The short answer
It can, in three ways. The replacement's unadjusted basis immediately after acquisition, or UBIA, carries over from the property you gave up instead of starting at the new price, which matters if your income is high enough for the 2.5% property limit to apply. The exchange itself keeps the year's taxable income lower, which can keep you under the 2026 thresholds of $403,500 joint and $201,750 for other filers, where no limit applies. And the deduction only follows the replacement if renting it is a trade or business, which a triple-net lease may not be.
At a glance
| Deduction | 20% of qualified business income, now permanent |
|---|---|
| Limits begin, 2026 | $403,500 joint and $201,750 other filers of taxable income |
| Limits fully apply, 2026 | $553,500 joint and $276,750 other filers |
| Property limit | 25% of W-2 wages plus 2.5% of UBIA, if greater than 50% of wages |
| UBIA after an exchange | Relinquished property's UBIA, less excess boot, plus cash you add |
| Gain on a sale | Capital gain is excluded from qualified business income |
| Safe harbor | 250 hours of rental services a year; triple-net leases excluded |
The property limit only matters above the 2026 income thresholds
Section 199A(b)(2) allows 20% of qualified business income, limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the UBIA of qualified property. Most landlords pay no wages, so the 2.5% figure is their only limit.
Rev. Proc. 2025-32 sets the 2026 threshold at $403,500 of taxable income on a joint return and $201,750 for other filers, with the limit fully phased in at $553,500 and $276,750. Below the threshold UBIA does not matter. The July 2025 tax act removed the provision that would have ended the deduction after 2025.
Qualified property is depreciable tangible property, so land has no UBIA. The figure is basis when placed in service, without reduction for depreciation already taken.
An exchange carries the old UBIA and placed-in-service date into the replacement
Reg. section 1.199A-2(c)(3)(ii) sets the replacement's UBIA at the UBIA of the relinquished property, decreased by excess boot or increased by money or other property you paid. Excess boot is money or other property received beyond the appreciation in the relinquished property. If you buy several replacements, the UBIA is apportioned by relative fair market value.
Paragraph (c)(2)(iii) handles dates. The part of the replacement's UBIA that does not exceed the old UBIA keeps the old property's placed-in-service date, and any excess is treated as separate property placed in service when the replacement was.
The date controls the depreciable period, which section 199A(b)(6) ends at the later of 10 years or the last full year of the recovery period. For a building that is 27.5 or 39 years, so the carried date rarely bites. For shorter-lived components it can end their UBIA sooner.
Worked example: trading a $500,000 UBIA into a $1,000,000 building
Hypothetical, round numbers, no W-2 wages, land ignored; run your own numbers with your CPA. Your building has a UBIA of $500,000 from a 2015 purchase. You exchange into a building worth $1,000,000, adding $200,000 of your own cash, with the rest covered by exchange proceeds and debt.
Under the regulation the replacement's UBIA is $500,000 plus the $200,000 paid, or $700,000. Of that, $500,000 keeps the 2015 date and $200,000 is new property placed in service in 2026. At 2.5%, the property limit is $17,500 a year.
Had you bought the same building outright for cash, its UBIA would be its $1,000,000 cost and the limit $25,000. If your taxable income is above $553,500 joint and the building nets $120,000, 20% would be $24,000, so the exchange would cost about $6,500 of deduction a year. Below $403,500 the difference is zero.
The sale year and the replacement's lease type matter as much as UBIA
Gain on the sale is not qualified business income: section 199A(c)(3)(B) excludes long-term capital gain. A fully taxable sale still raises taxable income, though, and can push you over the threshold for that year's deduction on your other rentals. Section 199A(a)(2) also caps the total at 20% of taxable income minus net capital gain, so the gain does not raise that cap.
Rental income counts only if the rental is a trade or business. Rev. Proc. 2019-38 gives a safe harbor for 250 or more hours of rental services a year, separate books and contemporaneous time records, but excludes real estate leased under a triple net lease, defined as one requiring the tenant to pay taxes, fees, insurance and maintenance.
That matters when choosing a replacement. A triple-net single-tenant building, or a Delaware Statutory Trust whose property is master leased on those terms, falls outside the safe harbor, and the deduction would depend on meeting the general trade or business standard. The safe harbor's details are in the QBI deduction for landlords.
Run the deduction both ways before choosing the replacement
For most landlords below the thresholds, the exchange does not change the deduction, and the deferred tax on the sale is far larger than any QBI difference. Above the thresholds, compare the replacement's carried UBIA against what a purchase would give you, and check whether the lease type keeps the income qualified.
The income tax on the sale itself is covered in how the gain stacks on your wages, and the replacement's basis for depreciation in depreciating replacement property after a 1031. Choosing between direct property and a DST is covered in DST vs NNN property.
Related questions
Does bonus depreciation on the replacement reduce UBIA?
No. Reg. section 1.199A-2(c)(3)(i) determines UBIA without the depreciation adjustments of section 1016(a)(2) or (3) or amounts expensed under section 179.
Does taking cash out of the exchange lower UBIA?
Only boot beyond the property's appreciation, which the regulation calls excess boot, reduces it. Boot within the appreciation leaves UBIA unchanged, though it is taxed; see what is boot in a 1031 exchange.
I own the property through an LLC taxed as a partnership. Does this still apply?
Yes. The regulation applies the same rules to relevant passthrough entities, which compute UBIA and pass it to the partners.
Do REIT dividends I receive after a 721 roll-up qualify?
Qualified REIT dividends are counted separately at 20% under section 199A(b)(1)(B) and are not subject to the wage and UBIA limit. See UPREIT from a DST.
Does the depreciation recapture on the sale count as QBI?
The statute excludes capital gain, and the 25% depreciation layer is long-term capital gain. Ordinary recapture on components is a separate question for your CPA.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.