1031 Exchanges in 2025: Execution, Cash Flow, and Tax Strategy in Focus

By Northmarq’s Chris Hall, vice president of defeasance and 1031 consulting; David Annett, vice president of investment sales; and Joe Dugoni, associate of investment sales

Certainty is rare in real estate, but investors now have clarity on one key strategy. The One Big Beautiful Bill Act preserved Section 1031 of the Internal Revenue Code – commonly known as 1031 exchanges – assuring that investors can continue deferring capital gains taxes by reinvesting proceeds into like-kind properties. Early proposals contemplated capping deferrals above $500,000, but those restrictions did not make it into the final legislation. In addition to preserving 1031 exchanges, the law reinstated key tax initiatives, including permanent bonus depreciation and 100% expensing of qualified improvements such as appliances, HVAC, and flooring.

For decades, 1031 exchanges have been a cornerstone of wealth preservation and portfolio optimization. By allowing investors to defer taxes when reinvesting in like-kind assets, the strategy provides flexibility to respond to market shifts, personal goals and regulatory changes.

With the rules unchanged, savvy investors are using this moment to rethink their portfolios, simplify management, and position themselves for long-term success. But succeeding in today’s environment requires more than just understanding the rules. It demands a clear vision for both sides of the exchange.

What Clients Are Prioritizing in 2025

While Section 1031 is intact, the overall market transaction volume remains lower than in prior years. Higher rates, tighter financing, and broader uncertainty have thinned activity, though the percentage of 1031 exchanges have held steady.

The following continue to be consistent themes we’re hearing from our 1031 exchange clients in today’s market.

• Tax deferral and wealth preservation remain top priorities.
• Improving cash flow continues to drive exchange activity.
• Simplifying management is a common goal, especially for owners transitioning out of multi-tenant, multifamily, or hands-on assets.
• Housing restrictions and regulations are pushing investors out of restrictive states and into more predictable, landlord-friendly markets.

In practice, investors are pruning portfolios at key inflection points – loan maturities, rental escalations, or tenant credit changes – while also diversifying tenants and lease ladders to smooth cash flow. Geographical shifts remain two-way, with some reallocating to landlord-friendly states and others moving into supply-constrained metros for insulation.

Top Concern: Certainty of Execution

Tight timelines and financing complexity mean execution often drives decision-making. Many investors won’t sell without a replacement identified, but waiting on the upleg can lead to delays or suboptimal choices. The most successful exchanges start with a disciplined process: lender alignment up front, multiple underwritten targets, and contracts structured with 1031 cooperation and built-in extensions – all while avoiding common mistakes that can derail the exchange.

Dual tracking is especially effective. Marketing the downleg while sourcing upleg options in parallel allows investors to preserve timing and control. Leveraging national networks, off-market relationships and multiple LOIs keeps options open when the 45-day identification window begins.

Market Dynamics: Inventory, Pricing and Strategy

Inventory is selective but improving. Quality supply remains limited, but incremental volume is expected as financing clarity improves. More properties coming to market should expand buyer choice over time.

Pricing is flexible but requires discipline. Sellers are more negotiable than a year ago. Deals listed at a 5.5% cap rate may still deliver investor goals if the lease structure, credit, and real estate fundamentals align.

Strategic repositioning is the opportunity. Investors are moving away from chasing headline yields and instead focusing on income durability, tenant credit and mark-to-market potential. Many are accepting tighter pricing in exchange for stronger lease structures and more predictable operating environments.

Looking Ahead: Trends Shaping 1031 Exchanges

Over the next 12 to 18 months, several factors could reshape exchange strategies:

• Selective but stabilizing supply: Durable-income assets remain most resilient, with pricing holding firm. A modest increase in inventory could expand buyer optionality.
• Shifting buyer focus: Investors are prioritizing income durability, reset rent to market potential and tenant credit quality over headline yields.
• Geographic re-weighting: Capital is reallocating in both directions – toward landlord-friendly jurisdictions and into high-barrier, supply-constrained metros.
• Interest rate impact: With potential Fed rate cuts later this year, sidelined investors may re-enter, sparking more exchange activity.

Final Thoughts

Investors are no longer chasing yield for its own sake. The focus has shifted to income durability, tenant credit, and the ability to reset rents to market. With the rules intact and financing clarity improving, 1031 exchanges are regaining momentum. Success will come to those who prepare early and stay flexible under the exchange clock.

Northmarq is a full-service capital markets resource for commercial real estate investors, offering seamless collaboration with top experts in debt, equity, investment sales, loan servicing, and fund management. The company combines industry-leading capabilities with a flexible structure, enabling its national team of experienced professionals to create innovative solutions for clients. Northmarq’s solid foundation and entrepreneurial approach have built a loan servicing portfolio of more than $78 billion and a three-year transaction volume of $69.5 billion.

The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of AltsWire.

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