2025
1031 Trends and Key Info
Economic fluctuations and evolving market conditions will require investors, property owners and their teams to stay informed about the latest trends and opportunities. Here’s a look at what to expect in 2025.
Interest rates will continue to fluctuate, creating an unpredictable environment. Despite this, 1031 transactional volume is expected to increase due to tax deferral benefits.
Strict underwriting guidelines continue to make CRE financing challenging. Seller-financed deals will continue to increase, with sellers motivated to seek creative 1031 Exchange solutions to optimize their purchasing potential.
Limited property availability is increasing the popularity of Reverse Exchanges, where taxpayers close on their new Replacement Property before selling their current investment. This flexibility has given 1031 Exchangers an advantage in competitive markets.
Larger multifamily properties, industrial spaces and neighborhood retail outlets are expected to remain in high demand throughout 2025. We see a growing trend of investors moving away from office properties and using 1031 Exchanges to reinvest their profits into more resilient asset classes with stronger growth potential.
Local governments continue to implement restrictions on short-term rentals, prompting many residential investment property owners to sell. These investors are turning to 1031 Exchanges to shift their investments into traditional apartment buildings or other asset classes with fewer regulatory hurdles.
In 2024, there were no significant changes to Section 1031 of the Tax Code. However, 2025 may bring new proposals, potentially affecting 1031 Exchanges. Given the anticipated challenges in the CRE market, 1031 transactions will stay active as informed investors and commercial property owners employ strategic 1031 tax deferral tools.
Anticipated 1031 Trends for 2025
- Reverse and Improvement (a/k/a Build-to-Suit) Exchanges - These will continue to be popular due to higher interest rates and interest rate volatility coupled with limited quality inventory.
- Maturing Loans and Refinancing Needs - There will be significant transactional activity driven by a substantial volume of loans coming due as CRE owners sell due to maturing loans and use 1031 Exchanges for better ROI and loan terms.
- Interest Rates and Transaction Volume - Any decrease in interest rates is expected to boost 1031 transaction volume, leading to an overall upward trend in residential and commercial exchanges.
- Seller Financing - Traditional financing challenges will lead to more seller-financed transactions, with sellers leveraging 1031 Exchanges to maximize their strategies.
- Shifts in Asset Classes - Multifamily, industrial, and retail properties are expected to see robust activity as investors use 1031 Exchanges to defer taxes.
- Shift to Passive Investments - An increase in management-intensive properties being exchanged for passive investment types like NNN (Triple Net Lease) and DSTs (Delaware Statutory Trusts) is expected.
- Geographical Shifts - Investors will continue to move their investments to more landlord-friendly areas, driven by local regulations and economic conditions.
- ADU/Mixed-Use Growth - 1031 opportunities are expected to thrive for properties with accessory dwelling units (ADUs) and mixed-use properties that combine residential and commercial spaces. The diverse income streams enhance the appeal for 1031 Exchanges investors seeking new Replacement Properties.
- Retirement-Friendly Areas - Warmer climates, lower costs of living, and favorable tax conditions will attract investors looking to exchange into retirement-friendly regions.
- Choose your 1031 Qualified Intermediary (QI)
- Consult with your tax professionals
- Include Cooperation Clause language in your purchase and sale agreement
- QI prepares your exchange documents
- Start searching for Replacement Property
- Sign all documents QI prepares
- Sell your Relinquished Property
- Identify your Replacement Property
- Enter into contract on Replacement Property
- Contact QI once Replacement Property escrow is opened
- Close on Replacement Property
- QI transfers funds to complete your purchase
- Your exchange is complete
As we navigate through 2025, staying informed and being adaptable will be key for success in the CRE market and 1031 Exchanges. By keeping an eye on these trends and leveraging strategic opportunities, investors can make the most of their investments and thrive in a dynamic market.
2025 Capital Gains Tax Brackets
2017 tax reform indexed the Long-Term Capital Gain rate breakpoints (whether a 15% or 20% rate) to inflation. The actual rates didn’t change for 2025, but the income brackets did adjust slightly. The breakpoints for 2025 are as follows: married filing jointly: $600,051+ and single filers: $533,401+. The capital gains brackets are based on “Taxable Income” whereas the Net Investment Income Tax thresholds are based on “Adjusted Gross Income”.
1031 Exchange Checklist
A 1031 Exchange transaction requires planning, expertise and support. Here’s a checklist outlining key steps in your exchange.
Tax Straddling – Pay Taxes in 2025 or 2026?
If your transaction closed at the end of 2024 and you are unable to find new property to identify or purchase the property that you have identified, you may still be able to defer paying taxes on your capital gains until your 2025. Since you will receive your 1031 funds back in 2025, in certain circumstances, since you did not have control/possession of your funds until 2025, the IRS may allow you to pay taxes on your 2025 tax return, which are due in 2026. This is in accordance with IRC Section 453(d) and requires your accountant to file specific tax forms. Ask your accountant if you are eligible to take advantage of this “mini” tax deferral
This material does not constitute an offer to sell, solicitation of an offer to buy, recommendation to buy, or representation as the suitability or appropriateness of any security, financial product or instrument, unless explicitly stated as such. This information should not be construed as legal, regulatory, tax, personalized investment, or accounting advice. This message (and any attached materials) is for the sole use of the intended recipient(s) and may contain information that is privileged, confidential and exempt from disclosure under applicable law. Any review, dissemination, distribution or duplication of this communication is strictly prohibited
This data is not meant to replace Adviser’s portfolio management/performance reporting systems or brokerage statements. Please consult your reports for actual performance data before making any decisions based on this information. Accordingly, reliance upon information in this data is at the sole discretion of the reader. Assumptions on returns are just that and may or may not come to fruition. Actual returns may not be as projected and are for illustrative purposes only.
Neither EFR (Exclusive Financial Resources, LLC), it’s officers or employees are authorized or permitted under applicable laws to provide tax or legal advice to any client or prospective client of EFR. The tax related information contained herein or in any other communication that you may have with a representative of EFR should not be construed as tax or legal advice specific to your situation and should not be relied upon in making any business, legal or tax related decision. A proper evaluation of the benefits and risks associated with a particular transaction or tax return position often requires advice from a competent tax and/or legal advisor familiar with your specific transaction, objectives and the relevant facts. We strongly urge you to involve your tax and/or legal advisor (or to seek such advice) in any significant real estate or business related transaction.
If you would like to find out more about 1031 Exchanges and 2025 Trends please give Exclusive Financial Resources a call at (980) 242-2533, email Louis Herford at LHerford@Exclusive1031.com or schedule a 15-minute discussion here.
