Is a 1031 exchange worth it in 2026?

Hans Goldstein structures installment sales for sellers and works alongside their CPAs and brokers. Email hans@goldsteinco.net or call 213-414-2808.

Go deeper: 1031 exchange rules for 2026 and where the exchange falls short on Big Sale Tax.

When is a 1031 clearly worth it?

The 1031 is one of the best tools an owner has. It is clearly worth it when most of these hold:

• The gain is large relative to the price. Long hold, low basis, years of depreciation. The more of the price is gain, the more tax there is to defer.
• You want to stay in real estate. The exchange only works if you buy more of it, and you will be running that building or paying someone to.
• The debt is easy to replace. Little or no loan on the building you sell, or a replacement that earns more than its loan costs.
• You have a target. You can name the replacement within 45 days and close within 180.
• You plan to hold long term. Deferral compounds when you keep exchanging, and under current law heirs generally get a stepped-up basis (IRC §1014).

When might it not be worth it?

• Full deferral needs new debt that costs more than the cap rate. To defer everything, the replacement has to carry at least as much debt as you paid off, or you add cash. Debt relief you don't replace is boot (Treas. Reg. §1.1031(d)-2-2), Example 2). If the new loan costs more than the building earns, every borrowed dollar lowers cash flow.
• You are done being a landlord. A 1031 keeps you in the business.
• The gain is small. Less tax to defer for the same work and clock.
• The loan is young. Its steepest prepayment charge applies whether you exchange or not.
• The timeline is tight and nothing you want is for sale.

Two owners, same $3.0 million sale

Illustrative, rounded, federal only, at a flat 23.8% (20% capital gain plus 3.8% net investment income tax) for simplicity. Real returns tax depreciation at up to 25% and add state tax. Selling costs ignored. Same 6.4% cap rate on the replacement. Your CPA runs your numbers.

Owner 1: $2,400,000 x 23.8% = $571,200 of tax deferred, no loan to replace, next building bought all cash. The case the 1031 was built for.

Owner 2: $500,000 x 23.8% = $119,000 of tax deferred. To get it, Owner 2 has to carry $1.8 million of new debt. On a $3.0 million replacement at a 6.4% cap, net operating income is $3,000,000 x 6.4% = $192,000. At an illustrative 7.0% interest-only rate, interest is $1,800,000 x 7.0% = $126,000. Cash flow is $192,000 minus $126,000 = $66,000 on $1.2 million of equity: 5.5%. The same $1.2 million in a building with no loan at a 6.4% cap would earn $76,800. The loan costs about $10,800 a year of cash flow, every year, to defer $119,000 that is still owed someday unless the basis steps up at death.

One more thing about Owner 2. Because the debt ($1.8 million) is larger than the gain ($500,000), a 1031 into a building with no new loan defers nothing at all: recognized gain is the lesser of realized gain or boot, and here that is the whole $500,000 (IRC §1031(b)). For Owner 2, the 1031 is a debt decision more than a tax decision.

Owner 2 might still exchange to keep building a portfolio. The point is to weigh the trade before listing.

The 2026 scorecard

The more answers in the left column, the stronger the case for a 1031.

On the deal on my desk (rounded): a $4.0 million office building at about a 6.4% cap, bought for $885,000 in 2019, with a $2.1 million loan taken seven months before the sale. Large gain: left column. $2.1 million of debt to replace at quotes above 6.4%: right. A seven-month-old loan: right. A mixed score like that is when a partial exchange or a structured sale earns a look.

The market as of October 2026

• Rates. The Fed raised its target range to 3.75% to 4.00% at its Sept. 16, 2026 meeting (Federal Reserve FOMC statement, Sept. 16, 2026). The 10-year Treasury was 5.24% on Oct. 1, 2026 (FRED, DGS10).
• Loan pricing. As of Oct. 4, 2026, Select Commercial listed starting rates of 7.46% for retail, office and industrial 7.06% for net-lease properties and 6.40% for multifamily over $6 million.
• Cap rates. As of MSCI US Capital Trends, Feb. 2026, trailing 12-month cap rates were 6.4% for industrial, 6.9% for retail and 5.6% for apartments. Each sits below the matching starting loan rate above.
• Outlook. In CBRE's Aug. 26, 2026 brief, about 60% of survey respondents expected no change in cap rates over six months, and the share expecting compression fell from 42% to 20%.
• Demand for no-loan replacements. Delaware statutory trust equity raised reached $6.48 billion through August 2026, up 33% from the same period of 2025 (AltsWire, citing Mountain Dell Consulting).

What are the alternatives if it scores poorly?

• A partial 1031. Buy a smaller replacement with less debt and accept some boot. You keep part of the deferral and lower the debt. See the 1031 and installment sale together.
• A structured installment sale. The buyer pays in full, your old loan is paid off at closing, and the rest of the gain is reported as payments arrive under IRC §453. No replacement, no new loan, no landlord job. The loan payoff is a year-one payment and is taxed in year one. The trade-offs: payments are locked in once set and can't be accelerated or cashed out; they depend on the assignment company and the insurer behind it; there is no published IRS ruling on this specific structure, so your CPA should review it; a commission (about 4% of the amount structured, paid by the insurer) is built into the pricing; and interest is ordinary income. It must be written into the purchase agreement before closing.
• A Delaware statutory trust interest as the replacement. Passive, but illiquid, with layered fees and no control. See Delaware statutory trust vs structured sale.
• Sell and pay the tax. With a small gain, sometimes the clean answer.

For a broker, this is where listings stall: the seller likes the 1031 until the debt math shows up. Alternatives on the table keep the deal moving.

What should you do before you list?

1. Get the payoff letter and prepayment terms on your loan.
2. Have your CPA estimate the gain, the depreciation and the tax on a straight sale.
3. Ask a lender what a replacement loan would cost, and compare it with the cap rates on buildings you would buy.
4. Score yourself on the table above.
5. If you exchange, write a backup into the purchase agreement before closing. See the 1031 backup plan.

Run the 1031 and the alternatives with your own numbers in the advanced calculator, or send Hans the deal and he will lay them side by side for your CPA.

Frequently asked

Q: Is a 1031 worth it for a small gain? A: Often less so. With a high basis there is less tax to defer, while the new loan, the 45 and 180-day clocks and the landlord job stay the same. Compare the tax on a straight sale with the cost of the replacement debt.

Q: Does a 1031 make sense if I have a large loan? A: It can, but full deferral requires carrying at least as much debt on the replacement, or adding cash. If that loan costs more than the replacement's cap rate, it lowers your cash flow. See the 1031 debt replacement rule.

Q: What if I want out of real estate but still want to defer? A: A 1031 keeps you in real estate. A structured installment sale lets you sell and report the gain as payments arrive, with the trade-offs above. See selling a rental without staying a landlord.

Q: Should I wait for rates to fall? A: No one can time it. As of August 2026 most of CBRE's survey respondents expected cap rates to hold steady over six months. Decide on the numbers you have today.

What should you read or run next?

• Advanced calculator
• 1031 boot calculator
• 1031 vs structured sale when rates are high
• Can you assume a loan in a 1031?
• 1031 exchange alternatives
• Will the 1031 be eliminated in 2026?

Who wrote this?