How the Like-Kind Exchange Rules Held Up Under OBBBA — and a Common Misconception to Avoid
Section 1031 of the Internal Revenue Code is one of the oldest tools available to real estate investors, and it survived the One Big Beautiful Bill Act (OBBBA) fully intact — though not without a common point of confusion worth clearing up.
As the IRS explains in its guidance on Section 1031, a 1031 exchange defers — rather than eliminates — capital gains tax when a taxpayer sells real property held for business or investment use and reinvests the proceeds in “like-kind” real property. The tax liability on the original sale doesn’t disappear; it carries forward and is generally recognized when the replacement property is eventually sold outside of another exchange.
The mechanics run on a strict clock. Per IRS Fact Sheet FS-08-18, an investor has 45 days from the sale of the relinquished property to identify potential replacement property, and 180 days from that sale (or the tax return due date, if earlier) to close on it. Proceeds must be held by a qualified intermediary throughout the process rather than passing through the seller’s hands.
During negotiations over OBBBA, signed into law in July 2025, some early proposals floated capping the amount of gain eligible for 1031 deferral — figures around $500,000 were discussed at various points. That cap was not included in the final legislation. According to the National Association of REALTORS’ analysis of the enacted law, Section 1031 “is not touched by the Act.” That reflects the law as currently written, not a guarantee of how future legislation may treat like-kind exchanges.
One point investors frequently get wrong: an interest in a private real estate fund is not the same thing as a 1031 replacement property. Section 1031 requires direct ownership of like-kind real property. The IRS is explicit on this point — partnership interests are named among the categories of property that do not qualify for like-kind exchange treatment. An investor selling real property and hoping to defer gain through a 1031 exchange generally needs to acquire a direct real property interest, not a fund LP interest, though certain structures such as a properly formed Delaware Statutory Trust may work in specific cases. Because this distinction affects eligibility for tax deferral, anyone considering it should work through their specific transaction with their own tax advisor before a sale closes. Longview Commercial does not provide tax, financial, or legal advice. This article is for general informational purposes only. Please consult your own qualified tax, financial, or legal advisor before making any investment decision.
“The IRS is explicit on this point — partnership interests are named among the categories of property that do not qualify for like-kind exchange treatment.”