Running a like-kind exchange through a self-directed IRA in Michigan

A section 1031 like-kind exchange is usually described the same way no matter who is selling: sell one investment property, buy a replacement, and you do not pay income tax on the gain that the sale would have triggered. That description assumes a person or a partnership that owes the IRS income tax on the sale. A self-directed IRA does not owe that tax on the appreciation it holds, so the one-line pitch does not map cleanly onto an account. The question inside an IRA is not whether the gain is deferred the way it would be on a personal sale. It is whether the account can run the exchange legally, who may touch the cash, and what the swap changes for the account's own tax file.

Two of those questions get asked on almost every Michigan deal of this kind. The first is legal: can the IRA be the seller and the buyer of the replacement property without creating a prohibited transaction with the owner, a family member, or a related business? The second is tax: does the exchange change the account's unrelated business taxable income, its basis, or who files Form 990-T and Form 8824? The answers come from the IRS rules, the custodian's written procedures, and the account's own CPA and attorney. This is the order the work usually runs in, and what each step requires.

What section 1031 actually defers

Under Internal Revenue Code section 1031, gain and loss on the disposition of property held for productive use in a trade or business or for investment are not recognized when like-kind property is received in an exchange. IRS Publication 544, Sales and Exchanges, is the plain-English source for the federal side. It limits like-kind treatment for real property to property held for investment or for productive use in a trade or business, and not held primarily for sale. The swap that matters is real property for real property: land for land, a building for a building, one rental building for another. The account does not need to match the properties on size, condition, or use within Michigan. It needs to keep both sides inside the like-kind definition.

That framing is the honest one for an IRA. The gain that section 1031 defers is the gain a taxpayer would otherwise report on a sale. An IRA that already holds the property is not reporting that gain as it grows, so the exchange is not, in most cases, a way to avoid a tax the account would have paid on the sale. What the exchange does is carry the relinquished property's basis over into the replacement and restructure how the account's income and gain are treated going forward. Whether that changes the account's tax at all, and by how much, is a CPA question answered with the account's records, not a promise that can be made in an article. A custodian that markets a specific property as a tax-free move is the one to question.

The two clocks that run a deferred exchange

A deferred exchange runs on two fixed periods in Publication 544. The buyer must identify the replacement property, or properties, within 45 days after the date the relinquished property is transferred. That is the identification period. Then the replacement must actually be received, or a qualifying transfer must be completed, no later than 180 days after the relinquished property is transferred. A calendar that misses either window treats the transaction as a sale that was not a valid exchange, and the deferral is gone.

Those two clocks sit on top of a Michigan closing. The title commitment is pulled, the survey and inspections are scheduled, the lender reviews if there is a non-recourse loan, and the settlement statement is prepared, and the custodian's approval and the exchange facilitator's escrow both have to be in place before the 45 days start. That is why the exchange is not settled on the day the property is picked. The dates are set before the offer is written so the account knows how long it has to identify and to close.

• Confirm with the exchange facilitator and the custodian what event starts the 45-day identification clock on this specific deal
• Identify the replacement property, or properties, in writing within the 45-day window, using the legal description or street address
• Set the 180-day completion date and build the Michigan title, survey, inspection, and lender steps to finish inside it
• Note in writing what happens if an identified property is released or a closing date moves, and who decides
• Confirm the custodian's document and funding timeline so the account can close on the replacement within the window

Keep the owner out of the receipt

The rule that makes a 1031 work is the rule that makes an IRA 1031 dangerous. Publication 544 says the buyer actually receives money or non-like-kind property when they receive it or the economic benefit of it, and that a deferred exchange is treated as complete even when a qualified intermediary is used. It also says actual or constructive receipt of money or non-like-kind property by an agent is actual or constructive receipt by the person. In an IRA, the account is the person. If the owner, a family member, or a business the owner controls takes the cash, takes the replacement property, or is the other side of the sale, the account has stepped into a prohibited transaction.

The prohibited-transaction rules are the reason the structure has to be run through a qualified intermediary, or another independent third party the custodian accepts, and not through the owner's hands. The exchange facilitator must not be a disqualified person, and the replacement property must be taken by the account, not by the owner or a related party. The custodian's written procedures should say exactly how the account is the seller, how the funds move through the intermediary, and how the replacement deed is recorded in the account's name. If any of those steps is left to a phone call at closing, the compliance question has not been answered.

• Any plan where the owner, a spouse, a family member, or a related entity takes the exchange proceeds or the replacement property
• The exchange facilitator or custodian being a related party or the owner's own business without independent review
• The replacement property being titled to the individual instead of the account, or to a personal LLC the owner controls without counsel
• Boot in the form of cash or non-like-kind property that the account is not set up to take, with no written plan for it
• No written custodian approval of who signs, who holds the funds, and how the replacement is vested

Name the replacement property to the account

The replacement property has to land in the account, not in a personal name. The vesting language, the same exact name and account identifier used on the purchase agreement, the title commitment, the insurance application, and the recorded Michigan deed, all has to match. If the replacement carries a non-recourse loan, the loan documents have to name the account as borrower with no personal guaranty, the same constraint the account faced when it first bought. The title company in Grand Rapids or Grandville will not wait for a walkthrough to sort that out, so the vesting language is confirmed in writing before the commitment is pulled.

Basis is the quiet part. Section 1031 carries the relinquished property's adjusted basis, plus any cash or boot paid and minus any received, into the replacement. The account's records have to show that basis going forward, because it is what a later sale or a UBTI calculation will start from. The custodian's valuation process and the CPA's workpapers should line up on that number, and the file should say who set it and when.

What the exchange changes in the account's tax file

The account still answers to the rules that make an IRA pay tax on its own business. A self-directed IRA that holds debt-financed property can have unrelated business taxable income, and the 2025 Instructions for Form 990-T treat each IRA as a separate trust that files when it has at least $1,000 of gross unrelated trade or business income. IRS Publication 598 explains that investment income can be included in UBTI to the extent it comes from debt-financed property, and that gain from a disposition is treated the same while acquisition indebtedness is in place. A like-kind exchange does not automatically turn that off or on. It can change the property, the debt on it, and the basis, and each of those feeds the UBTI analysis.

That is why the CPA reads the exchange as a tax event, not a real estate event. The CPA decides whether the replacement produces more, less, or the same unrelated debt-financed income, how the basis carryover is recorded, whether the account now has a separate filing that needs its own employer identification number, and how any tax that comes out of the account is paid so it does not become a prohibited transaction. The custodian confirms how the account names itself on the exchange documents and how any tax payment leaves the account. A projected cash flow that ignores the account-level filing and tax costs is the one to distrust.

Reporting sits with the account, not the owner. The exchange of like-kind property is reported on Form 8824 even when no gain or loss is recognized, and any recognized gain from boot is reported on the appropriate return for the account. The custodian, the exchange facilitator, and the CPA should agree in writing on who assembles that reporting and when, so it is not rebuilt from memory after the 180 days have run.

This article is educational, not legal, tax, financial, retirement-plan, or investment advice. No exchange, property, account, structure, or strategy is approved or endorsed by the IRS. Completing a like-kind exchange does not mean the account, the property, or the strategy is approved. Have your own self-directed IRA custodian, CPA, Michigan attorney, exchange facilitator, and lender review the account, both properties, and the exchange documents before the exchange clocks start.

Fair housing does not pause for the exchange

If the replacement property is a Michigan rental, the exchange does not change the housing rules that govern it. Leasing, screening, notices, maintenance, and accommodations follow the Fair Housing Act and applicable Michigan and local protections. The U.S. Department of Housing and Urban Development states that the Fair Housing Act prohibits housing discrimination because of race, color, national origin, religion, sex, familial status, or disability. The property manager keeps the exchange out of the tenant file and runs the leasing decisions on those rules, not on the account's structure.

Put the exchange on the offer calendar

• Confirm the custodian's written procedures, vesting language, and funding timeline for both the sale and the replacement before the offer is written
• Engage an exchange facilitator the custodian accepts, and confirm the facilitator is not a disqualified person
• Set the 45-day identification date and the 180-day completion date in writing, with the Michigan title, survey, inspection, and lender steps scheduled to finish inside them
• Send the exchange structure to the CPA for the UBTI, basis, and filing review, and to the attorney for the prohibited-transaction and vesting review
• Confirm in writing how any cash or non-like-kind property the account receives will be handled, and who files Form 8824 and any Form 990-T

Primary sources for this review are Internal Revenue Code section 1031, IRS Publication 544, IRS Publication 598, the 2025 Instructions for Form 990-T, and the U.S. Department of Housing and Urban Development Fair Housing Act overview. They set the general federal framework. The answer for one account, two specific Michigan properties, and one set of documents comes from the current exchange documents, the custodian's written procedures, and the buyer's own qualified professionals.

Rennie can help identify Michigan property and coordinate the title company, the survey, the inspection access, and the offer deadlines that fit a self-directed IRA exchange. Whether an exchange fits the account, how it is taxed, and how the documents are structured stay with the buyer's own custodian, CPA, attorney, and exchange facilitator.