Qualified Replacement Property (QRP) Rules in 1045 Exchanges

 

English Alt Text: A four-panel comic shows a woman asking how to defer tax on a stock sale. A man explains that QRP allows reinvestment into new startup stock within 60 days. The woman says “I see!” and they both conclude that this defers taxes.

Qualified Replacement Property (QRP) Rules in 1045 Exchanges

If you’ve invested in a Qualified Small Business (QSB) and are preparing to exit before the 5-year holding period ends, you may still have a way to defer capital gains taxes.

Enter Section 1045 of the Internal Revenue Code, which allows you to roll over gains from QSB stock into other Qualified Replacement Property (QRP) — effectively hitting “pause” on your tax bill.

This guide unpacks QRP rules, timelines, qualifications, and strategies to help investors protect gains and maintain momentum within the startup or venture capital ecosystem.

πŸ“Œ Table of Contents

πŸ“˜ What Is IRC Section 1045?

Section 1045 of the Internal Revenue Code allows an investor to defer capital gains from selling Qualified Small Business Stock (QSBS) held for more than 6 months but less than 5 years.

To qualify, the proceeds must be reinvested into Qualified Replacement Property (QRP) within 60 days.

This rollover treatment preserves long-term tax advantages — especially when paired with Section 1202 exclusions later on.

🏒 What Qualifies as QSB and QRP?

QSB (Qualified Small Business) Stock:

- Must be C corporation stock acquired at original issuance

- Gross assets under $50M before and after issuance

- 80% or more of assets used in active business (excludes investment, real estate, finance)

QRP (Qualified Replacement Property):

- New QSBS purchased with proceeds from the original sale

- Must be purchased within 60 days

- Must meet same “active business” and size criteria

πŸ—“️ 60-Day Timeline and Documentation Requirements

After selling the original QSB stock, you must reinvest into new QRP within 60 calendar days.

Documentation to maintain:

- Proof of original QSBS status (e.g., cap table, 1202 statement)

- Purchase agreements and wire confirmations for QRP

- Business activity breakdowns to verify “active use” qualification

Investors should coordinate closely with their CPA and legal team.

⚠️ Benefits and Pitfalls to Watch

Benefits:

- Defers capital gains tax

- Keeps assets compounding in tax-advantaged structure

- Allows switching from one startup to another without resetting the clock entirely

Pitfalls:

- Missed 60-day deadline = full tax bill

- Failure to meet QSB/QRP tests disqualifies rollover

- Not all states conform with federal 1045 treatment

🧠 Structuring and Investor Strategies

Investors can:

- Use bridge SPVs to buy time while vetting QRP investments

- Collaborate with early-stage VCs offering QRP-eligible deals

- Time liquidity events carefully with QRP timelines in mind

- Pair 1045 with 1202 to eliminate taxes entirely on ultimate exit

Example: Sell Startup A stock in year 3 → roll into Startup B via 1045 → exit Startup B in year 5 → use 1202 exclusion.

πŸ”— Further Resources

Explore further materials on QSBS, rollovers, and tax-advantaged venture investing:

Important Keywords: section 1045 QRP, qualified replacement property rules, QSBS rollover, startup tax deferral, 1045 exchange strategy