How the 2025 Tax Bill Affects 1031 Exchange Planning

The One Big Beautiful Bill Act, signed July 4, 2025, rewrote large parts of the federal tax code. Section 1031, the provision that lets investors defer capital gains tax by exchanging one investment property for another of like kind, came through the bill completely unchanged: no dollar cap, no repeal, no new conditions attached to its use.

The OBBBA did act on several fronts that matter to anyone running a real estate portfolio. Opportunity Zones, a program that had been set to stop accepting new investments and gain deferrals at the end of 2026, with the original zone designations themselves expiring at the end of 2028, are now permanent. The bill also restored full bonus depreciation under IRC Section 168(k) for property acquired after January 19, 2025, undoing the phase-down that had been scheduled under prior law. The estate tax exemption rises permanently starting in 2026 and will be indexed for inflation beginning in 2027. And the bill created a new, narrowly targeted provision, IRC Section 1062, that lets certain farmland sellers elect to pay the tax on a sale to a qualified farmer in four equal annual installments, effective for tax years beginning after July 4, 2025. That installment-payment option is distinct from Section 1031 and from gain deferral generally; it postpones when the tax gets paid, not whether it's owed.

What the OBBBA did not do matters just as much as what it did. No language in the bill limits, caps, or conditions Section 1031 deferral in any way. For an investor planning an exchange, the law governing the exchange itself is what it was before July 2025. The real work for anyone updating a tax strategy this year lies in the territory around Section 1031, not in the statute itself: restored bonus depreciation, a permanent Opportunity Zone program, and a higher estate tax exemption all change the environment in which an exchange happens, even though the exchange rules haven't moved an inch.

Why 1031's survival mattered

Section 1031 has been a repeated target in tax reform debates for years. None of that history guaranteed the outcome in 2025. A bill as sweeping as the OBBBA, touching bonus depreciation, estate tax thresholds, and the creation of entirely new code sections, had every structural opportunity to also reach into Section 1031 and scale it back.

It didn't, and an investor exchanging a high-value property defers the same proportion of gain as one exchanging a far more modest one, since the statute draws no distinction based on size. So real estate investors now have a basis for confidence that didn't exist going into the legislative session. The current administration does not appear to intend to revisit Section 1031, but legislative risk is a constant in tax law, so it remains worth monitoring. Survival this time doesn't guarantee survival in the next reform cycle, but the strategic ground for 2025 and the years immediately ahead stands firm.

Restored 100% Bonus Depreciation and Replacement Property

The single change most likely to reshape how investors approach exchange planning right now is the restoration of full bonus depreciation. Property acquired after January 19, 2025 and placed in service can qualify for 100% first-year bonus depreciation under IRC Section 168(k), reversing a phase-down that had been chipping away at this benefit in recent years. For a 1031 replacement property, that restoration means the first year of ownership can produce a substantial deduction that simply wasn't available at the same scale before the OBBBA.

The mechanism runs through cost segregation. A cost segregation study on the replacement property breaks the building down into components, separating out fixtures, HVAC systems, land improvements, and other elements that depreciate on a much shorter schedule than the building itself. Once reclassified, and provided they were acquired and placed in service after January 19, 2025, those shorter-life components qualify for full bonus depreciation in the year they go into service. The result: a sizable share of the replacement property's total value can be deducted immediately, producing a paper loss that offsets other income for the investor.

That benefit comes with a condition that needs to be built into the plan from day one, not discovered later. When the replacement property is eventually sold without a follow-on exchange, the IRS recaptures the accelerated depreciation at a rate set by statute. The sequencing matters: plan the exit strategy before deciding how aggressively to depreciate, not after.

This also changes which properties are worth targeting as replacements. Industrial buildings, hospitality properties, and retail space with extensive fixtures are the properties where this math works hardest in the investor's favor.

What permanently extended Opportunity Zones mean for exchanges that go partially wrong

Not every exchange closes cleanly, and the Opportunity Zone program becoming permanent changes how investors should think about what happens when one doesn't. OZ incentives had been set to expire at the end of 2026; the OBBBA eliminated that sunset and established new OZ tracts, making the program a fixture of long-term tax planning rather than a window investors had to race against before it closed.

The relevance to exchange planning is clearest when a transaction produces boot. Reinvesting that recognized gain into a Qualified Opportunity Fund within the statutory window after recognition can defer, and in some cases reduce, that remaining tax liability. It's important to be precise about what this does and doesn't accomplish: an OZ investment defers and potentially reduces the tax on the gain placed into it, but it doesn't replicate the full deferral of gain that a completed like-kind exchange provides. The two tools solve different problems and work best in combination, not as substitutes for one another.

The same logic extends to a failed exchange, one where the investor misses the 45-day identification deadline or the 180-day completion deadline. At that point, OZ funds become a relevant option for redeploying whatever portion of that gain the investor chooses to reinvest. Because the program no longer carries an expiration date, advisors and investors can now build OZ funds into multi-year exchange strategies as a standing contingency plan with no closing window of its own.

The Higher Estate Tax Exemption and Long-Term Exchange Chains

If you intend to hold exchanged property until death rather than sell it during your lifetime, the OBBBA's permanent increase to the estate tax exemption changes the calculus. Under current law, that accumulated gain gets erased entirely at death: heirs receive the property with its basis stepped up to fair market value, and the deferred gain built up across years or decades of exchanging simply vanishes for tax purposes.

The value of that step-up depends on the estate avoiding a tax event of its own at the moment of transfer. A higher estate tax exemption means a larger estate can pass to heirs without triggering estate tax, which preserves the full value of the step-up. This matters most for investors with appreciated portfolios who are at or approaching the age where estate planning becomes a practical concern, and particularly for those whose estate value falls between the old exemption threshold and the new, higher one.

Basis step-up is current law, not a permanent feature of the tax code, and future legislation could alter or eliminate it. The strategy described here works well under present conditions, but it isn't a guarantee that extends indefinitely into the future. Taken together with restored bonus depreciation and a permanent Opportunity Zone program, the higher estate exemption completes a three-part stack where each piece addresses a different stage of the investment lifecycle: bonus depreciation improves the economics of acquisition, Opportunity Zones provide a backstop when an exchange produces taxable gain, and the estate exemption protects the value of a long exchange chain at the point of generational transfer.

The core exchange mechanics that haven't changed and still determine whether deferral succeeds

None of the favorable changes discussed so far alter the procedural requirements that have always governed Section 1031. Missing any one of these requirements converts the transaction into a taxable sale, regardless of how well the investor chose the replacement property or how much bonus depreciation was on the table.

The qualified intermediary requirement sits at the center of this. The exchange agreement has to be in place before the relinquished property closes; bringing in a QI after the sale has already closed cannot retroactively turn a completed sale into an exchange. Taking even momentary control of the funds triggers constructive receipt and invalidates the exchange.

Two deadlines run on top of that structure, both measured in calendar days with no exceptions for weekends, holidays, or personal circumstances. These two periods run concurrently, not one after the other, so the clock on both starts the moment the first sale closes. A less obvious trap sits at the end of the calendar year: if the relinquished property closes late in the year and the investor doesn't file a tax return extension, the exchange period can end at the April filing deadline, cutting the full 180 days short.

Identification follows one of several defined rules, including the three-property rule, which allows the investor to identify up to three replacement properties of any value regardless of their combined worth. Selling through an LLC and buying personally, or having one spouse sell while both spouses buy, are common structural mistakes that invalidate the exchange even when every deadline was met. This operational checklist is not legal advice; whether the tax benefits discussed above ever get to apply depends on following it. If multiple partners are involved, get qualified counsel to review the deal before the relinquished property goes to market.

Choosing a qualified intermediary for this environment

The planning opportunities created by the OBBBA raise the stakes on a decision that used to be largely administrative. Choosing a qualified intermediary now carries strategic weight, because the quality of guidance, the speed of opening an exchange, and the transparency of how funds are handled all affect whether an investor can actually act on bonus depreciation, OZ fallback, or estate planning strategies before the clock runs out.

Speed matters because investors who want to layer cost segregation and bonus depreciation planning into an exchange need the exchange open and the funds secured before they can start coordinating with engineers and CPAs. Accessibility matters for the same reason: because the 45- and 180-day deadlines run in calendar days, questions come up on weekends and in the evening, and a QI available outside standard business hours isn't an extra convenience but a practical necessity.

Exchange funds held by the QI during the exchange period earn interest, and a QI that keeps that interest rather than passing it to the client works against the investor's interest, so transparency around interest deserves close examination. Continuity rounds out the list. Complex exchanges, especially ones involving cost segregation coordination, DST identification, or OZ fallback planning, benefit from a single experienced officer who knows the file from the first phone call through closing, rather than a rotating team handoff that forces the investor to re-explain the transaction at every stage.

There's also a network dimension to the decision. Exchanges involving DST identification, cost segregation timing, or OZ fallback coordination require the QI to work closely with brokers, CPAs, and title companies throughout the transaction. A QI trusted by professionals at demanding firms offers a different level of coordination than one that works in isolation from the rest of the deal team. Judged against that full set of criteria, speed, accessibility, transparency, security, and continuity, Deferred stands out as a QI built around exactly this kind of complex, time-sensitive exchange planning, with segregated accounts insured through its banking partner, interest passed through to clients, and dedicated officers who stay with a file from open to close.

Situations where a 1031 exchange is still the wrong answer despite the favorable environment

A favorable legislative environment doesn't make an exchange the right choice for every investor selling real estate. The decision to exchange should follow the investor's actual objectives, not the fact that the tax code happens to currently reward exchanging.

An investor who is retiring, simplifying their finances, or exiting real estate ownership altogether gains little from deferring taxes into a replacement property that comes with its own set of landlord obligations. And when the deferred gain is modest relative to the transaction costs, carrying costs, and management burden of the replacement property, paying the tax now and keeping the proceeds liquid can be the more rational outcome.

State tax law adds another layer that federal deferral doesn't resolve on its own. Federal deferral under Section 1031 doesn't automatically produce state-level deferral, and investors in states with similar clawback rules need to model that state liability before assuming an exchange delivers the full tax benefit it appears to on paper.

A qualified intermediary worth working with will help an investor think through whether an exchange makes sense before opening one, not just execute the mechanics once the decision is made. That willingness to talk an investor out of an exchange when it doesn't fit their goals is itself a sign of where that intermediary's interests lie. The legislative environment for real estate investors heading into the years ahead is as favorable as it has been in some time: Section 1031 intact, bonus depreciation restored to full strength, Opportunity Zones made permanent, and a higher estate tax exemption protecting long-term exchange chains. Whether any of that benefits a given investor depends on an honest assessment of whether an exchange fits their actual plans for the property and for their broader financial life.