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For decades, section 1031 like kind exchanges have been one of the most important tools in US real estate investing. They allow investors to sell property held for investment or for productive use in a trade or business, reinvest the proceeds into other real property of like kind, and defer recognition of gain that would otherwise be taxed immediately.
After several years of political debate and a major tax bill in 2025, many investors want to know whether 1031 exchanges still make sense and how to use them intelligently in 2026. This article walks through what actually changed, what stayed the same, and how you can use GRAI, the world's smartest real estate AI advisor, to design exchanges that improve your real position, not just delay your tax bill.
Section 1031 has already been narrowed once. The Tax Cuts and Jobs Act of 2017 limited like kind treatment to exchanges of real property only. Personal property and intangible exchanges are no longer eligible.
In 2024 and early 2025, the Biden administration’s budget proposals again targeted 1031. Treasury’s explanation of the fiscal year 2025 budget proposed to limit the deferral of gain to $500,000 per taxpayer per year, or $1,000,000 for married couples filing jointly. Gains above that cap would be recognized in the year of the exchange.
That proposal did not become law.
Instead, Congress passed the One Big Beautiful Bill Act in mid 2025, a large tax package that, among other things, increased the state and local tax deduction cap for several years, introduced new deductions for certain overtime and tip income and created a future remittance excise tax.
Specialists who track like kind exchanges point out that the act did not modify section 1031. An update from a major national qualified intermediary in July 2025 summarized it plainly. The biggest win for real estate investors was what the bill did not change. Section 1031 like kind exchanges for real property remain fully intact.
In other words, as you plan for 2026:
The core statutory framework of 1031 is the same as it has been since 2018
The threat of an immediate cap is real in political terms but is still only a proposal on paper
Surrounding tax rules on deductions, credits and income calculation have changed, which can influence your overall plan even if they do not touch 1031 directly
The IRS continues to emphasize the same key elements in its 2025 guidance and form instructions.
Core points include:
Qualifying property must be real property held for investment or for productive use in a trade or business
Property held primarily for sale, such as inventory or flips, does not qualify
Exchanges must be of like kind real property, and both relinquished and replacement properties must be located in the United States
The exchanger has 45 days from the transfer of the relinquished property to identify potential replacement properties
The exchanger has 180 days from that transfer or until the due date of the tax return, including extensions, whichever is earlier, to complete the acquisition of the replacement property
A qualified intermediary must hold the proceeds. If you or a disqualified party receive or control the funds, the exchange fails
The gain is deferred, not forgiven. Your basis carries over into the replacement and is adjusted for any additional cash or debt, which affects future depreciation and eventual recognition
The 2025 instructions for Form 8824, which covers like kind exchanges, explicitly reference final regulations under section 1031 that define real property and set out detailed rules for deferred exchanges. These regulations apply to exchanges beginning after December 2, 2020 and remain the operative framework for 2026 planning.
While the law stayed the same in 2025, the market using it did not.
Qualified intermediaries and tax advisors report that:
Exchange volume has softened compared with the peak years, mirroring softer transaction markets, yet the average size of exchange transactions has grown as smaller owners pause and larger investors continue to reposition portfolios
Investors are more cautious around identification, with a higher share of intended exchanges failing at the 45 day mark because the exchanger prefers to miss the exchange rather than buy a mediocre asset
There is more demand for reverse and improvement structures, because desirable replacement properties are scarce and investors need to secure them before selling or need to incorporate construction into the exchange timeline
End of year tax planning notes from several law and accounting firms in late 2025 continue to describe like kind exchanges as a core method for deferring gain and emphasize the timing interaction when an exchange straddles two tax years. In some failed exchanges that begin in one year and end in another, installment sale rules can soften the immediate tax impact.
For 2026, this adds up to a more selective environment. Investors still use 1031, but they are trying to be more deliberate about why and when.
There are four broad ways sophisticated investors are using 1031 now.
1. Upgrading asset quality and tenant credit
Instead of simply trading a smaller property for a larger one, many investors are consolidating several smaller or more management intensive properties into one or two higher quality assets. For example, selling multiple older single family rentals and exchanging into a newer multifamily asset or a well located retail center with strong anchors.
This aligns the tax deferral with a real improvement in portfolio quality.
2. Managing rate risk in a higher interest world
With borrowing costs elevated compared with the previous decade, exchanges that increase leverage can actually reduce cash flow if they are not underwritten conservatively.
The better practice for 2026 is to:
Model debt service at realistic rates and spreads
Use lower loan to value ratios where possible
Focus on fixed or capped rate structures when the exchange is part of a long term hold strategy
3. Using reverse and improvement exchanges to secure rare assets
When the right replacement property appears before the sale of the old asset, or when significant construction is needed to make the replacement viable, reverse and improvement exchanges offer more flexibility.
They allow:
Acquisition of the replacement property first, with the qualified intermediary or an exchange accommodation titleholder holding title during the exchange period
Use of exchange proceeds to fund specified improvements within the 180 day period, so that the improved asset qualifies as the replacement property
These structures are more complex and require careful coordination but can be worth it in constrained markets.
4. Integrating 1031 with other incentives
The 2025 tax act preserved many of the 2017 Tax Cuts and Jobs Act changes and made some provisions permanent. It also introduced new deductions and modified others.
Investors can now compare:
A pure 1031 into stable property
A sale with reinvestment into Qualified Opportunity Funds where appropriate
A 1031 combined with cost segregation and available bonus depreciation on new improvements
The goal is to build a coherent multi year tax and capital plan rather than treat 1031 as the only lever.
Deferral is not always better.
Cases where forcing a 1031 can be counterproductive:
The only replacement options that qualify within 45 days are inferior to the property you already own in location, tenant quality or physical risk
You have a personal or business need for liquidity that outweighs the benefit of deferral
You are close to a major transition such as retirement, relocation or estate restructuring where simplification is more valuable than additional complexity
Your portfolio is already over concentrated in one geographic market or asset type and a 1031 would make that concentration worse
In these scenarios, a clear eyed analysis that includes a sale and tax payment scenario is essential.
GRAI is designed to handle multi scenario real estate decisions, including the mix of tax rules, financing assumptions and property level data that determine whether a 1031 is worthwhile.
For a serious exchange plan, you can use GRAI in three layers:
A. Baseline comparison
Ask GRAI to build side by side projections for:
A sale with immediate tax recognition and reinvestment of after tax proceeds into a different asset or asset class
A 1031 into one or more identified replacement properties
This should include:
Federal and state tax assumptions
Closing costs and qualified intermediary fees
Debt structures, interest rates and amortization
Rent, expense and vacancy forecasts over at least 10 years
Terminal values and after tax exit proceeds
B. Structure selection
Use GRAI to explore whether a delayed, reverse or improvement exchange is more appropriate given your timing and property characteristics.
For example:
Build me a reverse exchange plan where I purchase this replacement asset first, then dispose of my current property. Show cash needs, safe time windows and the role of the exchange accommodation titleholder.
Model an improvement exchange where $500,000 of my exchange proceeds are used for specified renovations on the replacement property and show how much work can realistically be completed within 180 days.
C. Risk management and plan B
Plan for what happens if the exchange fails or if conditions change.
Prompts might include:
If my exchange spans 2025 and 2026 and ultimately fails, show how installment sale treatment would apply, and what my tax due would be for each year.
Stress test my replacement property under higher vacancy, slower rent growth or a rate reset and show when the trade stops making sense.
By running these scenarios before you list your property or sign a replacement contract, you move from reacting to the clock to actively designing a strategy.
Related: 1031 Exchange Time Crunch: How GRAI Closed a Million-Dollar Deal in Record Time
In 2026, 1031 exchanges are still here. The biggest potential legislative threat, a formal cap on gain deferral, exists only in budget proposals rather than in the Internal Revenue Code.
The real pressures are coming from market conditions, financing and asset quality, not from the statute itself.
That is both the good news and the challenge.
If you use 1031 simply to avoid a tax bill today without improving your portfolio’s cash flow, risk profile or long term position, you may be deferring into a worse outcome. If you treat it as a structured capital allocation move, integrate it with other parts of the tax law and use tools like GRAI to run real scenarios, 1031 can remain one of the most powerful wealth building engines in real estate.
GRAI’s role is to give you that clarity before the 45 day clock starts, not after it runs out.
Plan your 1031 strategy with GRAI: https://internationalreal.estate/chat
