1031 Exchanges: Are They Still Worth It in 2026?

The tax deferral remains powerful --- but only when the next property is a good investment before the tax benefit is counted.

July 28, 2026

Real-estate investors do not get a second chance to set up a Section 1031 exchange after the sale proceeds have reached their account. The planning has to begin before closing, the replacement-property search runs on a federal clock, and a missed deadline can turn a carefully modeled deferral into a fully taxable sale.^1,5

That makes the threshold question more important than the mechanics: is a 1031 exchange still worth doing in 2026? In the right circumstances, absolutely. The current published text of Internal Revenue Code Section 1031 still contains no federal dollar cap on the gain that can be deferred in a qualifying real-property exchange.¹ For an investor selling a highly appreciated rental, farm, office, industrial property, or other business or investment real estate, keeping more capital invested can be a meaningful advantage.

But I would not let the tax tail wag the investment dog. A 1031 exchange is worthwhile when the owner already wants to remain invested in real estate, can find a replacement property that meets the family's return, risk, liquidity, and management goals, and has enough embedded gain to justify the extra work. It is usually a poor trade when the owner needs cash, wants to leave real estate, has little taxable gain, or feels forced to overpay simply because day 45 is approaching.

Section 1031 allows an owner to exchange real property held for investment or productive use in a trade or business for other like-kind real property that will also be held for investment or business use without recognizing the qualifying gain immediately.¹ The rule dates to 1921. Treasury has described its central rationale as continuity of investment: the owner has changed the form of the real-estate holding but has not fully cashed out of the underlying investment.²

The word "exchange" can be misleading because most transactions are not literal swaps between two owners. In a typical delayed exchange, the investor sells the relinquished property to an ordinary buyer, a qualified intermediary holds the proceeds under a written exchange agreement, and those funds are used to acquire replacement property from a different seller. If the statutory and regulatory requirements are satisfied, the steps are treated as one exchange rather than a taxable sale followed by a new purchase.^3,4

This is tax deferral, not a tax deduction and not automatic tax forgiveness. The replacement property's basis generally carries over from the relinquished property, adjusted for additional money paid, gain recognized, liabilities, and other items.⁵ That lower basis preserves the unrecognized gain inside the new property. If the replacement property is later sold in a taxable transaction, the old deferred gain and any new appreciation generally come back into the calculation.

Since January 1, 2018, Section 1031 has been limited to real property. Machinery, vehicles, artwork, securities, and most other personal or intangible property no longer qualify. Real estate remains broadly like-kind: improved property can generally be exchanged for unimproved land, an apartment building for a farm, or one commercial property for another. Domestic real estate, however, is not like-kind to real estate outside the United States.^1,3,5

The first step happens before the relinquished property closes. The owner selects a qualified intermediary and signs the exchange documents so the intermediary, not the owner, receives and controls the sale proceeds. If the owner actually or constructively receives the money first, the transaction is generally treated as a sale even if the same dollars are later used to buy another property.⁵ The taxpayer, CPA, attorney, intermediary, lender, and title team should therefore be working from the same structure before funds move.

The transfer of the relinquished property starts two clocks. The replacement property must be identified in a signed writing no later than midnight on day 45. The acquisition must be completed by the earlier of day 180 or the due date of the federal income-tax return for the year of the transfer, including extensions.^1,4 If several relinquished properties are part of the same exchange and transfer on different dates, the earliest transfer starts the periods.⁴ Figure 1 shows the basic sequence.

Identification is more than writing "a rental somewhere in Dallas" on a note. The property must be described unambiguously, generally by legal description, street address, or distinguishable name, and the signed identification must be delivered on time to a permitted party involved in the exchange.^4,7 The regulations then limit how many alternatives can be named. An investor may identify up to three properties without regard to value, or any number of properties whose aggregate fair market value does not exceed 200% of the aggregate fair market value of the relinquished property. A narrow 95% exception can rescue an over-identification only when the investor ultimately receives at least 95% of the value of everything identified.⁴

These rules are why I prefer to begin the replacement search before the sale closes. Forty-five days is enough time to finish diligence on a property already under review. It is not much time to define an investment strategy, search an unfamiliar market, negotiate terms, inspect the asset, arrange financing, and develop credible backups.

Figure 1: The 45-day identification period and 180-day exchange period both begin when the relinquished property transfers.

Both sides of the exchange must be real property held for investment or productive use in a trade or business. A principal residence used solely as a home does not qualify, and property held primarily for sale --- such as dealer inventory or a flip developed for resale --- is expressly excluded.^1,5,7 A former residence, mixed-use property, or home converted to rental use can involve both Section 1031 and the home-sale rules under Section 121, but the allocation and holding history need to be modeled rather than assumed.

Vacation and short-term-rental properties deserve special attention because personal use can undermine investment intent. IRS Revenue Procedure 2008-16 provides a dwelling-unit safe harbor when the property is owned for at least 24 months and, during each of the two relevant 12-month periods, is rented at a fair rental for at least 14 days while personal use does not exceed the greater of 14 days or 10% of the fair-rental days. Parallel requirements apply to relinquished property before the exchange and replacement property after it.⁶ A property outside that safe harbor is not automatically disqualified, but its facts and investment intent receive less certainty.

Tax ownership also has to line up. The taxpayer that held and transfers the relinquished property generally needs to be the taxpayer that receives and holds the replacement property, although disregarded entities can provide flexibility. A partnership interest itself does not qualify, even when the partnership owns real estate.⁵ That distinction can become a major obstacle when partners want to separate and buy individual replacement properties after a partnership-level sale. Ownership changes should be resolved well before closing, not improvised on the settlement statement.

Certain fractional real-estate interests can qualify. For example, Revenue Ruling 2004-86 concludes that an interest in the specifically structured Delaware statutory trust described in the ruling is treated as an interest in the trust's real property for Section 1031 purposes.¹⁰ That can help an owner exchange into professionally managed real estate without becoming the day-to-day landlord. It does not mean every trust certificate, syndicated interest, or real-estate partnership is eligible. Structure, sponsor economics, fees, leverage, concentration, liquidity, and securities-law disclosures still require independent diligence.

Related-party exchanges carry an additional two-year rule. If the taxpayer or related person disposes of the property received before two years have passed from the last transfer in the exchange, the original nonrecognition can be reversed unless a statutory exception applies. The Code also denies exchanges structured to avoid those related-party rules.^1,5

A reverse exchange may help when the right replacement property appears before the old property can be sold. Under the IRS qualified exchange accommodation arrangement framework, an exchange accommodation titleholder temporarily holds qualifying ownership, the relinquished property is identified within 45 days, and the required transfer occurs within 180 days.⁵ Reverse and improvement exchanges are more expensive and document-intensive than an ordinary delayed exchange, but they can reduce the risk of losing a genuinely attractive replacement asset.

For a straightforward exchange, the practical shorthand for full deferral is to buy replacement property of equal or greater value, reinvest all net equity, and avoid receiving cash or other non-like-kind property. That shorthand is useful, but the actual tax calculation follows the realized-gain, liability, expense, and basis rules.⁵

Cash, non-like-kind property, or net debt relief received in the transaction is commonly called "boot." Gain is generally recognized up to the lesser of the realized gain or the money and fair market value of non-like-kind property received, after applicable adjustments. A mortgage paid off on the relinquished property can count as money received, although debt assumed on the replacement property and cash contributed can offset liability relief under the applicable rules.^5,7 An investor does not necessarily fail the entire exchange by taking boot; the transaction can be partially deferred and partially taxable.

Consider an owner who sells a $1.5 million debt-free rental property with $90,000 of selling costs and a $600,000 adjusted tax basis. The amount realized after selling costs is $1.41 million, and the hypothetical realized gain is $810,000. If the owner directs the full $1.41 million through a qualified intermediary and satisfies the replacement-value and other full-deferral requirements, the illustration assumes full federal deferral. If the owner instead reinvests $1.2 million and receives the balance, some gain may be recognized even though the rest of the exchange qualifies.⁵

Every exchange is reported on Form 8824 for the year the relinquished property is transferred, including an exchange in which no gain is currently recognized. Related-party exchanges can require Form 8824 filings for the following two years as well.⁷ The closing statements, exchange agreement, identification notice, settlement dates, basis history, depreciation schedules, debt records, and replacement-property allocations should be retained as one tax file.

Figure 2 uses the same hypothetical $1.5 million sale to isolate the immediate tax effect. It assumes $250,000 of the $810,000 gain falls into the unrecaptured Section 1250 category at the 25% maximum rate, the remaining $560,000 is taxed at the 20% long-term capital-gain rate, the full gain is subject to the 3.8% net investment income tax, and an illustrative 5% state tax applies. The federal maximum rates and the 3.8% NIIT come from current IRS guidance; the state rate is simply a planning assumption.⁸

Under those assumptions, a taxable sale produces an estimated $245,780 immediate tax bill and leaves $1,164,220 available after selling costs and estimated tax. A fully qualifying exchange leaves the full $1.41 million of net proceeds available for replacement property before exchange-specific fees. That is $245,780 of additional capital remaining in the real-estate investment.⁸

The chart is not a tax estimate for any particular client. Suspended passive losses, capital losses, income level, depreciation history, entity type, state residence, property location, debt, transaction costs, and the character of the gain can all change the result. The point is narrower: when the embedded gain is large, deferral can preserve a meaningful amount of purchasing power at the moment the next property is acquired.

The other side of the math matters just as much. The replacement property's carryover basis means the exchange does not create the same depreciation profile as a fully taxable sale followed by a purchase at a fresh cost basis.⁵ The investor has more capital working, but also carries the old tax history forward. A sound analysis compares the present value of the deferred tax, expected holding period, future depreciation, projected property returns, liquidity needs, and likely exit path.

Figure 2: Hypothetical immediate reinvestment capacity. The exchange defers tax; it does not erase the embedded gain or create a fresh basis.

The most obvious benefit is that money otherwise sent to taxing authorities can remain invested. Deferral can increase the equity available for the next down payment, reduce the amount of outside financing needed, or support a larger replacement property. Over a long holding period, the return earned on the deferred-tax dollars can become as important as the initial tax deferral.

Section 1031 can also be a portfolio-management tool. An owner can move from a mature property with limited upside to one with a stronger business plan, shift geographic exposure, exchange one large asset for several smaller properties, consolidate several holdings into one, or move from active landlord duties toward a more passive qualifying real-estate structure. The properties do not need to share the same tenant base or physical form; they need to satisfy the federal real-property and investment-use standards.^3,5

Estate planning can increase the value of a long deferral horizon. Under current Section 1014, property acquired from a decedent generally receives a basis equal to its fair market value at death, subject to statutory exceptions.⁹ If an investor completes successive exchanges and still owns the final property at death, that basis adjustment may substantially reduce or eliminate the built-in income-tax gain for heirs. Estate tax, state law, entity structure, debt, and future legislation remain separate questions, so "swap until you drop" is a planning description, not a guaranteed result.

The deadlines create investment risk. A seller who believes the tax benefit must be saved at any price may accept a weak location, optimistic underwriting, poor lease terms, deferred maintenance, excessive leverage, or an unfavorable sponsor structure. Overpaying by $200,000 to avoid $150,000 of current tax is not tax planning. It is a bad investment with a tax explanation attached.

The process adds cost and complexity. Qualified-intermediary fees, added legal and tax work, lender coordination, title requirements, appraisals, entity analysis, and accelerated diligence all consume time and money. The qualified intermediary also matters as a counterparty because it controls exchange funds under the agreement; IRS guidance specifically addresses the possibility of intermediary bankruptcy or receivership.^5,7 Financial controls, segregation of funds, bonding or insurance, experience, and the exchange agreement deserve diligence.

Liquidity is another cost. Full deferral generally requires the investor to keep the sale equity inside qualifying real estate. An owner who needs funds for retirement spending, diversification outside real estate, debt reduction, charitable giving, or family transfers may be better served by a taxable sale, a partial exchange with intentional boot, or a different structure. Tax deferral is valuable, but cash that cannot support the owner's actual goals is not free.

The tax liability also remains embedded. A future taxable sale can expose both the old deferred gain and later appreciation, and the carryover basis may constrain future depreciation.⁵ State rules need a separate review, especially when an exchange moves value across state lines. These issues do not make the exchange unattractive; they mean the correct comparison is lifetime after-tax wealth and flexibility, not just this year's Form 1040.

The strongest candidate is a long-term real-estate investor with a low adjusted basis, substantial appreciation, meaningful depreciation history, and a clear desire to remain invested. The benefit becomes more compelling when federal capital-gain tax, potential unrecaptured Section 1250 gain, NIIT, and state tax would otherwise consume a large share of the net proceeds.⁸ Owners who have already identified a better property, want to reposition a portfolio, or wish to reduce direct management while retaining real-estate exposure may also be good candidates.

Business owners and families with a multi-generational real-estate plan can benefit because the exchange coordinates investment repositioning with a longer deferral horizon. A family that expects to hold real estate for decades may place a higher value on keeping capital invested and preserving the possibility of a future basis adjustment than an investor who expects to liquidate the replacement property in two years.^5,9

The weak candidate has the opposite facts. An owner with little or no taxable gain, available capital losses that already offset the gain, a near-term need for liquidity, a desire to exit real estate, or no acceptable replacement property may receive little value from the structure. The same is true when the property is a principal residence, was held primarily for sale, sits outside the domestic real-property rules, or is owned through a partnership whose members want incompatible outcomes.^1,3,5

Age alone does not decide the answer. An older owner who no longer wants landlord responsibility might benefit from a carefully diligenced passive qualifying structure, while another may prefer to pay the tax and simplify the estate. A younger investor may value decades of compounding, but should still reject a mediocre replacement property. The investment thesis comes first in both cases.

I view a 1031 analysis as four connected decisions. First, we calculate the real tax exposure using adjusted basis, depreciation, selling costs, debt, passive losses, federal rates, NIIT, and state rules. Second, we define the amount of liquidity the family needs outside real estate. Third, we underwrite the replacement property without giving it credit for the tax benefit. Fourth, we compare the exchange, taxable sale, and partial-exchange outcomes over the expected holding period.

That order matters. It keeps the plan tax-aware, not tax-driven. If the replacement property works only because the tax bill is painful, the investment may not be strong enough. If the property stands on its own and the exchange preserves substantial capital, Section 1031 can improve an already sound transaction.

The implementation team should be assembled before the sale closes. The qualified intermediary handles the exchange mechanics, the CPA models gain and reporting, the attorney reviews ownership and documents, the lender confirms financing, and Perissos connects the transaction to liquidity, portfolio concentration, cash flow, and estate planning. This memo is the framework; the specific answer is a coordinated conversation with your attorney, your CPA, a qualified intermediary, and our team.

The takeaway is straightforward: 1031 exchanges are still worth it in 2026, but not because taxes should dictate the next investment. They are worth it when an investor has substantial embedded gain, wants to continue owning real estate, can meet the rules, and has found replacement property that improves the plan on its own merits.

The best exchange preserves tax deferral and upgrades the investment. The worst one preserves the tax deferral and downgrades everything else. Our role is to calculate the real benefit, protect liquidity, pressure-test the replacement property, and coordinate the decision before the statutory clock starts.

Our team will continue monitoring Section 1031, related Treasury and IRS guidance, and any legislative proposals that could change the analysis. For now, the provision remains available under current law.¹ Used with discipline, I believe it is still one of the most useful real-estate planning tools in the Internal Revenue Code.

All my best,

Brandon VanLandingham, CFA, CMT, CFP

Founder / CIO

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[1] U.S. House of Representatives, Office of the Law Revision Counsel, 26 U.S.C. Section 1031 --- Exchange of Real Property Held for Productive Use or Investment (text containing laws in effect July 17, 2026), https://uscode.house.gov/view.xhtml?edition=prelim&req=granuleid%3AUSC-prelim-title26-section1031.

[2] U.S. Department of the Treasury, Office of Tax Analysis, The Tax Treatment of Like Kind Exchanges (2014), history and continuity-of-investment rationale, https://home.treasury.gov/system/files/131/Like-Kind-Exchange-2014.pdf.

[3] Internal Revenue Service, Like-Kind Exchanges --- Real Estate Tax Tips (last reviewed or updated May 1, 2026), qualifying real property, like-kind standard, foreign-property rule, boot, and reporting, https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips.

[4] U.S. Department of the Treasury, 26 C.F.R. Section 1.1031(k)-1 --- Treatment of Deferred Exchanges (April 1, 2025 edition), identification and exchange periods, written-identification requirements, three-property rule, 200% rule, and 95% rule, https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol13/pdf/CFR-2025-title26-vol13-sec1-1031k-1.pdf.

[5] Internal Revenue Service, Publication 544 (2025), Sales and Other Dispositions of Assets (current revision posted in 2026), qualifying property, basis, deferred and reverse exchanges, qualified intermediaries, liabilities, partial exchanges, partnership interests, and related-party rules, https://www.irs.gov/publications/p544.

[6] Internal Revenue Service, Revenue Procedure 2008-16, dwelling-unit safe harbor for Section 1031, https://www.irs.gov/irb/2008-10_IRB.

[7] Internal Revenue Service, Instructions for Form 8824 (2025), Like-Kind Exchanges, deferred-exchange timing, written identification, reporting, related parties, and property used as a home, https://www.irs.gov/instructions/i8824.

[8] Internal Revenue Service, Topic No. 409, Capital Gains and Losses (20% maximum long-term capital-gain rate and 25% maximum rate for unrecaptured Section 1250 gain), https://www.irs.gov/taxtopics/tc409; Internal Revenue Service, Topic No. 559, Net Investment Income Tax (3.8% NIIT and real-estate gains), https://www.irs.gov/taxtopics/tc559.

[9] U.S. House of Representatives, Office of the Law Revision Counsel, 26 U.S.C. Section 1014 --- Basis of Property Acquired From a Decedent (text containing laws in effect July 9, 2026), https://uscode.house.gov/view.xhtml?edition=prelim&num=0&req=granuleid%3AUSC-prelim-title26-section1014.

[10] Internal Revenue Service, Revenue Ruling 2004-86, federal tax classification of the specified Delaware statutory trust and Section 1031 treatment, https://www.irs.gov/irb/2004-33_IRB.

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