your estate plan for stepped-up basis planning — we provide the legal guidance you need to move forward with confidence.

Protect what you've built. Schedule a consultation with OTT Law at (314) 710-2740.

Frequently Asked Questions

Can I do a 1031 exchange on my primary residence?

No. Section 1031 only applies to property held for productive use in a trade or business or for investment. Your primary residence does not qualify. However, if you convert your primary residence to a rental property and hold it for investment for a sufficient period, it may then qualify for a 1031 exchange. Consult a tax advisor for guidance on your specific situation.

Is there a limit on how many 1031 exchanges I can do?

No. There is no statutory limit on the number of 1031 exchanges you can complete. Some investors use a series of exchanges over decades to defer capital gains indefinitely, only paying the tax when they eventually sell without reinvesting — or receiving a stepped-up basis at death under IRC Section 1014. This is one reason 1031 exchanges are often coordinated with broader estate planning strategies.

What happens if I cannot find a replacement property within 45 days?

If you fail to identify a replacement property within the 45-day window, the exchange is disqualified and the capital gain is taxable in the year of the sale. This is why it is critical to begin identifying potential replacement properties before you even close on the sale of the relinquished property.

This article is for informational purposes only and does not constitute legal advice. Every case is different. Contact OTT Law at (314) 710-2740 for a free consultation specific to your situation.