1031 Exchanges After the 2025 Tax Law: What Changed Around Them
The federal tax law signed on July 4, 2025 left Section 1031 like-kind exchanges for real estate exactly as they were, despite years of proposals to cap or eliminate them. You can still defer the gain on an apartment building, a care facility or other investment or business real estate by reinvesting the proceeds in replacement real property. What did change are the rules around an exchange, chiefly the return of permanent 100 percent bonus depreciation and a rebuilt opportunity zone program that gives sellers a second way to defer gains.
The mechanics that govern an exchange carry over without change, so you still have 45 days after the sale to identify replacement property and 180 days to close on it, the proceeds still have to pass through a qualified intermediary rather than your own accounts, and you still need to buy replacement property of equal or greater value and replace the debt you paid off to defer the full gain.
The last real narrowing came in 2017, when exchanges were limited to real property and personal property was removed from the program. That limit still matters on apartment and care properties, because furniture, equipment and other personal property sold with the building do not qualify, although regulations allow a small amount of personal property that is incidental to the real estate to ride along without spoiling the exchange.
Bonus depreciation is the bigger change for buyers of replacement property, because the 2025 law made 100 percent bonus depreciation permanent for qualified property acquired after January 19, 2025, and IRS Notice 2026-11 provides the interim rules. The deduction applies to property with a recovery period of 20 years or less, which in a building means components such as appliances, carpeting, site improvements and parking areas that a cost segregation study separates from the structure, while the building itself still depreciates over 27.5 years for residential property.
Combining an exchange with bonus depreciation is possible but technical, because part of the replacement property's tax basis carries over from the property you sold, and that carried-over basis is treated differently from the new money you add, so how much bonus depreciation the exchange produces depends on that split. Large first-year deductions also build up more depreciation to be recaptured later, which raises the stakes on exchanging again when you eventually sell.
Opportunity zones offer an alternative for some sellers, because the 2025 law made the program permanent with new zone designations that take effect for investments on January 1, 2027. Gains invested in a qualified opportunity fund after December 31, 2026 are deferred for five years, the basis rises by 10 percent at the five-year mark or 30 percent for qualifying rural funds, and appreciation on an investment held at least 10 years is excluded from tax.
The two programs work very differently in practice, since an exchange requires reinvesting all of the proceeds in real property and can defer tax indefinitely through repeated exchanges, while an opportunity zone investment requires reinvesting only the gain, but the deferred tax comes due after five years, so the choice depends on how much cash you want to keep and how long you plan to hold.
Syndicated deals add their own limit, since interests in a partnership are not real property, so individual investors cannot exchange their shares while the partnership itself sells the building. A sponsor whose investors want different outcomes, some cash and some an exchange, needs to address that well before the sale. Some states also track exchanges that move gains elsewhere, and California requires an annual information return when property in the state is exchanged for property outside it.
Before you list a property, decide whether an exchange, an opportunity zone investment or simply paying the tax fits your plans and your investors. Engage a qualified intermediary before the sale closes, since the funds cannot touch your accounts, and plan a cost segregation study on any replacement property so the bonus depreciation rules work in your favor.
Whichever route you choose, the replacement property still has to stand on its own as an investment, and the 45-day identification window leaves little time to underwrite it properly. I help sellers and buyers review replacement properties quickly, build CRE models on the deals they are considering and test the returns before the identification deadline arrives. If you are planning a sale and expect to exchange into another property, send the deals you are looking at to amer@awadcapitaladvisors.com, and I can help you see which ones hold up before the clock runs out.