Should You Close Your Like-Kind Exchange Before the End of the Year?

With the end of 2025 fast approaching, many investors are starting to think about what they can do to minimize their tax bill next year. If you are considering (or in the process of conducting) a like-kind exchange, should you prioritize closing your exchange by December 31? Find out from a 1031 exchange expert at 1031 National Services:

You Don’t Need to Close Your Like-Kind Exchange Before the End of the Year

Fundamentally, there isn’t a tax benefit to closing a like-kind exchange before the end of the year. Section 1031 states that taxpayers must report like-kind exchanges on their tax return “for the year in which the exchange occurred.” As the Instructions for IRS Form 8824 make clear, this is the year in which the exchange begins, regardless of when it ends:

“If during the current tax year you transferred property to another party in a like-kind exchange, you must file Form 8824 with your tax return for that year.”

As a result, regardless of when you close your like-kind exchange, if you started it in 2025, you will need to report it on your 2025 return.

Starting a Like-Kind Exchange Before the End of the Year Could Have Tax Consequences

But, even with this being the case, starting a like-kind exchange before the end of the year could still have tax consequences—if you aren’t careful. This is because Section 1031 states that taxpayers must acquire the replacement property in a like-kind exchange by the earlier of:

• 180 days after the sale of the relinquished property; or,
• The due date of their return for the tax year in which the relinquished property was sold.

Since Tax Day is in mid-April, this means that if you start a like-kind exchange after mid-October, you will have less than 180 days to acquire your replacement property and close the exchange. However, if you obtain an extension for your tax return from the IRS, then you can still take advantage of the maximum 180-day window if necessary.  

With this in mind, if you have the ability to choose whether to start a 1031 exchange before the end of the year or after, the bigger question might be whether you should wait to start your exchange. In this scenario, you can assess whether you are likely to achieve greater tax benefits by initiating your exchange in 2025 or 2026. While like-kind exchanges generally result in indefinite tax deferral, if you will be receiving “boot” in the exchange, it may be worth considering whether you want to recognize this gain this year or next. With that said, while you can delay the recognition of gain on boot by delaying your 1031 exchange, you may also be able to delay recognition by making the appropriate election under the relevant provisions of the Internal Revenue Code.

Additional Timing-Related Considerations for 1031 Exchanges

Importantly, along with these tax-related considerations, there may be other timing-related considerations that you will want to factor into your decision-making as well. Some examples of other potential timing-related considerations include:

• Current market conditions for selling the property you intend to relinquish
• The availability of a desirable replacement property
• Anticipated future market conditions (for both transactions in your 1031 exchange)
• Expiration of a lease term
• The time involved in renovating a desirable replacement property

But, here too, you have options. For example, while delayed exchanges are most common (acquiring a replacement property after selling a relinquished property), conducting a reverse exchange is also an option—provided that you have access to the necessary capital. With a reverse exchange, you acquire your replacement property before selling your relinquished property.

It is also possible to combine a reverse exchange with an improvement exchange (or “build to suit” exchange), which involves using funds that would otherwise be classified as boot to make necessary improvements or renovations. There are other options as well, and an experienced 1031 exchange expert will be able to help you consider all of your options so that you can make strategic decisions about your next step.

Questions? Schedule a Free Consultation with a 1031 Exchange Expert at 1031 National Services

Do you have questions about timing-related or other considerations involved in conducting a 1031 exchange? If so, we invite you to get in touch. To discuss your options with an experienced 1031 exchange expert at 1031 National Services, give us a call at 888-872-1031 or tell us how we can help online today.