How to Complete a 1031 Exchange in Billings, MT in 2026

Last reviewed and updated October 6, 2026

What is a 1031 exchange, and how does it work in Billings? A 1031 exchange lets a Billings investor sell investment real estate and defer federal capital gains tax by buying replacement investment property under IRS rules: 45 days to identify it and 180 days to close.

Selling a rental or other investment property in Yellowstone County can mean a large tax bill at closing. Section 1031 of the Internal Revenue Code lets you defer that tax by reinvesting in other real property held for investment or business use. As a Real Estate Broker with The Morales Group at Engel & Völkers Billings, my part of an exchange is the real estate: finding and evaluating replacement property inside the deadlines. The exchange itself is set up by a qualified intermediary and your tax advisor.

For context, Billings homes sold for a median $385,000 from October 1, 2025 through September 30, 2026, according to the Billings MLS. If you bought a Billings rental years ago for much less, the gain on a sale can be substantial.

What does Section 1031 allow?

Section 1031 lets you defer, not eliminate, the tax on the gain from selling real property held for investment or business use when you exchange it for like-kind real property. If you receive cash or other property that is not like-kind, called "boot," that portion is generally taxable in the year of the exchange.

Since 2018, Section 1031 applies only to real property. Equipment, vehicles and other personal property no longer qualify.

What counts as like-kind property?

Most real property held for investment or business use is like-kind to other real property held the same way. A Billings rental house can be exchanged for a duplex, a commercial building or land held for investment, in Montana or in another state. U.S. and foreign real property are not like-kind to each other.

Your personal residence does not qualify, and neither does property held primarily for resale, such as a fix-and-flip. If you are weighing those two strategies, my guide to flip vs rental in Billings covers how I would screen a property for each.

What are the 45-day and 180-day deadlines?

From the day you transfer your property, you have 45 days to identify replacement property in writing and 180 days to close on it. The two periods run at the same time, so after day 45 you have 135 days left to close. The 180-day period ends sooner if the due date of your tax return for that year, including extensions, comes first.

The deadlines do not move for weekends or holidays. The IRS does not extend them for ordinary delays; the main exception is relief the IRS announces for federally declared disasters.

Most investors identify property under one of two 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 is not more than 200% of the value of the property you sold.

You must buy property you identified. If your identified properties fall through after day 45, you cannot add a new one.

Do you need a qualified intermediary?

For a standard delayed exchange, in practice yes. If you receive or control the sale proceeds, even briefly, the exchange can fail. IRS regulations provide a safe harbor in which a qualified intermediary holds the funds and handles the exchange documents, so you never have actual or constructive receipt of the money.

Set up the qualified intermediary agreement before your sale closes. The intermediary will hold a large sum on your behalf, so ask how funds are held and what bonding and insurance are in place.

How could an exchange look on a Billings rental?

This is an illustration only, not tax advice. Suppose you bought a Billings rental years ago for $200,000 and sell it at about the Billings median of $385,000 (Billings MLS, October 1, 2025 to September 30, 2026). Without an exchange, you would generally owe tax on the gain after selling costs and other adjustments, including tax on depreciation you claimed.

To defer all of the gain, the general rule is to buy replacement property of equal or greater value, reinvest all of your net proceeds, and replace any debt that was paid off at the sale. Taking cash out, or buying for less, creates taxable boot. Your tax advisor should run your actual numbers before you list.

How does the Billings market affect the 45-day window?

Billings homes sold in a median 25.5 days on market from October 1, 2025 through September 30, 2026, according to the Billings MLS, and 655 Billings residential listings were active on October 4, 2026. A well-priced property can go under contract before your 45 days run out, so start looking before your sale closes.

Small multifamily is a common exchange target. The Billings MLS recorded 58 sales of 2 to 4 unit properties with a Billings address that closed between October 13, 2025 and October 1, 2026, at a median $419,950, and 9% of those sales were recorded as 1031 exchanges. My guide to buying a duplex or multifamily property in Billings covers how to underwrite one, and the 12-month Billings real estate market report breaks prices down by area and property type.

How does Montana tax a 1031 exchange?

Montana generally follows the federal treatment, because Montana income tax starts from federal income figures, so a gain deferred under a valid federal exchange is generally deferred for Montana as well. You report the exchange on IRS Form 8824 with your federal return.

Montana is one of a few states with a "clawback" rule. If you exchange Montana property for property in another state, Montana can require ongoing reporting and can tax the Montana gain when you later sell the replacement property in a taxable sale. Confirm the current requirements with your tax advisor or the Montana Department of Revenue before you exchange out of state.

When a gain is taxed, rates matter. According to the Montana Department of Revenue, for tax year 2026 Montana taxes long-term capital gains at 3.0% and 4.1%, and ordinary income at 4.7% and 5.65%, under House Bill 337 (2025).

Frequently Asked Questions

What is a 1031 exchange in real estate?

A 1031 exchange is a tax-deferral rule in Section 1031 of the Internal Revenue Code. It lets an investor sell real property held for investment or business use and defer the tax on the gain by buying like-kind replacement real property within IRS deadlines.

How long do I have to identify a replacement property?

Under IRS rules you have 45 days from the day you transfer your property to identify replacement property in writing, and 180 days to close. The 45-day deadline does not move for weekends or holidays.

Can I live in a 1031 exchange property?

Not as your residence. Both the property you sell and the property you buy must be held for investment or business use. A personal residence does not qualify for a 1031 exchange.

Can I exchange a Billings rental for property in another state?

Yes. Real property in any U.S. state is like-kind to a Billings rental held for investment. Montana's clawback rule can still require reporting to Montana and can tax the Montana gain when the out-of-state property is later sold in a taxable sale.

Do I need a qualified intermediary for a 1031 exchange in Billings?

For a standard delayed exchange, in practice yes. Receiving or controlling the sale proceeds can disqualify the exchange, and a qualified intermediary holds the funds under IRS safe-harbor rules. Set up the agreement before your sale closes.

Before you rely on any of this

This article provides general real estate information and is not tax, legal or accounting advice. 1031 exchange rules are technical, and the result depends on your situation. Talk with a qualified tax advisor and a qualified intermediary before you list a property you plan to exchange.

Thinking about selling a Billings investment property or buying a replacement? Start with the Billings real estate investing page, or call or text Gene at 406-861-4844.

Gene Hauck is a Real Estate Broker and REALTOR® with The Morales Group at Engel & Völkers Billings, 1921 1st Ave N, Billings, MT 59101. Montana license RRE-BRO-LIC-135399. 406-861-4844.