Category: 1031 Exchange General

As we start to settle into the new year, the commercial real estate (CRE) market continues to evolve in response to economic shifts, technological advancements, a new administration, and societal changes. In this blog, we look at key trends, top sectors to watch, and predictions shaping the commercial real estate outlook for 2025. 
Economic Trends Impacting Commercial Real Estate 
The CRE market is shaped by economic stability, interest rates, and inflation, key indicators that have historically been used to measure the strength of our economy. Over the past few years, the economy has faced significant challenges, with the lingering effects of the COVID-19 pandemic, disruptions in the supply chain, and historically high inflation peaking at 9.1% in 2022. These factors led to economic uncertainty, decreased business investment and consumer confidence. In response, the Federal Reserve (“the Fed”) aggressively raised interest rates to combat inflation, resulting in higher borrowing costs and reduced business and consumer spending. Now, as inflation begins to decline, cooling from its peak in 2022 down to 2.7%, the Fed has been gradually lowering interest rates, implementing a 0.25% cut in December 2024. This means that the Fed has reduced rates by a total of 1% since September 2024. Currently, the Fed’s rate sits at 4.25-4.5%, and is expected to drop further to 3.75-4% by the end of 2025. These measures aim at stabilizing the economy, encouraging investment, and supporting growth among sectors such as commercial real estate. 
Key CRE Market Influences: 

Interest Rates: Lower rates could support higher property values and transaction volume by making financing more affordable. On the other hand, prolonged high rates, such as those seen in recent years, may suppress property values and transaction volume by making financing more expensive, limiting affordability, thus reducing demand. 

Economic Growth: A stable or expanding economy will sustain demand across most CRE sectors, though a slowdown could weaken office and retail markets. 

Inflation: Sectors like multifamily and self-storage, which can adjust rents quickly, are better positioned to weather inflationary pressures. 

What does this mean for the CRE market? Lower rates could make borrowing more affordable, fueling property acquisitions and new development. Meanwhile, economic growth remains strong, the S&P 500 gained 22.5% in 2024, house prices increased 6.8%, and real disposable income rose 3.1%. This is projected to aid in driving consumer spending growth of 2-4% in 2025, supporting continued strength in the CRE market. 
Top Sectors Poised for Growth in 2025 
Office Space 
The U.S. office market is showing signs of stabilization after years of volatility. In the third quarter of 2024, the national office vacancy rate held steady at 20.1%, with some suburban markets experiencing improving capitalization rates. However, regional disparities persist. 
The hybrid work model has become a permanent fixture in the workforce, reshaping the demands for office space as companies prioritize flexibility and collaboration. Businesses are seeking amenity-rich environments that foster productivity and sustainability, driving demand for modern Class A office spaces. In contrast, older, less efficient buildings face ongoing challenges in attracting tenants. 
The return-to-office (RTO) movement is a key factor in the projected rise in office space occupancy levels in 2025. Additionally, co-working and flexible office spaces are experiencing strong demand, reflecting the ongoing evolution of the office market. 
Geographic Trends and Growth Opportunities 

Regional Market Disparities: While some cities like New York maintain a relatively low vacancy rate of 13.1%, other like San Francisco continue to struggle with elevated rates, sitting at 36.5%. 

Growing Interest in Suburban Markets: Offices in suburban areas near major cities are gaining popularity as businesses seek cost-effective and accessible alternatives. 

Looking ahead in 2025, the office sector is expected to strengthen, with continued demand for high-quality spaces in prime locations. Companies are increasingly investing in mixed-use environments with strong amenities to encourage in-person collaboration, while outdated office properties will continue to face difficulty. This presents a great opportunity for investors interested in acquiring an underperforming office property as part of a 1031 Exchange, specifically, an improvement exchange. https://www.accruit.com/blog/1031-exchanges-involving-construction-and-… Exchanges present a strategic opportunity for investors to modernize outdated office spaces by utilizing a portion of exchange funds into upgrades that could enhance efficiency and general market appeal, investors can better position their properties to meet the demands and expectations for office space in 2025. 
Industrial Real Estate 
The industrial real estate sector continues to perform strongly in 2025, driven by sustained demand for e-commerce, manufacturing, and logistics facilities. The increasing expectation for same-day delivery is prompting companies to establish distribution centers closer to urban areas, while the expansion of online grocery shopping is fueling demand for cold storage. To enhance efficiency and reduce labor costs, warehouses are integrating robotics and automation, solidifying the sector’s position as a leader in innovation. 
As the digital economy expands, the need for industrial properties, including trucking terminals, logistics centers, warehouses, storage facilities, and manufacturing plants, continues to grow. Consumers now expect rapid delivery of everything from household essentials to prepared meals, driving companies to invest in localized industrial real estate rather than relying solely on regional hubs. Investors and developers recognize that this trend will continue in 2025 and beyond. 
Market Trends and Growth Factors 

Declining Vacancy Rates: In Q3 2024, industrial vacancy rates fell to 6.7%, reversing two years of gradual vacancy increases. These rates remain well below pre-pandemic levels, which averaged around 7%, highlighting the resilience of the sector. 

E-Commerce & Logistics: Online sales accounted for 23.2% of total retail sales (excluding auto and gas) in Q3 2024 and are projected to reach 25.0% by year-end 2025, sustaining high demand for fulfillment centers, distribution hubs, and last-mile facilities. Third-party logistics (3PL) providers are expected to be the leading source of new space absorption. 

Cold Storage: The continued rise in grocery delivery and pharmaceutical logistics is increasing demand for temperature-controlled storage facilities. 

Digital Infrastructure: The rapid expansion of cloud computing, AI, 5G, and blockchain is driving historically high demand for data centers, server farms, and cell towers. Despite high construction costs and power limitations, demand is expected to outpace new development, keeping vacancy rates at record lows. 

With e-commerce growth and technological advancements continuing to reshape supply chains, industrial real estate remains a critical sector. Developers and investors focused on logistics, cold storage, and digital infrastructure will be well-positioned for long-term success. 
Multifamily Rental Property 
The multifamily rental sector is primed for continued growth in 2025 as rising home prices and mortgage rates push more individuals into the rental market. Demand remains strong across all segments, as homeownership becomes increasingly out of reach for many households. The growing popularity of Build-to-Rent (BTR) communities is further reshaping the rental landscape, offering an alternative to traditional homeownership for those seeking single-family living without the financial barriers of buying. 
Market Trends & Projections 

Vacancy & Rent Growth: The national multifamily vacancy rate is expected to rise slightly, reaching 4.9% by the end of 2025, driven by the surge in new rental supply, including the growth of Build-to-Rent communities. While this increase in available units provides renters with more options, it may drive up vacancy rates. However, strong demand, fueled by population growth and affordability challenges in the for-sale housing market, is projected to sustain annual rent growth at around 2.6%. 

Regional Growth Hotspots: Cities with strong job markets and increasing population levels will see the highest absorption rates, particularly in the Sun Belt and Mountain West regions. 

Record-High Supply: Developers are delivering more multifamily units than at any time since the 1970s, with some markets expanding their rental inventory by nearly 20% in just three years. 

Impact of Housing Affordability & Mortgage Rates 
Persistently high home prices and mortgage rates are widening the cost gap between buying and renting, ensuring sustained demand for rental housing. As of Q3 2024, newly originated mortgage payments were 35% higher than the average apartment rent, making homeownership unattainable for many. While this premium is expected to decrease slightly to 32% by the end of 2025, it will still be enough to keep many renters in the market longer. 

Long-Term Rent Growth Outlook: Over the next five years, multifamily rents are projected to grow at an average annual rate of 3.1%, exceeding the pre-pandemic average of 2.7%. This trend will slightly narrow the gap between the cost of buying and renting, but renting will remain the more affordable option in most markets. 

Regional Cost Disparities: High-cost cities like Austin and Los Angeles currently have some of the highest homeownership premiums, where buying is more than 2.5x the cost of renting. While this premium will shrink in the coming years, it will remain significantly higher than in other parts of the country. 

Fastest Declining Premium Markets: Cities like Phoenix, Salt Lake City, and Nashville are among those expected to see the largest declines in homeownership premiums over the next five years due to strong renter demand and slowing multifamily construction. 

By mid-2025, the initiation of new multifamily construction projects is expected to be 74% lower than its peak in 2021 and 30% below pre-pandemic levels, indicating a slowdown in new housing supply. As the flow of new development slows down, stronger rental demand will push vacancy rates lower and drive above-average rent growth into 2026. With economic factors keeping many households in the rental market longer, multifamily real estate will continue to be a resilient and attractive investment opportunity in the years ahead. 
Opportunities and Challenges for 1031 Exchange Investors 
For investors conducting a 1031 Exchange, these economic trends influencing the CRE market present significant opportunities and challenges. Lower interest rates and continued growth in sectors such as industrial real estate, multifamily, and office spaces offer opportunities to acquire properties with strong cash flow potential. Those seeking to defer associated taxes while reinvesting in expanding sectors are expected to benefit from favorable market conditions. 
However, with the slowing of multifamily construction and growing demand of rental property, the competition for quality rental properties may increase, potentially driving up prices. Investors aiming to utilize a 1031 Exchange may find it more challenging to identify suitable Replacement Property(ies) that meet the requirements of IRC §1031, especially as available inventory dwindles. In such cases, investors may need to explore alternative exchange structures, such as improvement or build-to-suit exchanges, which allow Exchangers to utilize exchange proceeds to the make necessary improvements or modifications in their Replacement Property(ies) to ensure that their property meets their investment needs.  
Additionally, investors may dispose of underperforming assets through a 1031 Exchange and reinvest in high-growth sectors, positioning themselves for stronger returns. With the slowing of new office space development and shifting market demands, opportunities are emerging, particularly in suburban and flex spaces.  Investors can acquire older, outdated office buildings as their Replacement Property and conduct an improvement exchange to modernize and enhance their property, making them more competitive and desirable in this evolving market. By making improvements to meet tenant preferences of amenity-rich, high-quality spaces, investors can maximize property value and attract more demand. Understanding these market dynamics will allow investors utilizing 1031 Exchanges to make informed decisions, identify emerging opportunities, and ensure they’re maximizing the benefits of their exchange. 
 
Economic trends are shaping the future of commercial real estate, creating both challenges and opportunities. As demand for high-quality spaces continues to grow, sectors like office, industrial, and multifamily real estate will thrive. Developers and investors who stay informed and adapt to shifts in the market will be well-positioned to capitalize on these evolving dynamics, ensuring long-term success in the ever-changing CRE market. 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.  
Sources
The Commercial Real Estate Outlook for 2025 | Investing | U.S. News 
U.S. Real Estate Market Outlook 2025 | CBRE 

As we start to settle into the new year, the commercial real estate (CRE) market continues to evolve in response to economic shifts, technological advancements, a new administration, and societal changes. In this blog, we look at key trends, top sectors to watch, and predictions shaping the commercial real estate outlook for 2025. 
Economic Trends Impacting Commercial Real Estate 
The CRE market is shaped by economic stability, interest rates, and inflation, key indicators that have historically been used to measure the strength of our economy. Over the past few years, the economy has faced significant challenges, with the lingering effects of the COVID-19 pandemic, disruptions in the supply chain, and historically high inflation peaking at 9.1% in 2022. These factors led to economic uncertainty, decreased business investment and consumer confidence. In response, the Federal Reserve (“the Fed”) aggressively raised interest rates to combat inflation, resulting in higher borrowing costs and reduced business and consumer spending. Now, as inflation begins to decline, cooling from its peak in 2022 down to 2.7%, the Fed has been gradually lowering interest rates, implementing a 0.25% cut in December 2024. This means that the Fed has reduced rates by a total of 1% since September 2024. Currently, the Fed’s rate sits at 4.25-4.5%, and is expected to drop further to 3.75-4% by the end of 2025. These measures aim at stabilizing the economy, encouraging investment, and supporting growth among sectors such as commercial real estate. 
Key CRE Market Influences: 

Interest Rates: Lower rates could support higher property values and transaction volume by making financing more affordable. On the other hand, prolonged high rates, such as those seen in recent years, may suppress property values and transaction volume by making financing more expensive, limiting affordability, thus reducing demand. 

Economic Growth: A stable or expanding economy will sustain demand across most CRE sectors, though a slowdown could weaken office and retail markets. 

Inflation: Sectors like multifamily and self-storage, which can adjust rents quickly, are better positioned to weather inflationary pressures. 

What does this mean for the CRE market? Lower rates could make borrowing more affordable, fueling property acquisitions and new development. Meanwhile, economic growth remains strong, the S&P 500 gained 22.5% in 2024, house prices increased 6.8%, and real disposable income rose 3.1%. This is projected to aid in driving consumer spending growth of 2-4% in 2025, supporting continued strength in the CRE market. 
Top Sectors Poised for Growth in 2025 
Office Space 
The U.S. office market is showing signs of stabilization after years of volatility. In the third quarter of 2024, the national office vacancy rate held steady at 20.1%, with some suburban markets experiencing improving capitalization rates. However, regional disparities persist. 
The hybrid work model has become a permanent fixture in the workforce, reshaping the demands for office space as companies prioritize flexibility and collaboration. Businesses are seeking amenity-rich environments that foster productivity and sustainability, driving demand for modern Class A office spaces. In contrast, older, less efficient buildings face ongoing challenges in attracting tenants. 
The return-to-office (RTO) movement is a key factor in the projected rise in office space occupancy levels in 2025. Additionally, co-working and flexible office spaces are experiencing strong demand, reflecting the ongoing evolution of the office market. 
Geographic Trends and Growth Opportunities 

Regional Market Disparities: While some cities like New York maintain a relatively low vacancy rate of 13.1%, other like San Francisco continue to struggle with elevated rates, sitting at 36.5%. 

Growing Interest in Suburban Markets: Offices in suburban areas near major cities are gaining popularity as businesses seek cost-effective and accessible alternatives. 

Looking ahead in 2025, the office sector is expected to strengthen, with continued demand for high-quality spaces in prime locations. Companies are increasingly investing in mixed-use environments with strong amenities to encourage in-person collaboration, while outdated office properties will continue to face difficulty. This presents a great opportunity for investors interested in acquiring an underperforming office property as part of a 1031 Exchange, specifically, an improvement exchange. https://www.accruit.com/blog/1031-exchanges-involving-construction-and-… Exchanges present a strategic opportunity for investors to modernize outdated office spaces by utilizing a portion of exchange funds into upgrades that could enhance efficiency and general market appeal, investors can better position their properties to meet the demands and expectations for office space in 2025. 
Industrial Real Estate 
The industrial real estate sector continues to perform strongly in 2025, driven by sustained demand for e-commerce, manufacturing, and logistics facilities. The increasing expectation for same-day delivery is prompting companies to establish distribution centers closer to urban areas, while the expansion of online grocery shopping is fueling demand for cold storage. To enhance efficiency and reduce labor costs, warehouses are integrating robotics and automation, solidifying the sector’s position as a leader in innovation. 
As the digital economy expands, the need for industrial properties, including trucking terminals, logistics centers, warehouses, storage facilities, and manufacturing plants, continues to grow. Consumers now expect rapid delivery of everything from household essentials to prepared meals, driving companies to invest in localized industrial real estate rather than relying solely on regional hubs. Investors and developers recognize that this trend will continue in 2025 and beyond. 
Market Trends and Growth Factors 

Declining Vacancy Rates: In Q3 2024, industrial vacancy rates fell to 6.7%, reversing two years of gradual vacancy increases. These rates remain well below pre-pandemic levels, which averaged around 7%, highlighting the resilience of the sector. 

E-Commerce & Logistics: Online sales accounted for 23.2% of total retail sales (excluding auto and gas) in Q3 2024 and are projected to reach 25.0% by year-end 2025, sustaining high demand for fulfillment centers, distribution hubs, and last-mile facilities. Third-party logistics (3PL) providers are expected to be the leading source of new space absorption. 

Cold Storage: The continued rise in grocery delivery and pharmaceutical logistics is increasing demand for temperature-controlled storage facilities. 

Digital Infrastructure: The rapid expansion of cloud computing, AI, 5G, and blockchain is driving historically high demand for data centers, server farms, and cell towers. Despite high construction costs and power limitations, demand is expected to outpace new development, keeping vacancy rates at record lows. 

With e-commerce growth and technological advancements continuing to reshape supply chains, industrial real estate remains a critical sector. Developers and investors focused on logistics, cold storage, and digital infrastructure will be well-positioned for long-term success. 
Multifamily Rental Property 
The multifamily rental sector is primed for continued growth in 2025 as rising home prices and mortgage rates push more individuals into the rental market. Demand remains strong across all segments, as homeownership becomes increasingly out of reach for many households. The growing popularity of Build-to-Rent (BTR) communities is further reshaping the rental landscape, offering an alternative to traditional homeownership for those seeking single-family living without the financial barriers of buying. 
Market Trends & Projections 

Vacancy & Rent Growth: The national multifamily vacancy rate is expected to rise slightly, reaching 4.9% by the end of 2025, driven by the surge in new rental supply, including the growth of Build-to-Rent communities. While this increase in available units provides renters with more options, it may drive up vacancy rates. However, strong demand, fueled by population growth and affordability challenges in the for-sale housing market, is projected to sustain annual rent growth at around 2.6%. 

Regional Growth Hotspots: Cities with strong job markets and increasing population levels will see the highest absorption rates, particularly in the Sun Belt and Mountain West regions. 

Record-High Supply: Developers are delivering more multifamily units than at any time since the 1970s, with some markets expanding their rental inventory by nearly 20% in just three years. 

Impact of Housing Affordability & Mortgage Rates 
Persistently high home prices and mortgage rates are widening the cost gap between buying and renting, ensuring sustained demand for rental housing. As of Q3 2024, newly originated mortgage payments were 35% higher than the average apartment rent, making homeownership unattainable for many. While this premium is expected to decrease slightly to 32% by the end of 2025, it will still be enough to keep many renters in the market longer. 

Long-Term Rent Growth Outlook: Over the next five years, multifamily rents are projected to grow at an average annual rate of 3.1%, exceeding the pre-pandemic average of 2.7%. This trend will slightly narrow the gap between the cost of buying and renting, but renting will remain the more affordable option in most markets. 

Regional Cost Disparities: High-cost cities like Austin and Los Angeles currently have some of the highest homeownership premiums, where buying is more than 2.5x the cost of renting. While this premium will shrink in the coming years, it will remain significantly higher than in other parts of the country. 

Fastest Declining Premium Markets: Cities like Phoenix, Salt Lake City, and Nashville are among those expected to see the largest declines in homeownership premiums over the next five years due to strong renter demand and slowing multifamily construction. 

By mid-2025, the initiation of new multifamily construction projects is expected to be 74% lower than its peak in 2021 and 30% below pre-pandemic levels, indicating a slowdown in new housing supply. As the flow of new development slows down, stronger rental demand will push vacancy rates lower and drive above-average rent growth into 2026. With economic factors keeping many households in the rental market longer, multifamily real estate will continue to be a resilient and attractive investment opportunity in the years ahead. 
Opportunities and Challenges for 1031 Exchange Investors 
For investors conducting a 1031 Exchange, these economic trends influencing the CRE market present significant opportunities and challenges. Lower interest rates and continued growth in sectors such as industrial real estate, multifamily, and office spaces offer opportunities to acquire properties with strong cash flow potential. Those seeking to defer associated taxes while reinvesting in expanding sectors are expected to benefit from favorable market conditions. 
However, with the slowing of multifamily construction and growing demand of rental property, the competition for quality rental properties may increase, potentially driving up prices. Investors aiming to utilize a 1031 Exchange may find it more challenging to identify suitable Replacement Property(ies) that meet the requirements of IRC §1031, especially as available inventory dwindles. In such cases, investors may need to explore alternative exchange structures, such as improvement or build-to-suit exchanges, which allow Exchangers to utilize exchange proceeds to the make necessary improvements or modifications in their Replacement Property(ies) to ensure that their property meets their investment needs.  
Additionally, investors may dispose of underperforming assets through a 1031 Exchange and reinvest in high-growth sectors, positioning themselves for stronger returns. With the slowing of new office space development and shifting market demands, opportunities are emerging, particularly in suburban and flex spaces.  Investors can acquire older, outdated office buildings as their Replacement Property and conduct an improvement exchange to modernize and enhance their property, making them more competitive and desirable in this evolving market. By making improvements to meet tenant preferences of amenity-rich, high-quality spaces, investors can maximize property value and attract more demand. Understanding these market dynamics will allow investors utilizing 1031 Exchanges to make informed decisions, identify emerging opportunities, and ensure they’re maximizing the benefits of their exchange. 
 
Economic trends are shaping the future of commercial real estate, creating both challenges and opportunities. As demand for high-quality spaces continues to grow, sectors like office, industrial, and multifamily real estate will thrive. Developers and investors who stay informed and adapt to shifts in the market will be well-positioned to capitalize on these evolving dynamics, ensuring long-term success in the ever-changing CRE market. 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.  
Sources
The Commercial Real Estate Outlook for 2025 | Investing | U.S. News 
U.S. Real Estate Market Outlook 2025 | CBRE 

As we start to settle into the new year, the commercial real estate (CRE) market continues to evolve in response to economic shifts, technological advancements, a new administration, and societal changes. In this blog, we look at key trends, top sectors to watch, and predictions shaping the commercial real estate outlook for 2025. 
Economic Trends Impacting Commercial Real Estate 
The CRE market is shaped by economic stability, interest rates, and inflation, key indicators that have historically been used to measure the strength of our economy. Over the past few years, the economy has faced significant challenges, with the lingering effects of the COVID-19 pandemic, disruptions in the supply chain, and historically high inflation peaking at 9.1% in 2022. These factors led to economic uncertainty, decreased business investment and consumer confidence. In response, the Federal Reserve (“the Fed”) aggressively raised interest rates to combat inflation, resulting in higher borrowing costs and reduced business and consumer spending. Now, as inflation begins to decline, cooling from its peak in 2022 down to 2.7%, the Fed has been gradually lowering interest rates, implementing a 0.25% cut in December 2024. This means that the Fed has reduced rates by a total of 1% since September 2024. Currently, the Fed’s rate sits at 4.25-4.5%, and is expected to drop further to 3.75-4% by the end of 2025. These measures aim at stabilizing the economy, encouraging investment, and supporting growth among sectors such as commercial real estate. 
Key CRE Market Influences: 

Interest Rates: Lower rates could support higher property values and transaction volume by making financing more affordable. On the other hand, prolonged high rates, such as those seen in recent years, may suppress property values and transaction volume by making financing more expensive, limiting affordability, thus reducing demand. 

Economic Growth: A stable or expanding economy will sustain demand across most CRE sectors, though a slowdown could weaken office and retail markets. 

Inflation: Sectors like multifamily and self-storage, which can adjust rents quickly, are better positioned to weather inflationary pressures. 

What does this mean for the CRE market? Lower rates could make borrowing more affordable, fueling property acquisitions and new development. Meanwhile, economic growth remains strong, the S&P 500 gained 22.5% in 2024, house prices increased 6.8%, and real disposable income rose 3.1%. This is projected to aid in driving consumer spending growth of 2-4% in 2025, supporting continued strength in the CRE market. 
Top Sectors Poised for Growth in 2025 
Office Space 
The U.S. office market is showing signs of stabilization after years of volatility. In the third quarter of 2024, the national office vacancy rate held steady at 20.1%, with some suburban markets experiencing improving capitalization rates. However, regional disparities persist. 
The hybrid work model has become a permanent fixture in the workforce, reshaping the demands for office space as companies prioritize flexibility and collaboration. Businesses are seeking amenity-rich environments that foster productivity and sustainability, driving demand for modern Class A office spaces. In contrast, older, less efficient buildings face ongoing challenges in attracting tenants. 
The return-to-office (RTO) movement is a key factor in the projected rise in office space occupancy levels in 2025. Additionally, co-working and flexible office spaces are experiencing strong demand, reflecting the ongoing evolution of the office market. 
Geographic Trends and Growth Opportunities 

Regional Market Disparities: While some cities like New York maintain a relatively low vacancy rate of 13.1%, other like San Francisco continue to struggle with elevated rates, sitting at 36.5%. 

Growing Interest in Suburban Markets: Offices in suburban areas near major cities are gaining popularity as businesses seek cost-effective and accessible alternatives. 

Looking ahead in 2025, the office sector is expected to strengthen, with continued demand for high-quality spaces in prime locations. Companies are increasingly investing in mixed-use environments with strong amenities to encourage in-person collaboration, while outdated office properties will continue to face difficulty. This presents a great opportunity for investors interested in acquiring an underperforming office property as part of a 1031 Exchange, specifically, an improvement exchange. https://www.accruit.com/blog/1031-exchanges-involving-construction-and-… Exchanges present a strategic opportunity for investors to modernize outdated office spaces by utilizing a portion of exchange funds into upgrades that could enhance efficiency and general market appeal, investors can better position their properties to meet the demands and expectations for office space in 2025. 
Industrial Real Estate 
The industrial real estate sector continues to perform strongly in 2025, driven by sustained demand for e-commerce, manufacturing, and logistics facilities. The increasing expectation for same-day delivery is prompting companies to establish distribution centers closer to urban areas, while the expansion of online grocery shopping is fueling demand for cold storage. To enhance efficiency and reduce labor costs, warehouses are integrating robotics and automation, solidifying the sector’s position as a leader in innovation. 
As the digital economy expands, the need for industrial properties, including trucking terminals, logistics centers, warehouses, storage facilities, and manufacturing plants, continues to grow. Consumers now expect rapid delivery of everything from household essentials to prepared meals, driving companies to invest in localized industrial real estate rather than relying solely on regional hubs. Investors and developers recognize that this trend will continue in 2025 and beyond. 
Market Trends and Growth Factors 

Declining Vacancy Rates: In Q3 2024, industrial vacancy rates fell to 6.7%, reversing two years of gradual vacancy increases. These rates remain well below pre-pandemic levels, which averaged around 7%, highlighting the resilience of the sector. 

E-Commerce & Logistics: Online sales accounted for 23.2% of total retail sales (excluding auto and gas) in Q3 2024 and are projected to reach 25.0% by year-end 2025, sustaining high demand for fulfillment centers, distribution hubs, and last-mile facilities. Third-party logistics (3PL) providers are expected to be the leading source of new space absorption. 

Cold Storage: The continued rise in grocery delivery and pharmaceutical logistics is increasing demand for temperature-controlled storage facilities. 

Digital Infrastructure: The rapid expansion of cloud computing, AI, 5G, and blockchain is driving historically high demand for data centers, server farms, and cell towers. Despite high construction costs and power limitations, demand is expected to outpace new development, keeping vacancy rates at record lows. 

With e-commerce growth and technological advancements continuing to reshape supply chains, industrial real estate remains a critical sector. Developers and investors focused on logistics, cold storage, and digital infrastructure will be well-positioned for long-term success. 
Multifamily Rental Property 
The multifamily rental sector is primed for continued growth in 2025 as rising home prices and mortgage rates push more individuals into the rental market. Demand remains strong across all segments, as homeownership becomes increasingly out of reach for many households. The growing popularity of Build-to-Rent (BTR) communities is further reshaping the rental landscape, offering an alternative to traditional homeownership for those seeking single-family living without the financial barriers of buying. 
Market Trends & Projections 

Vacancy & Rent Growth: The national multifamily vacancy rate is expected to rise slightly, reaching 4.9% by the end of 2025, driven by the surge in new rental supply, including the growth of Build-to-Rent communities. While this increase in available units provides renters with more options, it may drive up vacancy rates. However, strong demand, fueled by population growth and affordability challenges in the for-sale housing market, is projected to sustain annual rent growth at around 2.6%. 

Regional Growth Hotspots: Cities with strong job markets and increasing population levels will see the highest absorption rates, particularly in the Sun Belt and Mountain West regions. 

Record-High Supply: Developers are delivering more multifamily units than at any time since the 1970s, with some markets expanding their rental inventory by nearly 20% in just three years. 

Impact of Housing Affordability & Mortgage Rates 
Persistently high home prices and mortgage rates are widening the cost gap between buying and renting, ensuring sustained demand for rental housing. As of Q3 2024, newly originated mortgage payments were 35% higher than the average apartment rent, making homeownership unattainable for many. While this premium is expected to decrease slightly to 32% by the end of 2025, it will still be enough to keep many renters in the market longer. 

Long-Term Rent Growth Outlook: Over the next five years, multifamily rents are projected to grow at an average annual rate of 3.1%, exceeding the pre-pandemic average of 2.7%. This trend will slightly narrow the gap between the cost of buying and renting, but renting will remain the more affordable option in most markets. 

Regional Cost Disparities: High-cost cities like Austin and Los Angeles currently have some of the highest homeownership premiums, where buying is more than 2.5x the cost of renting. While this premium will shrink in the coming years, it will remain significantly higher than in other parts of the country. 

Fastest Declining Premium Markets: Cities like Phoenix, Salt Lake City, and Nashville are among those expected to see the largest declines in homeownership premiums over the next five years due to strong renter demand and slowing multifamily construction. 

By mid-2025, the initiation of new multifamily construction projects is expected to be 74% lower than its peak in 2021 and 30% below pre-pandemic levels, indicating a slowdown in new housing supply. As the flow of new development slows down, stronger rental demand will push vacancy rates lower and drive above-average rent growth into 2026. With economic factors keeping many households in the rental market longer, multifamily real estate will continue to be a resilient and attractive investment opportunity in the years ahead. 
Opportunities and Challenges for 1031 Exchange Investors 
For investors conducting a 1031 Exchange, these economic trends influencing the CRE market present significant opportunities and challenges. Lower interest rates and continued growth in sectors such as industrial real estate, multifamily, and office spaces offer opportunities to acquire properties with strong cash flow potential. Those seeking to defer associated taxes while reinvesting in expanding sectors are expected to benefit from favorable market conditions. 
However, with the slowing of multifamily construction and growing demand of rental property, the competition for quality rental properties may increase, potentially driving up prices. Investors aiming to utilize a 1031 Exchange may find it more challenging to identify suitable Replacement Property(ies) that meet the requirements of IRC §1031, especially as available inventory dwindles. In such cases, investors may need to explore alternative exchange structures, such as improvement or build-to-suit exchanges, which allow Exchangers to utilize exchange proceeds to the make necessary improvements or modifications in their Replacement Property(ies) to ensure that their property meets their investment needs.  
Additionally, investors may dispose of underperforming assets through a 1031 Exchange and reinvest in high-growth sectors, positioning themselves for stronger returns. With the slowing of new office space development and shifting market demands, opportunities are emerging, particularly in suburban and flex spaces.  Investors can acquire older, outdated office buildings as their Replacement Property and conduct an improvement exchange to modernize and enhance their property, making them more competitive and desirable in this evolving market. By making improvements to meet tenant preferences of amenity-rich, high-quality spaces, investors can maximize property value and attract more demand. Understanding these market dynamics will allow investors utilizing 1031 Exchanges to make informed decisions, identify emerging opportunities, and ensure they’re maximizing the benefits of their exchange. 
 
Economic trends are shaping the future of commercial real estate, creating both challenges and opportunities. As demand for high-quality spaces continues to grow, sectors like office, industrial, and multifamily real estate will thrive. Developers and investors who stay informed and adapt to shifts in the market will be well-positioned to capitalize on these evolving dynamics, ensuring long-term success in the ever-changing CRE market. 
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.  
Sources
The Commercial Real Estate Outlook for 2025 | Investing | U.S. News 
U.S. Real Estate Market Outlook 2025 | CBRE 

As Tax Day approaches, individuals and businesses are gearing up to file their tax returns. If you completed or started a 1031 Exchange in 2024, it’s important to be aware of the specific reporting requirements for your return. In this blog, we cover key tax deadlines and provide guidance on how to properly report a 1031 Exchange for the 2024 tax year. 
Reporting Deadlines for Different Entities in 2025 
The due dates for 2024 tax returns, based on the type of entity and form being filed, generally follow these timelines: 
Individuals 

Standard Filing Deadline: Most individuals living and working in the U.S. must file their 2024 tax returns (Form 1040 or 1040-SR) and pay any taxes due by April 15, 2025. 

Extended Filing Deadline and Extension: If you elect to file for an extension, you must submit it no later than April 15, 2025, which will allow you until October 15, 2025, to file your 2024 tax return. To obtain an automatic six-month extension, file Form 4868 and pay an estimated amount to avoid penalties and interest. 

Maine and Massachusetts Residents: Due to local holidays, individuals in these states must file their 2024 tax returns by April 17, 2025. 

Farmers and Ranchers 

Standard Filing Deadline: Farmers and ranchers who didn’t make an estimated tax payment by January 15, 2025, must file their 2024 tax returns (Form 1040 or 1040-SR, Schedule F) by March 3, 2025. 

Extended Filing Deadline and Extension: If an estimated tax payment was made by January 15, 2025, the filing deadline aligns with the standard tax deadline of April 15, 2025. To obtain an automatic six-month extension, file Form 4868 and pay any estimated taxes due. The extended deadline is October 15, 2025. 

Corporations 

Standard Filing Deadline: Corporations must file their 2024 calendar year income tax return (Form 1120) and pay any taxes due by April 15, 2025. 

Extended Filing Deadline: File Form 7004 and make an estimated tax payment by April 15, 2025, to receive a six-month extension and avoid penalties. The extended filing deadline is October 15, 2025. 

Partnerships and S Corporations 

Standard Filing Deadline: Partnerships and S corporations must file their 2024 tax returns (Form 1065 or Form 1120-S) and provide each partner or shareholder with their Schedule K-1 (or Schedule K-3, if applicable) by March 15, 2025. 

Extended Filing Deadline: File Form 7004 and make an estimated tax payment by March 15, 2025, to receive a six-month extension and avoid penalties. The extended filing deadline is September 15, 2025. 

Any entity reporting a 1031 Exchange conducted in the 2024 tax year must report the exchange to the IRS by filing Form 8824 with their income tax return by the applicable deadline. 
For a complete list of 2025 tax deadlines, visit the https://www.accruit.com/depreciation-calculator”>Depreciation Calculator to determine your annual allowable depreciation. 
*The calculator is for informational purposes only and provides an approximate estimate. Consult with your Tax Advisor for an accurate calculation based on your specific situation. 
Depreciation and 1031 Exchanges 
A 1031 Exchange allows you to defer taxes associated with the real estate transaction, including depreciation recapture tax and https://www.accruit.com/blog/what-net-investment-income-tax”>net investment income tax, when reinvesting proceeds into a like-kind property. The Net Investment Income Tax (NIIT) applies a 3.8% tax on certain investment income, such as capital gains, rental income, and interest. While a 1031 Exchange defers the gain, Exchangers should be aware of how the NIIT may impact their tax reporting. When reporting a 1031 Exchange: 

Include a depreciation schedule on Form 8824 if the Relinquished Property was depreciated over the time owned. Accurate depreciation reporting is critical to accurate tax calculations and proper handling of the net investment income tax.  

The depreciation schedule helps calculate depreciation recapture, which affects your tax liability. 

Since depreciation recapture rules can vary depending on the nature of the depreciable asset, consulting a tax advisor is highly recommended to ensure compliance, navigating net investment income tax implications, and maximize tax benefits. 
Reporting a 1031 Exchange 
When filing your taxes, any 1031 Exchange completed in 2024 must be reported using Form 8824, providing the IRS with a comprehensive record of your exchange.  
Documents Needed to Complete Form 8824 
Accurate and complete documentation is crucial for properly filling out Form 8824. Here is what you’ll need: 

Closing Statements: These include the final settlement documents for both the sale of the Relinquished Property and the purchase of the Replacement Property(ies). They provide key details, such as sale prices, transaction dates, and any adjustments made at closing. 

Exchange Agreement: The Qualified Intermediary (QI) will provide this document, which outlines the structure of the exchange and confirms it meets IRS requirements. 

Depreciation Schedules: If the Relinquished Property was used for business or investment purposes, the depreciation schedules must be included. These are essential for calculating depreciation recapture, which may impact your tax liability upon sale.  

Timeline Records: Maintain a detailed log of key dates, such as the date the Relinquished Property was sold, the date you identified potential Replacement Properties (within the 45-day identification period), and the date you acquired the Replacement Property(ies) (within the 180-day exchange period). Many QIs will provide this information as part of an exchange summary at the conclusion of the 1031 Exchange. 

Special Considerations for 1031 Exchanges Conducted in 2024 
1031 Exchanges That Span Two Tax Years 
When a https://www.accruit.com/blog/considerations-1031-exchange-spans-two-yea… Exchange spans two tax years, such as those initiated after July 5, 2024, the 180-day exchange period will extend into 2025. However, the entire exchange will be reported on the 2024 tax return, regardless of when the Replacement Property(ies) are acquired, provided the exchange was successful. Additionally, if any funds remain in the exchange account due to unacquired properties or failure to complete the exchange before the deadline, they cannot be returned before January 1 of the following year, potentially creating tax implications. 
To fully utilize the 180-day exchange period without being impacted by the April 15 tax deadline, Exchangers initiating exchanges after October 18, 2024, must file a tax extension using Form 4868, which provides an additional six months to report the exchange and avoid forfeiting time in the 180-day window. 
Failed 1031 Exchanges 
Understanding the distinction between a successful and failed 1031 Exchange is crucial to proper tax reporting. A successful exchange adheres to IRS rules, including identifying Replacement Property(ies) within 45 days and completing the acquisition within 180 days or the due date of the tax return for the year in which the exchange commenced, allowing for tax deferral to be reported on Form 8824. However, if an exchange fails, such as failure to identify or acquire Replacement Property(ies), as well as failure to fully utilize exchange funds, any unused funds are returned subject to the standard associated taxes including federal capital gain, depreciation recapture, state, and net investment income taxes. 
For exchanges spanning two tax years, such as one initiated in late 2024 with funds returned in 2025, the gain is generally reported in the year the funds are received, unless a special election is made to recognize the gain in the sale year under https://www.accruit.com/blog/considerations-1031-exchange-spans-two-yea… Section 453 installment sale rules. This option can provide short-term tax deferral, offering flexibility in managing tax obligations. Additionally, if the exchange results in taxable “boot” due to partial Replacement Property acquisition, installment sale rules allow taxes on the boot to be paid in the following year, rather than being paid entirely in the year of the exchange. 
State-level Tax Implications  
State-level tax implications can add additional considerations when completing a 1031 Exchange. Certain states, like https://www.accruit.com/blog/california-require-irc-section-1031-taxpay…;, have specific reporting requirements. For example, California requires Exchangers to file Form 3840 to track deferred gains within the state. This is particularly important because California does not conform to federal tax deferral rules for 1031 Exchanges. Even if the Replacement Property is located outside California, the state requires Exchangers to report the sale of the Relinquished Property and the acquisition of the Replacement Property(ies) within its jurisdiction. Additionally, California imposes tax on any capital gains from the exchange if the Replacement Property is sold outside the state without a new 1031 Exchange, and failure to comply with these reporting requirements could result in penalties. It’s crucial to review the tax laws of all relevant jurisdictions, as states may have differing rules for reporting deferred gains and other tax obligations, ensuring full compliance with all state-specific requirements. 
As always, we recommend that Exchangers work closely with their tax preparer, advisor, or CPA to ensure accurate reporting and compliance when filing their tax return for the 1031 Exchange. For a complete breakdown of tax items for the year, visit the https://www.irs.gov/”>IRS website.
  
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. 
 

As Tax Day approaches, individuals and businesses are gearing up to file their tax returns. If you completed or started a 1031 Exchange in 2024, it’s important to be aware of the specific reporting requirements for your return. In this blog, we cover key tax deadlines and provide guidance on how to properly report a 1031 Exchange for the 2024 tax year. 
Reporting Deadlines for Different Entities in 2025 
The due dates for 2024 tax returns, based on the type of entity and form being filed, generally follow these timelines: 
Individuals 

Standard Filing Deadline: Most individuals living and working in the U.S. must file their 2024 tax returns (Form 1040 or 1040-SR) and pay any taxes due by April 15, 2025. 

Extended Filing Deadline and Extension: If you elect to file for an extension, you must submit it no later than April 15, 2025, which will allow you until October 15, 2025, to file your 2024 tax return. To obtain an automatic six-month extension, file Form 4868 and pay an estimated amount to avoid penalties and interest. 

Maine and Massachusetts Residents: Due to local holidays, individuals in these states must file their 2024 tax returns by April 17, 2025. 

Farmers and Ranchers 

Standard Filing Deadline: Farmers and ranchers who didn’t make an estimated tax payment by January 15, 2025, must file their 2024 tax returns (Form 1040 or 1040-SR, Schedule F) by March 3, 2025. 

Extended Filing Deadline and Extension: If an estimated tax payment was made by January 15, 2025, the filing deadline aligns with the standard tax deadline of April 15, 2025. To obtain an automatic six-month extension, file Form 4868 and pay any estimated taxes due. The extended deadline is October 15, 2025. 

Corporations 

Standard Filing Deadline: Corporations must file their 2024 calendar year income tax return (Form 1120) and pay any taxes due by April 15, 2025. 

Extended Filing Deadline: File Form 7004 and make an estimated tax payment by April 15, 2025, to receive a six-month extension and avoid penalties. The extended filing deadline is October 15, 2025. 

Partnerships and S Corporations 

Standard Filing Deadline: Partnerships and S corporations must file their 2024 tax returns (Form 1065 or Form 1120-S) and provide each partner or shareholder with their Schedule K-1 (or Schedule K-3, if applicable) by March 15, 2025. 

Extended Filing Deadline: File Form 7004 and make an estimated tax payment by March 15, 2025, to receive a six-month extension and avoid penalties. The extended filing deadline is September 15, 2025. 

Any entity reporting a 1031 Exchange conducted in the 2024 tax year must report the exchange to the IRS by filing Form 8824 with their income tax return by the applicable deadline. 
For a complete list of 2025 tax deadlines, visit the https://www.accruit.com/depreciation-calculator”>Depreciation Calculator to determine your annual allowable depreciation. 
*The calculator is for informational purposes only and provides an approximate estimate. Consult with your Tax Advisor for an accurate calculation based on your specific situation. 
Depreciation and 1031 Exchanges 
A 1031 Exchange allows you to defer taxes associated with the real estate transaction, including depreciation recapture tax and https://www.accruit.com/blog/what-net-investment-income-tax”>net investment income tax, when reinvesting proceeds into a like-kind property. The Net Investment Income Tax (NIIT) applies a 3.8% tax on certain investment income, such as capital gains, rental income, and interest. While a 1031 Exchange defers the gain, Exchangers should be aware of how the NIIT may impact their tax reporting. When reporting a 1031 Exchange: 

Include a depreciation schedule on Form 8824 if the Relinquished Property was depreciated over the time owned. Accurate depreciation reporting is critical to accurate tax calculations and proper handling of the net investment income tax.  

The depreciation schedule helps calculate depreciation recapture, which affects your tax liability. 

Since depreciation recapture rules can vary depending on the nature of the depreciable asset, consulting a tax advisor is highly recommended to ensure compliance, navigating net investment income tax implications, and maximize tax benefits. 
Reporting a 1031 Exchange 
When filing your taxes, any 1031 Exchange completed in 2024 must be reported using Form 8824, providing the IRS with a comprehensive record of your exchange.  
Documents Needed to Complete Form 8824 
Accurate and complete documentation is crucial for properly filling out Form 8824. Here is what you’ll need: 

Closing Statements: These include the final settlement documents for both the sale of the Relinquished Property and the purchase of the Replacement Property(ies). They provide key details, such as sale prices, transaction dates, and any adjustments made at closing. 

Exchange Agreement: The Qualified Intermediary (QI) will provide this document, which outlines the structure of the exchange and confirms it meets IRS requirements. 

Depreciation Schedules: If the Relinquished Property was used for business or investment purposes, the depreciation schedules must be included. These are essential for calculating depreciation recapture, which may impact your tax liability upon sale.  

Timeline Records: Maintain a detailed log of key dates, such as the date the Relinquished Property was sold, the date you identified potential Replacement Properties (within the 45-day identification period), and the date you acquired the Replacement Property(ies) (within the 180-day exchange period). Many QIs will provide this information as part of an exchange summary at the conclusion of the 1031 Exchange. 

Special Considerations for 1031 Exchanges Conducted in 2024 
1031 Exchanges That Span Two Tax Years 
When a https://www.accruit.com/blog/considerations-1031-exchange-spans-two-yea… Exchange spans two tax years, such as those initiated after July 5, 2024, the 180-day exchange period will extend into 2025. However, the entire exchange will be reported on the 2024 tax return, regardless of when the Replacement Property(ies) are acquired, provided the exchange was successful. Additionally, if any funds remain in the exchange account due to unacquired properties or failure to complete the exchange before the deadline, they cannot be returned before January 1 of the following year, potentially creating tax implications. 
To fully utilize the 180-day exchange period without being impacted by the April 15 tax deadline, Exchangers initiating exchanges after October 18, 2024, must file a tax extension using Form 4868, which provides an additional six months to report the exchange and avoid forfeiting time in the 180-day window. 
Failed 1031 Exchanges 
Understanding the distinction between a successful and failed 1031 Exchange is crucial to proper tax reporting. A successful exchange adheres to IRS rules, including identifying Replacement Property(ies) within 45 days and completing the acquisition within 180 days or the due date of the tax return for the year in which the exchange commenced, allowing for tax deferral to be reported on Form 8824. However, if an exchange fails, such as failure to identify or acquire Replacement Property(ies), as well as failure to fully utilize exchange funds, any unused funds are returned subject to the standard associated taxes including federal capital gain, depreciation recapture, state, and net investment income taxes. 
For exchanges spanning two tax years, such as one initiated in late 2024 with funds returned in 2025, the gain is generally reported in the year the funds are received, unless a special election is made to recognize the gain in the sale year under https://www.accruit.com/blog/considerations-1031-exchange-spans-two-yea… Section 453 installment sale rules. This option can provide short-term tax deferral, offering flexibility in managing tax obligations. Additionally, if the exchange results in taxable “boot” due to partial Replacement Property acquisition, installment sale rules allow taxes on the boot to be paid in the following year, rather than being paid entirely in the year of the exchange. 
State-level Tax Implications  
State-level tax implications can add additional considerations when completing a 1031 Exchange. Certain states, like https://www.accruit.com/blog/california-require-irc-section-1031-taxpay…;, have specific reporting requirements. For example, California requires Exchangers to file Form 3840 to track deferred gains within the state. This is particularly important because California does not conform to federal tax deferral rules for 1031 Exchanges. Even if the Replacement Property is located outside California, the state requires Exchangers to report the sale of the Relinquished Property and the acquisition of the Replacement Property(ies) within its jurisdiction. Additionally, California imposes tax on any capital gains from the exchange if the Replacement Property is sold outside the state without a new 1031 Exchange, and failure to comply with these reporting requirements could result in penalties. It’s crucial to review the tax laws of all relevant jurisdictions, as states may have differing rules for reporting deferred gains and other tax obligations, ensuring full compliance with all state-specific requirements. 
As always, we recommend that Exchangers work closely with their tax preparer, advisor, or CPA to ensure accurate reporting and compliance when filing their tax return for the 1031 Exchange. For a complete breakdown of tax items for the year, visit the https://www.irs.gov/”>IRS website.
  
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. 
 

As Tax Day approaches, individuals and businesses are gearing up to file their tax returns. If you completed or started a 1031 Exchange in 2024, it’s important to be aware of the specific reporting requirements for your return. In this blog, we cover key tax deadlines and provide guidance on how to properly report a 1031 Exchange for the 2024 tax year. 
Reporting Deadlines for Different Entities in 2025 
The due dates for 2024 tax returns, based on the type of entity and form being filed, generally follow these timelines: 
Individuals 

Standard Filing Deadline: Most individuals living and working in the U.S. must file their 2024 tax returns (Form 1040 or 1040-SR) and pay any taxes due by April 15, 2025. 

Extended Filing Deadline and Extension: If you elect to file for an extension, you must submit it no later than April 15, 2025, which will allow you until October 15, 2025, to file your 2024 tax return. To obtain an automatic six-month extension, file Form 4868 and pay an estimated amount to avoid penalties and interest. 

Maine and Massachusetts Residents: Due to local holidays, individuals in these states must file their 2024 tax returns by April 17, 2025. 

Farmers and Ranchers 

Standard Filing Deadline: Farmers and ranchers who didn’t make an estimated tax payment by January 15, 2025, must file their 2024 tax returns (Form 1040 or 1040-SR, Schedule F) by March 3, 2025. 

Extended Filing Deadline and Extension: If an estimated tax payment was made by January 15, 2025, the filing deadline aligns with the standard tax deadline of April 15, 2025. To obtain an automatic six-month extension, file Form 4868 and pay any estimated taxes due. The extended deadline is October 15, 2025. 

Corporations 

Standard Filing Deadline: Corporations must file their 2024 calendar year income tax return (Form 1120) and pay any taxes due by April 15, 2025. 

Extended Filing Deadline: File Form 7004 and make an estimated tax payment by April 15, 2025, to receive a six-month extension and avoid penalties. The extended filing deadline is October 15, 2025. 

Partnerships and S Corporations 

Standard Filing Deadline: Partnerships and S corporations must file their 2024 tax returns (Form 1065 or Form 1120-S) and provide each partner or shareholder with their Schedule K-1 (or Schedule K-3, if applicable) by March 15, 2025. 

Extended Filing Deadline: File Form 7004 and make an estimated tax payment by March 15, 2025, to receive a six-month extension and avoid penalties. The extended filing deadline is September 15, 2025. 

Any entity reporting a 1031 Exchange conducted in the 2024 tax year must report the exchange to the IRS by filing Form 8824 with their income tax return by the applicable deadline. 
For a complete list of 2025 tax deadlines, visit the https://www.accruit.com/depreciation-calculator”>Depreciation Calculator to determine your annual allowable depreciation. 
*The calculator is for informational purposes only and provides an approximate estimate. Consult with your Tax Advisor for an accurate calculation based on your specific situation. 
Depreciation and 1031 Exchanges 
A 1031 Exchange allows you to defer taxes associated with the real estate transaction, including depreciation recapture tax and https://www.accruit.com/blog/what-net-investment-income-tax”>net investment income tax, when reinvesting proceeds into a like-kind property. The Net Investment Income Tax (NIIT) applies a 3.8% tax on certain investment income, such as capital gains, rental income, and interest. While a 1031 Exchange defers the gain, Exchangers should be aware of how the NIIT may impact their tax reporting. When reporting a 1031 Exchange: 

Include a depreciation schedule on Form 8824 if the Relinquished Property was depreciated over the time owned. Accurate depreciation reporting is critical to accurate tax calculations and proper handling of the net investment income tax.  

The depreciation schedule helps calculate depreciation recapture, which affects your tax liability. 

Since depreciation recapture rules can vary depending on the nature of the depreciable asset, consulting a tax advisor is highly recommended to ensure compliance, navigating net investment income tax implications, and maximize tax benefits. 
Reporting a 1031 Exchange 
When filing your taxes, any 1031 Exchange completed in 2024 must be reported using Form 8824, providing the IRS with a comprehensive record of your exchange.  
Documents Needed to Complete Form 8824 
Accurate and complete documentation is crucial for properly filling out Form 8824. Here is what you’ll need: 

Closing Statements: These include the final settlement documents for both the sale of the Relinquished Property and the purchase of the Replacement Property(ies). They provide key details, such as sale prices, transaction dates, and any adjustments made at closing. 

Exchange Agreement: The Qualified Intermediary (QI) will provide this document, which outlines the structure of the exchange and confirms it meets IRS requirements. 

Depreciation Schedules: If the Relinquished Property was used for business or investment purposes, the depreciation schedules must be included. These are essential for calculating depreciation recapture, which may impact your tax liability upon sale.  

Timeline Records: Maintain a detailed log of key dates, such as the date the Relinquished Property was sold, the date you identified potential Replacement Properties (within the 45-day identification period), and the date you acquired the Replacement Property(ies) (within the 180-day exchange period). Many QIs will provide this information as part of an exchange summary at the conclusion of the 1031 Exchange. 

Special Considerations for 1031 Exchanges Conducted in 2024 
1031 Exchanges That Span Two Tax Years 
When a https://www.accruit.com/blog/considerations-1031-exchange-spans-two-yea… Exchange spans two tax years, such as those initiated after July 5, 2024, the 180-day exchange period will extend into 2025. However, the entire exchange will be reported on the 2024 tax return, regardless of when the Replacement Property(ies) are acquired, provided the exchange was successful. Additionally, if any funds remain in the exchange account due to unacquired properties or failure to complete the exchange before the deadline, they cannot be returned before January 1 of the following year, potentially creating tax implications. 
To fully utilize the 180-day exchange period without being impacted by the April 15 tax deadline, Exchangers initiating exchanges after October 18, 2024, must file a tax extension using Form 4868, which provides an additional six months to report the exchange and avoid forfeiting time in the 180-day window. 
Failed 1031 Exchanges 
Understanding the distinction between a successful and failed 1031 Exchange is crucial to proper tax reporting. A successful exchange adheres to IRS rules, including identifying Replacement Property(ies) within 45 days and completing the acquisition within 180 days or the due date of the tax return for the year in which the exchange commenced, allowing for tax deferral to be reported on Form 8824. However, if an exchange fails, such as failure to identify or acquire Replacement Property(ies), as well as failure to fully utilize exchange funds, any unused funds are returned subject to the standard associated taxes including federal capital gain, depreciation recapture, state, and net investment income taxes. 
For exchanges spanning two tax years, such as one initiated in late 2024 with funds returned in 2025, the gain is generally reported in the year the funds are received, unless a special election is made to recognize the gain in the sale year under https://www.accruit.com/blog/considerations-1031-exchange-spans-two-yea… Section 453 installment sale rules. This option can provide short-term tax deferral, offering flexibility in managing tax obligations. Additionally, if the exchange results in taxable “boot” due to partial Replacement Property acquisition, installment sale rules allow taxes on the boot to be paid in the following year, rather than being paid entirely in the year of the exchange. 
State-level Tax Implications  
State-level tax implications can add additional considerations when completing a 1031 Exchange. Certain states, like https://www.accruit.com/blog/california-require-irc-section-1031-taxpay…;, have specific reporting requirements. For example, California requires Exchangers to file Form 3840 to track deferred gains within the state. This is particularly important because California does not conform to federal tax deferral rules for 1031 Exchanges. Even if the Replacement Property is located outside California, the state requires Exchangers to report the sale of the Relinquished Property and the acquisition of the Replacement Property(ies) within its jurisdiction. Additionally, California imposes tax on any capital gains from the exchange if the Replacement Property is sold outside the state without a new 1031 Exchange, and failure to comply with these reporting requirements could result in penalties. It’s crucial to review the tax laws of all relevant jurisdictions, as states may have differing rules for reporting deferred gains and other tax obligations, ensuring full compliance with all state-specific requirements. 
As always, we recommend that Exchangers work closely with their tax preparer, advisor, or CPA to ensure accurate reporting and compliance when filing their tax return for the 1031 Exchange. For a complete breakdown of tax items for the year, visit the https://www.irs.gov/”>IRS website.
  
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice. 
 

There is often confusion surrounding 1031 Exchanges and related parties. A common misconception about 1031 Exchanges is that transactions involving related parties are prohibited. In reality, exchanges involving related parties are allowed, but come with stricter rules and oversight to ensure compliance with the tax code. Another point of confusion is what qualifies as a “related party”. Many assume it applies only to relatives, but the definition extends beyond family to include certain business entities and fiduciary relationships. Understanding related party rules is critical for investors looking to utilize a 1031 Exchange that is compliant with the tax code.
Who is a Related Party? 
The Internal Revenue Code provides clear guidelines on who qualifies as a https://www.accruit.com/blog/1031-tax-deferred-exchanges-between-relate… party in 1031 Exchanges. Under Sections 267(b) and 707(b)(1) of the Internal Revenue Code, related parties include: 

Immediate Family Members: Siblings, spouses, ancestors (parents, grandparents), and descendants (children, grandchildren). 

Business Entities with Significant Ownership or Control: Entities where the Exchanger holds more than 50% ownership, such as corporations, partnerships, or trusts; two corporations that are members of the same controlled group; and corporations and partnerships with more than 50% direct or indirect common ownership. 

Certain Fiduciary Relationships: Ex. An Exchanger and the fiduciary of a trust. 

Affiliated Businesses: Entities that are directly or indirectly controlled by the Exchanger or their immediate family. 

This broad definition ensures that any transaction involving individuals or entities with close personal or financial ties is subject to heightened scrutiny. https://www.accruit.com/blog/video-related-party-rules-1031-exchange”>T… Related Party Rules are designed to prevent potential abuse, such as shifting tax liabilities or inflating property values in ways that undermine the intent of a 1031 Exchange. 
It’s also important to note that these relationships are closely monitored to ensure the legitimacy of the transaction. If an exchange involving related parties fails to meet the requirements, the transaction may be disqualified, and tax deferral could be denied. Understanding these parameters is essential for Exchangers considering transactions with related parties. 
The Tax Reform Act of 1984 
Before the 1980s, Exchangers could potentially conduct a 1031 Exchange with related party real estate to manipulate property values or defer taxes improperly. For instance, two related parties might exchange properties where one has experienced significant appreciation, in order to shift tax liabilities. To address this issue, Congress strengthened the statute. The Tax Reform Act of 1984 introduced critical changes to related party exchanges, implementing safeguards to ensure these transactions were legitimate and not used to evade taxes. 
Direct Related Party Exchanges 
The introduction of the two-year holding period under the Tax Reform Act of 1984 fundamentally reshaped the landscape of 1031 Exchanges involving related parties. This rule only applies to a direct swap, which occurs when both parties directly swap properties with one another simultaneously and stipulates that both parties must hold their new properties for at least two years following the transaction. If either party disposes of their exchanged property within the two-year window, the tax-deferral benefit is retroactively revoked, and the original capital gain becomes fully taxable in the year the property is transferred. Again, this rule is only true in a direct exchange between related parties and does not apply if an Exchanger sells their Relinquished Property to a related party or purchases their Replacement Property from a related party. 
Exceptions to the Two-Year Rule 
There are specific circumstances where the two-year holding period rule does not apply. One circumstance involves the death of an involved party. If one of the parties involved in the exchange passes away during the two-year period, the rule is waived. Another exception includes situations like eminent domain or natural disasters that force the disposition of a property. For example, the holding period requirement may be waived if a government agency acquires the property for public use or a disaster makes the property unusable. Lastly, the rule does not apply if the IRS determines through an audit that the transaction was not structured to avoid taxes, requiring the Exchanger to demonstrate legitimacy of their intent for the transaction. 
Relinquished Property to Related Party Considerations 
Selling Relinquished Property to a related party in a 1031 Exchange is generally more straightforward than other related party scenarios. Unlike direct exchanges, there are no specific holding period requirements if an Exchanger sells their Relinquished Property to a related party in a 1031 Exchange. As long as the sale of the Relinquished Property complies with IRC Section 1031 guidelines, such as proper use for business/investment purposes and adherence to identification and timing rules, it can proceed without any additional considerations. 
Considerations for Buying Replacement Property from a Related Party 
Buying Replacement Property from a related party, however, involves stricter requirements. In order for this transaction to qualify under 1031 Exchange rules, the related party selling the Replacement Property must also be conducting a 1031 Exchange. In this case, the Replacement Property being acquired would simultaneously serve as the related party’s Relinquished Property. If the related party is not conducting a 1031 Exchange, the transaction would be disqualified from 1031 Exchange treatment under IRS regulations.  
Why Related Party Rules Exist 
The two-year holding period and Related Party Rules from the 1984 amendment were designed to protect the integrity of the tax system. Before these changes, related party transactions in 1031 Exchanges could be misused for tax avoidance. When it applies, the holding period seeks to avoid improper basis shifting between the related parties. For example, consider two related parties: Party A and Party B. Party A owns a property with a low adjusted basis while Party B owns a property with a high basis. If Party A exchanges their property for Party B’s property, Party A transfers their low basis to Party B, avoiding substantial taxation upon sale. Party B could then sell the acquired property after the exchange, incurring minimal taxable gain due to the higher basis, which undermines the intended purpose of a 1031 Exchange.   
By addressing ambiguities surrounding these exchanges, the amendment boosts confidence in the fairness of the tax code. https://www.irs.gov/pub/irs-pdf/f8824.pdf”>IRS Form 8824 reflects the heightened scrutiny of related party exchanges and outlines steps for Exchangers to ensure compliance. Specifically, lines 7-11 require Exchangers to disclose detailed information about the related party, the nature of the relationship, and whether the Relinquished and Replacement Property(ies) were transferred to/from a related party. These disclosures help the IRS identify potential compliance issues within a related party exchange. 
Considerations for Related Party 1031 Exchanges 
For Exchangers considering a 1031 Exchange that involves a related party, here are some key considerations: 

Plan for the Two-Year Holding Period: Ensure that both you and the related party can hold the exchanged properties for at least two years where it is applicable. Disposing of property before the two-year period will trigger immediate tax consequences. 

Document the Transaction: Maintain clear records of the exchange, including appraisals, contracts, and any correspondence with the related party. This documentation will be critical if the IRS scrutinizes the transaction.  

Seek Professional Guidance: Related party transactions are complex and monitored closely by the IRS. To ensure compliance with all regulations, consult tax and legal advisors and work with a Qualified Intermediary like Accruit, who specializes in 1031 Exchanges. 

By understanding these considerations, Exchangers can confidently navigate the complexities of related party transactions while preserving the benefits of a 1031 Exchange. With careful planning, thorough documentation, and professional support, Exchangers can avoid common pitfalls and achieve a successful investment strategy.  
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.      

There is often confusion surrounding 1031 Exchanges and related parties. A common misconception about 1031 Exchanges is that transactions involving related parties are prohibited. In reality, exchanges involving related parties are allowed, but come with stricter rules and oversight to ensure compliance with the tax code. Another point of confusion is what qualifies as a “related party”. Many assume it applies only to relatives, but the definition extends beyond family to include certain business entities and fiduciary relationships. Understanding related party rules is critical for investors looking to utilize a 1031 Exchange that is compliant with the tax code.
Who is a Related Party? 
The Internal Revenue Code provides clear guidelines on who qualifies as a https://www.accruit.com/blog/1031-tax-deferred-exchanges-between-relate… party in 1031 Exchanges. Under Sections 267(b) and 707(b)(1) of the Internal Revenue Code, related parties include: 

Immediate Family Members: Siblings, spouses, ancestors (parents, grandparents), and descendants (children, grandchildren). 

Business Entities with Significant Ownership or Control: Entities where the Exchanger holds more than 50% ownership, such as corporations, partnerships, or trusts; two corporations that are members of the same controlled group; and corporations and partnerships with more than 50% direct or indirect common ownership. 

Certain Fiduciary Relationships: Ex. An Exchanger and the fiduciary of a trust. 

Affiliated Businesses: Entities that are directly or indirectly controlled by the Exchanger or their immediate family. 

This broad definition ensures that any transaction involving individuals or entities with close personal or financial ties is subject to heightened scrutiny. https://www.accruit.com/blog/video-related-party-rules-1031-exchange”>T… Related Party Rules are designed to prevent potential abuse, such as shifting tax liabilities or inflating property values in ways that undermine the intent of a 1031 Exchange. 
It’s also important to note that these relationships are closely monitored to ensure the legitimacy of the transaction. If an exchange involving related parties fails to meet the requirements, the transaction may be disqualified, and tax deferral could be denied. Understanding these parameters is essential for Exchangers considering transactions with related parties. 
The Tax Reform Act of 1984 
Before the 1980s, Exchangers could potentially conduct a 1031 Exchange with related party real estate to manipulate property values or defer taxes improperly. For instance, two related parties might exchange properties where one has experienced significant appreciation, in order to shift tax liabilities. To address this issue, Congress strengthened the statute. The Tax Reform Act of 1984 introduced critical changes to related party exchanges, implementing safeguards to ensure these transactions were legitimate and not used to evade taxes. 
Direct Related Party Exchanges 
The introduction of the two-year holding period under the Tax Reform Act of 1984 fundamentally reshaped the landscape of 1031 Exchanges involving related parties. This rule only applies to a direct swap, which occurs when both parties directly swap properties with one another simultaneously and stipulates that both parties must hold their new properties for at least two years following the transaction. If either party disposes of their exchanged property within the two-year window, the tax-deferral benefit is retroactively revoked, and the original capital gain becomes fully taxable in the year the property is transferred. Again, this rule is only true in a direct exchange between related parties and does not apply if an Exchanger sells their Relinquished Property to a related party or purchases their Replacement Property from a related party. 
Exceptions to the Two-Year Rule 
There are specific circumstances where the two-year holding period rule does not apply. One circumstance involves the death of an involved party. If one of the parties involved in the exchange passes away during the two-year period, the rule is waived. Another exception includes situations like eminent domain or natural disasters that force the disposition of a property. For example, the holding period requirement may be waived if a government agency acquires the property for public use or a disaster makes the property unusable. Lastly, the rule does not apply if the IRS determines through an audit that the transaction was not structured to avoid taxes, requiring the Exchanger to demonstrate legitimacy of their intent for the transaction. 
Relinquished Property to Related Party Considerations 
Selling Relinquished Property to a related party in a 1031 Exchange is generally more straightforward than other related party scenarios. Unlike direct exchanges, there are no specific holding period requirements if an Exchanger sells their Relinquished Property to a related party in a 1031 Exchange. As long as the sale of the Relinquished Property complies with IRC Section 1031 guidelines, such as proper use for business/investment purposes and adherence to identification and timing rules, it can proceed without any additional considerations. 
Considerations for Buying Replacement Property from a Related Party 
Buying Replacement Property from a related party, however, involves stricter requirements. In order for this transaction to qualify under 1031 Exchange rules, the related party selling the Replacement Property must also be conducting a 1031 Exchange. In this case, the Replacement Property being acquired would simultaneously serve as the related party’s Relinquished Property. If the related party is not conducting a 1031 Exchange, the transaction would be disqualified from 1031 Exchange treatment under IRS regulations.  
Why Related Party Rules Exist 
The two-year holding period and Related Party Rules from the 1984 amendment were designed to protect the integrity of the tax system. Before these changes, related party transactions in 1031 Exchanges could be misused for tax avoidance. When it applies, the holding period seeks to avoid improper basis shifting between the related parties. For example, consider two related parties: Party A and Party B. Party A owns a property with a low adjusted basis while Party B owns a property with a high basis. If Party A exchanges their property for Party B’s property, Party A transfers their low basis to Party B, avoiding substantial taxation upon sale. Party B could then sell the acquired property after the exchange, incurring minimal taxable gain due to the higher basis, which undermines the intended purpose of a 1031 Exchange.   
By addressing ambiguities surrounding these exchanges, the amendment boosts confidence in the fairness of the tax code. https://www.irs.gov/pub/irs-pdf/f8824.pdf”>IRS Form 8824 reflects the heightened scrutiny of related party exchanges and outlines steps for Exchangers to ensure compliance. Specifically, lines 7-11 require Exchangers to disclose detailed information about the related party, the nature of the relationship, and whether the Relinquished and Replacement Property(ies) were transferred to/from a related party. These disclosures help the IRS identify potential compliance issues within a related party exchange. 
Considerations for Related Party 1031 Exchanges 
For Exchangers considering a 1031 Exchange that involves a related party, here are some key considerations: 

Plan for the Two-Year Holding Period: Ensure that both you and the related party can hold the exchanged properties for at least two years where it is applicable. Disposing of property before the two-year period will trigger immediate tax consequences. 

Document the Transaction: Maintain clear records of the exchange, including appraisals, contracts, and any correspondence with the related party. This documentation will be critical if the IRS scrutinizes the transaction.  

Seek Professional Guidance: Related party transactions are complex and monitored closely by the IRS. To ensure compliance with all regulations, consult tax and legal advisors and work with a Qualified Intermediary like Accruit, who specializes in 1031 Exchanges. 

By understanding these considerations, Exchangers can confidently navigate the complexities of related party transactions while preserving the benefits of a 1031 Exchange. With careful planning, thorough documentation, and professional support, Exchangers can avoid common pitfalls and achieve a successful investment strategy.  
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.      

There is often confusion surrounding 1031 Exchanges and related parties. A common misconception about 1031 Exchanges is that transactions involving related parties are prohibited. In reality, exchanges involving related parties are allowed, but come with stricter rules and oversight to ensure compliance with the tax code. Another point of confusion is what qualifies as a “related party”. Many assume it applies only to relatives, but the definition extends beyond family to include certain business entities and fiduciary relationships. Understanding related party rules is critical for investors looking to utilize a 1031 Exchange that is compliant with the tax code.
Who is a Related Party? 
The Internal Revenue Code provides clear guidelines on who qualifies as a https://www.accruit.com/blog/1031-tax-deferred-exchanges-between-relate… party in 1031 Exchanges. Under Sections 267(b) and 707(b)(1) of the Internal Revenue Code, related parties include: 

Immediate Family Members: Siblings, spouses, ancestors (parents, grandparents), and descendants (children, grandchildren). 

Business Entities with Significant Ownership or Control: Entities where the Exchanger holds more than 50% ownership, such as corporations, partnerships, or trusts; two corporations that are members of the same controlled group; and corporations and partnerships with more than 50% direct or indirect common ownership. 

Certain Fiduciary Relationships: Ex. An Exchanger and the fiduciary of a trust. 

Affiliated Businesses: Entities that are directly or indirectly controlled by the Exchanger or their immediate family. 

This broad definition ensures that any transaction involving individuals or entities with close personal or financial ties is subject to heightened scrutiny. https://www.accruit.com/blog/video-related-party-rules-1031-exchange”>T… Related Party Rules are designed to prevent potential abuse, such as shifting tax liabilities or inflating property values in ways that undermine the intent of a 1031 Exchange. 
It’s also important to note that these relationships are closely monitored to ensure the legitimacy of the transaction. If an exchange involving related parties fails to meet the requirements, the transaction may be disqualified, and tax deferral could be denied. Understanding these parameters is essential for Exchangers considering transactions with related parties. 
The Tax Reform Act of 1984 
Before the 1980s, Exchangers could potentially conduct a 1031 Exchange with related party real estate to manipulate property values or defer taxes improperly. For instance, two related parties might exchange properties where one has experienced significant appreciation, in order to shift tax liabilities. To address this issue, Congress strengthened the statute. The Tax Reform Act of 1984 introduced critical changes to related party exchanges, implementing safeguards to ensure these transactions were legitimate and not used to evade taxes. 
Direct Related Party Exchanges 
The introduction of the two-year holding period under the Tax Reform Act of 1984 fundamentally reshaped the landscape of 1031 Exchanges involving related parties. This rule only applies to a direct swap, which occurs when both parties directly swap properties with one another simultaneously and stipulates that both parties must hold their new properties for at least two years following the transaction. If either party disposes of their exchanged property within the two-year window, the tax-deferral benefit is retroactively revoked, and the original capital gain becomes fully taxable in the year the property is transferred. Again, this rule is only true in a direct exchange between related parties and does not apply if an Exchanger sells their Relinquished Property to a related party or purchases their Replacement Property from a related party. 
Exceptions to the Two-Year Rule 
There are specific circumstances where the two-year holding period rule does not apply. One circumstance involves the death of an involved party. If one of the parties involved in the exchange passes away during the two-year period, the rule is waived. Another exception includes situations like eminent domain or natural disasters that force the disposition of a property. For example, the holding period requirement may be waived if a government agency acquires the property for public use or a disaster makes the property unusable. Lastly, the rule does not apply if the IRS determines through an audit that the transaction was not structured to avoid taxes, requiring the Exchanger to demonstrate legitimacy of their intent for the transaction. 
Relinquished Property to Related Party Considerations 
Selling Relinquished Property to a related party in a 1031 Exchange is generally more straightforward than other related party scenarios. Unlike direct exchanges, there are no specific holding period requirements if an Exchanger sells their Relinquished Property to a related party in a 1031 Exchange. As long as the sale of the Relinquished Property complies with IRC Section 1031 guidelines, such as proper use for business/investment purposes and adherence to identification and timing rules, it can proceed without any additional considerations. 
Considerations for Buying Replacement Property from a Related Party 
Buying Replacement Property from a related party, however, involves stricter requirements. In order for this transaction to qualify under 1031 Exchange rules, the related party selling the Replacement Property must also be conducting a 1031 Exchange. In this case, the Replacement Property being acquired would simultaneously serve as the related party’s Relinquished Property. If the related party is not conducting a 1031 Exchange, the transaction would be disqualified from 1031 Exchange treatment under IRS regulations.  
Why Related Party Rules Exist 
The two-year holding period and Related Party Rules from the 1984 amendment were designed to protect the integrity of the tax system. Before these changes, related party transactions in 1031 Exchanges could be misused for tax avoidance. When it applies, the holding period seeks to avoid improper basis shifting between the related parties. For example, consider two related parties: Party A and Party B. Party A owns a property with a low adjusted basis while Party B owns a property with a high basis. If Party A exchanges their property for Party B’s property, Party A transfers their low basis to Party B, avoiding substantial taxation upon sale. Party B could then sell the acquired property after the exchange, incurring minimal taxable gain due to the higher basis, which undermines the intended purpose of a 1031 Exchange.   
By addressing ambiguities surrounding these exchanges, the amendment boosts confidence in the fairness of the tax code. https://www.irs.gov/pub/irs-pdf/f8824.pdf”>IRS Form 8824 reflects the heightened scrutiny of related party exchanges and outlines steps for Exchangers to ensure compliance. Specifically, lines 7-11 require Exchangers to disclose detailed information about the related party, the nature of the relationship, and whether the Relinquished and Replacement Property(ies) were transferred to/from a related party. These disclosures help the IRS identify potential compliance issues within a related party exchange. 
Considerations for Related Party 1031 Exchanges 
For Exchangers considering a 1031 Exchange that involves a related party, here are some key considerations: 

Plan for the Two-Year Holding Period: Ensure that both you and the related party can hold the exchanged properties for at least two years where it is applicable. Disposing of property before the two-year period will trigger immediate tax consequences. 

Document the Transaction: Maintain clear records of the exchange, including appraisals, contracts, and any correspondence with the related party. This documentation will be critical if the IRS scrutinizes the transaction.  

Seek Professional Guidance: Related party transactions are complex and monitored closely by the IRS. To ensure compliance with all regulations, consult tax and legal advisors and work with a Qualified Intermediary like Accruit, who specializes in 1031 Exchanges. 

By understanding these considerations, Exchangers can confidently navigate the complexities of related party transactions while preserving the benefits of a 1031 Exchange. With careful planning, thorough documentation, and professional support, Exchangers can avoid common pitfalls and achieve a successful investment strategy.  
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.