Understanding Like-Kind Exchanges of Real Property Under Section 1031

As of July 27, 2025, several important updates and clarifications have been made to the rules for Section 1031 like-kind exchanges of real property in the United States 🇺🇸. These changes affect how taxpayers can defer capital gains taxes when exchanging certain types of real estate. Below is a clear summary of the latest rules, policy changes, and what they mean for people involved in these transactions.

Section 1031, often called the like-kind exchange rule, lets people who own business or investment real property trade it for other business or investment real property without paying taxes on any gain right away. Instead, the tax is delayed until the new property is sold or disposed of. This rule is very popular with real estate investors because it helps them grow their investments without an immediate tax bill.

Key Changes and Updates in 2025

1. Expanded Definition of Eligible Real Estate
In 2025, the IRS updated the rules to include more types of real property. Now, properties like renewable energy projects and mixed-use developments can qualify for a like-kind exchange. This means investors have more options when choosing replacement properties, reflecting changes in the real estate market.

2. Enhanced Reporting Requirements
The IRS now requires more detailed information when reporting a Section 1031 exchange. Taxpayers must use Form 8824 and include property appraisals, transaction timelines, and proof that they met all deadlines. This is meant to make the process more transparent and prevent misuse of the tax deferral benefit.

3. Capital Gain Deferral Cap
A new rule in 2025 sets a $5 million cap on the amount of capital gain that can be deferred in a like-kind exchange. If the gain from the exchange is more than $5 million, the extra amount is taxed right away. This change mostly affects people or companies doing very large real estate deals.

4. Green Investment Incentives
If investors use a like-kind exchange to buy properties that are LEED-certified or energy-efficient, they may get extra time to finish the exchange and could qualify for additional tax credits. This encourages investment in environmentally friendly buildings.

Core Rules for Like-Kind Exchanges

What Qualifies as a Like-Kind Exchange?
– Both the property given up and the property received must be real property used for business or investment.
– The properties must be of the same nature or character, even if they are different in quality or grade. For example, you can exchange a rental house for a commercial building.
– Personal residences or properties held mainly for sale do not qualify.

No More Personal Property Exchanges
Since the Tax Cuts and Jobs Act of 2017, only real property can be exchanged under Section 1031. Personal property, like equipment or vehicles, no longer qualifies.

Procedural Rules and Timelines

Same Taxpayer Rule
The person or company selling the old property must be the same as the one buying the new property. If the names are different, the exchange does not qualify.

Identification and Exchange Deadlines
– 45-Day Identification Period: After selling the old property, you have 45 days to identify possible replacement properties in writing.
– 180-Day Exchange Period: The entire exchange must be finished within 180 days of the sale.

Identification Rules
– You can identify up to three properties, no matter their value.
– If you want to identify more than three, their total value cannot be more than 200% of the value of the property you sold.

Qualified Intermediary (QI)
A QI is a third party who holds the money from the sale so you don’t get it directly. This is required to keep the exchange valid. The QI uses the funds to buy the replacement property for you.

Related Party Transactions
If you exchange property with a related party, both you and the other party must keep the new property for at least two years. If either of you sells the property within two years, you must report any gain or loss that was not recognized in the original exchange.

Market Trends and Practical Implications in 2025

Increased Transaction Volume
Even with ups and downs in the economy and tough commercial real estate financing, more people are expected to use Section 1031 exchanges in 2025. The chance to delay taxes makes these exchanges attractive.

Shift in Asset Classes
Investors are moving away from office buildings and are more interested in things like apartment buildings, warehouses, and neighborhood stores. They use like-kind exchanges to change their investments to these more stable types of property.

Reverse Exchanges
Because it can be hard to find good replacement properties, more people are using reverse exchanges. This means they buy the new property before selling the old one, giving them more flexibility.

Regulatory Environment
Some local governments are making it harder to rent out properties for short periods. As a result, investors are using like-kind exchanges to move their money into property types with fewer restrictions.

No Major Legislative Changes in 2025
There have been no big changes to Section 1031 in 2025, but industry groups are working with lawmakers to keep the law as it is.

Step-by-Step Process for a 1031 Exchange in 2025

1. Consult Professionals:
   Talk to a tax advisor and a qualified intermediary before starting. They can help you follow the rules and get the most benefit.

2. List and Sell Your Property:
   Let everyone involved know that the sale is part of a 1031 exchange.

3. Identify Replacement Properties:
   Within 45 days after the sale, give your QI a written list of up to three possible replacement properties.

4. Buy the Replacement Property:
   Complete the purchase within 180 days of selling your old property.

5. Use Exchange Funds Properly:
   The money from the sale, held by the QI, can only be used to buy the new property, pay closing costs, or pay off loans on the old property. Using the money for anything else means you have to pay taxes on the gain.

1. File IRS Form 8824:
   Report the exchange on your tax return with all the required documents.

2. Keep Good Records:
   Save all paperwork, appraisals, and emails in case the IRS asks for proof.

Expert Perspectives and Practical Tips

• Tax Advisors say it’s more important than ever to follow deadlines and keep good records because the IRS is watching these exchanges more closely.
• Qualified Intermediaries note that the process is getting more complicated, especially with new types of property and stricter reporting.
• Industry Groups argue that like-kind exchanges help the real estate market and are working to keep the law in place.
• Investors need to plan carefully, especially for large deals that might go over the $5 million cap, and should look into green building incentives.

Background and Historical Context

Section 1031 has helped real estate investors delay paying taxes on gains for many years. The 2017 law changes limited exchanges to real property only. The 2025 updates show the IRS is trying to keep up with changes in the real estate market and encourage investment in environmentally friendly buildings.

Future Outlook

While there are talks about possible changes to Section 1031, nothing has been decided yet. Industry groups are working to protect the benefits of like-kind exchanges. Taxpayers should keep an eye on IRS updates and any new laws that might affect these exchanges.

For more details and the latest official guidance, visit the IRS’s official page on like-kind exchanges.

As reported by VisaVerge.com, these updates mean that anyone planning a Section 1031 like-kind exchange in 2025 should pay close attention to the new rules, work with professionals, and keep careful records to make sure they get the full benefit of the law.

Learn Today

Section 1031 → A U.S. tax code allowing deferral of capital gains taxes on qualifying real property exchanges.
Like-Kind Exchange → A transaction exchanging one business or investment real property for another without immediate tax liability.
Qualified Intermediary → An independent third party who holds sale proceeds to ensure compliance in a like-kind exchange.
Form 8824 → IRS form used to report details of a Section 1031 like-kind exchange on tax returns.
Capital Gain Deferral Cap → The maximum amount ($5 million in 2025) of gain allowed to be deferred before taxes apply immediately.

This Article in a Nutshell

In 2025, Section 1031 like-kind exchanges include more property types and a $5 million deferral cap, requiring stricter IRS reporting. Investors must meet deadlines, use qualified intermediaries, and keep thorough records to defer capital gains taxes successfully under updated rules encouraging green investments.
— By VisaVerge.com