Will 1031 Exchanges and DST Tax Benefits Survive Future Tax Law Changes?

The July 2025 act is the newest evidence, and it rebuilt the neighbours of §1031 without touching §1031

Public Law 119-21, signed July 4, 2025, is the widest rewrite of individual tax law since 2017, and the exchange rules are not in it. The last amendment to §1031 remains the 2017 limitation to real property, which took hold for exchanges completed after December 31, 2017.

What the act did reach is the instructive part. Rev. Proc. 2025-32 lists the provisions Treasury had to re-index because of it: the §1(j) rate tables made permanent, the §63(c)(7) standard deduction raised, §2010(c)(3) lifted so 2026 carries a $15,000,000 basic exclusion, §179 expensing raised to $2,500,000, §199A made permanent, and §1400Z-2 rebuilt with a rolling five-year deferral for amounts invested after December 31, 2026.

So a bill that went deep into real-estate taxation — opportunity zones, expensing, the estate exclusion — left like-kind exchanges where it found them. That is one data point rather than a promise, but it is the most recent one there is.

Treasury's own words: both Greenbooks name qualified intermediaries and aim at what they call permanent deferral

The FY2017 Greenbook asked Congress to 'limit the amount of capital gain deferred under section 1031 to $1 million (indexed for inflation) per taxpayer per taxable year,' effective for exchanges completed after December 31, 2016, and scored it at $47,323 million over ten years. It would also have removed art and collectibles from the section entirely.

Its stated reasoning points at the way ordinary sellers actually exchange. Treasury wrote that three-party exchanges facilitated by qualified intermediaries 'were not contemplated when the provision was enacted,' and that swapping unimproved for improved real estate 'encourages permanent deferral by allowing taxpayers to continue the cycle of tax deferred exchanges.'

Eight years later the FY2025 Greenbook renamed the item 'Repeal deferral of gain from like-kind exchanges,' cut the allowance to $500,000 per taxpayer or $1,000,000 on a joint return, scored it at $19,678 million, and would have reached exchanges completed in taxable years starting after 2024. Neither version became law, and neither was a bill: a budget request is a document Treasury publishes, not legislation that has moved.

Two other FY2025 proposals would cost a thirty-year exchanger more than any cap on deferral

A deferral cap changes when you pay. The FY2025 proposal to require 100% recapture of depreciation as ordinary income on §1250 property changes the rate you pay, and it would reach every building and every DST interest you hold.

Under that proposal, gain would be ordinary to the extent of cumulative depreciation taken after the effective date, while depreciation claimed before it would keep today's treatment, and it would not apply to noncorporate taxpayers with adjusted gross income under $400,000. Hypothetically, $1,000,000 of post-effective-date depreciation taxed at a 37% top rate instead of today's 25% ceiling costs $120,000 more on that layer alone.

The second is the proposal to treat gifts and transfers at death as realization events, with a $5,000,000 per-donor exclusion portable to $10,000,000 for a couple, indexed after 2024, plus a 15-year fixed-rate payment plan for illiquid assets and a carve-out for the charity's share of a split-interest trust. For a plan built on holding until the basis reset, that is the proposal that would force a redesign, not the cap.

Grandfather clauses are only as good as your depreciation ledger and your Form 8824 chain

Every one of these proposals splits time at an effective date, and the recapture proposal states the split explicitly: deductions taken before the date keep current rules, deductions after it do not. That is a records requirement wearing a transition rule's clothing.

An owner who cannot show which depreciation belongs to which period would be arguing from a blank page. The same applies to basis carried through four legs of exchanges, since each leg's deferred gain rides forward on a Form 8824, and a long chain with gaps in the file is the one most exposed to any new dividing line.

• Keep every Form 8824 and settlement statement for the whole chain, not only for the property you hold now (what the file should contain).
• Keep depreciation schedules by year and by component, so a date-based rule could be applied without reconstructing a decade of returns.
• Keep the state filings that track deferred gain separately, such as California's annual Form FTB 3840 (California rules).

Pricing the risk: deferral earns a carry every year, while a rushed replacement costs its premium once

Put the two sides in dollars instead of headlines. Deferral is an interest-free loan whose annual value is the deferred tax multiplied by what that money earns for you; overpaying for a replacement to beat a proposal is a single loss you never recover.

Hypothetically, a $2,000,000 gain with roughly $500,000 of federal tax deferred earns about $25,000 a year at a 5% return. Paying 4% too much for a $2,000,000 replacement costs $80,000 on day one, a little over three years of that carry, and you still own a building you did not want.

The workable rule is that policy should change the timing of a decision you have already made on the property's merits, never the property itself. A sale already under contract with a large gain is consistent with how every proposal was drafted; starting an exchange to outrun a bill that does not exist is not, and neither is buying a trust you have not read (due diligence questions).

Sort your plan by what would have to change: an act of Congress, an IRS ruling, or neither

Most anxiety about tax policy dissolves once you separate the pieces by who can move them. The exchange itself and the basis reset at death are statutes, so only legislation touches them; the treatment of a DST beneficial interest as real estate rests on a 2004 revenue ruling, which the IRS controls without Congress (how that ruling risk works).

• Needs Congress: §1031 itself, §1014's reset at death, the 25% ceiling on unrecaptured §1250 gain, and the 3.8% rate in §1411.
• Needs only the IRS: the ruling that lets a trust interest count as like-kind real property, which is the one extra layer a DST carries over a deed.
• Needs nobody: asset quality, tenant credit, the fee load and the leverage on your replacement, which decide most of your outcome under any of these regimes.
• A 721 roll-up sits under §721 rather than §1031, so it answers to a different statute and ends further exchanges; treat it as a choice about the asset, not as legislative insurance.
• Build the plan so that no single change forces a sale, and have your CPA or attorney model how each proposal would land on your own basis and entity.