1031 Exchange Rules in 2026: What Changed and What Stayed the Same

What stayed the same in 2026

The rules that govern a 1031 exchange in 2026 are the ones that governed it in 2025. A 1031 exchange lets a real estate investor sell one property and roll the proceeds into another without paying capital gains tax right away; the tax is deferred, not erased. To qualify you still name a replacement property within 45 days of selling, close on it within 180 days, route the money through a qualified intermediary you never personally touch, and trade real property only for real property.

None of that moved. The Tax Cuts and Jobs Act of 2017 permanently limited these exchanges to real property, ending the old practice of swapping equipment or other personal property, and that limit is still the law.

Predictability is the underrated part. A structure that worked last year works this year and, absent a change in the law, will work next year. Here is what you can build a plan around:

Real property only. Business equipment, vehicles, intellectual property, and other intangibles do not qualify. This limit is permanent under current law.

45 days to identify. You have 45 days from the sale closing to identify replacement property. There are no exceptions.

180 days to close. You have 180 days from the sale closing to close on everything you identified. It is a hard deadline.

Like-kind real property. Both the property you sell and the one you buy must be real property, but the two can look nothing alike: a commercial building can be exchanged for a residential one, or the reverse. The main carve-outs are foreign real property, inventory, and securities in a REIT or partnership.

Same taxpayer. The entity that sells must be the entity that buys. If an LLC sells, the LLC buys. Because of that, any entity restructuring has to happen before the sale, not in the middle of an exchange.

Qualified intermediary. You cannot take possession of the sale proceeds. They go straight to a qualified intermediary, an independent party who holds the money and pays the seller of your replacement property.

Why the 2026 brackets make a deferral worth more

The headline change for 2026 is not a rule at all. It is the IRS's annual inflation adjustment to federal tax brackets, which changes what you would owe if you sold without exchanging.

Skip the exchange and you owe capital gains tax on the sale. Long-term capital gains, the rate for property held more than a year and the one covering most real estate, are taxed at 0, 15, or 20 percent depending on income. The 2026 adjustment lifts the income thresholds for each bracket, so a single filer now reaches the top 20 percent rate at a higher income than in 2025.

At that top rate, the bill rarely stops at 20 percent. Income high enough for the 20 percent bracket also triggers the 3.8 percent Net Investment Income Tax, and once state tax is added, the marginal rate on a gain can top 25 percent.

That is the mechanism in one line: the higher the rate you would otherwise pay, the larger the bill a 1031 exchange lets you postpone. You can run your own numbers to see how the 2026 brackets change the figure for a specific sale.

What the IRS has clarified

No substantive rule changed, but the IRS has kept sharpening its guidance on the trickier structures.

In a reverse exchange, you buy the replacement property before selling the one you are giving up, parking the new property with an Exchange Accommodation Titleholder, a third party who holds legal title until the sale closes. The IRS's terms here are unchanged: the sale has to close within 180 days, and the titleholder cannot be you or your agent. It costs more than a straight exchange, but it is a settled, widely used structure.

An improvement exchange lets you buy a property for less than your sale price and spend the leftover exchange proceeds on capital improvements before day 180. The IRS treats these as permissible, but the tracking has to be airtight, which means the qualified intermediary and the contractor working from the same timeline.

Form 8824 is unchanged for 2026. You file it with your return for the year you started the exchange, reporting the swap and calculating the gain you deferred.

On the intermediary side, FinCEN's anti-money-laundering rule, which we cover separately on the FinCEN "1031" confusion, leaves the qualified intermediary requirements themselves alone, but it does push settlement agents to coordinate more closely on timing and disclosure. Most large intermediary firms send clients updates when their procedures change, and it is a fair question to ask yours.

Reform risk: real but not imminent

Congress has floated limits on 1031 exchanges for decades. The most recent serious attempt, from the Biden administration in 2021, would have capped the deferral at $500,000 per taxpayer per year. It did not pass, and it has not been reintroduced in the current Congress.

There is no strong momentum behind 1031 reform right now. Real estate, agriculture, and allied industries have defended the provision since 1921, and while a limit could resurface in a future budget proposal, elimination or a sharp restriction is not on the near horizon.

The mechanics of reform matter as much as the odds. When 1031 rules have changed, the change has applied going forward, to exchanges done after the new law, not retroactively to deals already closed. A future limit would not reach back and undo an exchange completed under today's rules. We go deeper on whether the 1031 is going away in a separate piece.

State-level proposals

Federal rules are the whole game for most investors, but a few states have stirred. California has proposed, though not passed, changes to how it treats 1031 exchanges, and New York has discussed something similar. These are proposals, not law. If you own property in a state that has floated changes, a state tax professional can tell you whether anything actually applies for 2026.

What to watch through 2026

Delaware Statutory Trusts (DSTs). A DST, a co-ownership structure investors use to hold replacement property, remains popular. The IRS is running its usual compliance programs on exchange transactions. Anyone looking at a DST needs the qualified intermediary and the sponsor aligned on documentation and fees.

Opportunity Zones. The Qualified Opportunity Zone program sunsets on December 31, 2026 for certain original benefits, including the 10 percent basis step-up, which trims the eventual taxable gain, for a five-year hold. It is separate from 1031 exchanges, but it shapes the field of alternatives investors weigh. Our 2026 Opportunity Zone update covers it.

IRS enforcement. The agency keeps examining exchanges where the intermediary relationship looks too informal or the paper trail is thin. A well-capitalized qualified intermediary and meticulous records are what hold up under that scrutiny.

Real property definitions. The IRS periodically clarifies what counts as real property rather than personal property or a fixture. If you are selling something with unusual components, rooftop solar panels or a manufactured building, say, it is worth confirming with your intermediary that it still qualifies under current guidance.

The bottom line

2026 brings no big surprises. The core rules are stable, the inflation-adjusted brackets raise what a sale would cost in tax and therefore what a deferral is worth in dollars, and legislative risk stays low.

To size up your own situation, you can estimate your deferral, use a short quiz to see how the different structures - straight exchange, reverse, DST - compare, and talk to an advisor about how a plan fits your timeline and property. For the rules in full, see the 1031 exchange rules and like-kind real property.