What Florida CRE Investors Need to Know About 1031 Exchanges in 2026
A 1031 exchange — named after Section 1031 of the Internal Revenue Code — allows commercial real estate investors to defer capital gains taxes by reinvesting the proceeds from a property sale into a like-kind replacement property. In 2026, the 1031 exchange remains fully intact for real property under federal tax law, and Florida's zero state income tax makes the state one of the most tax-efficient environments in the country for executing these transactions. However, investors face a narrower window of viable replacement properties, rising due diligence demands driven by insurance and valuation shifts, and ongoing legislative uncertainty that requires active monitoring. At FlaREGS, our team has guided clients through 1031 exchanges across multiple market cycles — and the advice we give in 2026 is more nuanced than it has been in years.
How a 1031 Exchange Works: The Mechanics That Matter
The concept is straightforward. The execution is where investors either preserve wealth or create expensive problems.
When you sell an investment property and reinvest the full proceeds into another qualifying property, the IRS allows you to defer the capital gains tax that would otherwise be owed on the sale. The key word is defer — the tax liability doesn't disappear, it transfers to the replacement property's cost basis. If you eventually sell the replacement property without doing another exchange, the deferred gains come due.
The critical timelines have not changed:
- 45-day identification period. From the date of closing on your relinquished property, you have exactly 45 calendar days to formally identify up to three potential replacement properties (or more, under specific valuation rules). This deadline is absolute — no extensions, no exceptions.
- 180-day exchange period. You must close on the replacement property within 180 calendar days of selling the original property, or by the due date of your tax return for that year, whichever comes first.
- Qualified intermediary requirement. The exchange proceeds must be held by a qualified intermediary (QI). You cannot touch the funds at any point during the exchange. Constructive receipt — even briefly — disqualifies the transaction.
Lee Johnson has watched investors lose six-figure tax deferrals over a missed deadline or a poorly structured intermediary arrangement. The rules are not complicated, but they are unforgiving.
The 2026 Legislative Landscape: What Has Changed and What Hasn't
The Tax Cuts and Jobs Act Extension Debate
The Tax Cuts and Jobs Act of 2017 preserved 1031 exchanges for real property while eliminating them for personal property, artwork, and other asset classes. As provisions of that legislation have come up for renewal and modification through 2025 and into 2026, commercial real estate investors have been watching closely.
As of early 2026, 1031 exchanges for real property remain intact under federal law. Multiple proposals introduced in Congress over the past two years — including caps on deferral amounts and restrictions based on income thresholds — have not advanced. The National Association of Realtors and commercial real estate industry groups have mounted sustained advocacy efforts, citing economic studies showing that 1031 exchanges support property improvements, increase transaction velocity, and generate downstream tax revenue from the economic activity they facilitate.
That said, the legislative environment is not static. Any significant tax reform package could revisit 1031 treatment, and investors executing exchanges in 2026 should be aware that the policy landscape could shift. Our team advises clients to plan exchanges based on current law while maintaining flexibility in their overall portfolio strategy.
Bonus Depreciation Phase-Down
One related change that directly impacts 1031 exchange strategy is the continued phase-down of bonus depreciation. Under the TCJA, 100% bonus depreciation allowed investors to immediately deduct the cost of qualifying property improvements. That percentage has been stepping down — 60% in 2024, 40% in 2025, and 20% in 2026. For exchange buyers who plan significant capital improvements on replacement properties, this reduced depreciation benefit changes the after-tax math on the deal. It doesn't eliminate the value of a 1031 exchange, but it alters the optimal holding and improvement strategy on the back end.
Why Florida Is Structurally Advantaged for 1031 Exchanges
Florida's tax environment creates a compounding advantage for 1031 exchange investors that is easy to understate.
No state income tax means that when you defer federal capital gains through a 1031 exchange in Florida, you are deferring 100% of your tax exposure on the transaction. Compare this to California, where an investor executing a 1031 exchange still faces a state capital gains rate of up to 13.3% — the state does not conform to federal 1031 treatment in the same way. New York, New Jersey, and other high-tax states create similar friction. Florida investors face none of it.
Population growth continues to drive demand. Florida added over 365,000 new residents in the year ending July 2025, maintaining its position as the fastest-growing large state by net domestic migration. That growth translates directly into demand for commercial real estate — retail space serving new communities, industrial and logistics facilities supporting expanded consumer markets, medical office space for a growing and aging population, and multifamily housing across every submarket.
Secondary markets are the exchange opportunity. In Central Florida specifically, markets like DeLand, Daytona Beach, and the broader Volusia County corridor offer replacement property options at price points and cap rates that make exchange math work in ways that Miami or Tampa core deals often cannot. A 1031 buyer exiting a $2.5 million single-tenant retail asset in a primary market can find legitimate replacement opportunities in Florida's secondary corridor — properties with stronger current yields, lower insurance exposure, and genuine growth tailwinds from the I-4 and I-95 corridor expansion.
Common 1031 Exchange Mistakes Florida Investors Make
Our team sees the same errors cycle after cycle. Every one of them is avoidable.
Starting the Replacement Property Search After Closing
The 45-day identification clock starts ticking the moment you close on the sale of your relinquished property. Investors who wait until after closing to begin evaluating replacement options are already behind. In a market where quality commercial properties in Florida can go under contract within weeks of listing, 45 days is not as generous as it sounds.
The correct approach: begin identifying and evaluating potential replacement properties before you list your relinquished property. By the time the sale closes, you should have a short list of viable targets with preliminary due diligence already underway.
Ignoring Insurance in the Replacement Property Underwriting
This is Florida-specific and it costs people real money. Commercial property insurance premiums in Florida have increased substantially since 2023, and the gap between inland and coastal properties has widened further. An investor exchanging out of a well-insured inland property and into a coastal asset may find that the insurance cost differential erodes the NOI advantage they were underwriting. Our team rebuilds insurance projections on every potential replacement property before a client commits an identification.
Choosing the Wrong Qualified Intermediary
Not all QIs are created equal. The qualified intermediary holds your exchange proceeds — often seven figures — in escrow during the exchange period. There is no federal bonding or insurance requirement for QIs. Investors should verify that their intermediary carries fidelity bond coverage, errors and omissions insurance, and segregated escrow accounts. Lee Johnson has seen situations where an undercapitalized intermediary created unnecessary risk for an otherwise clean exchange.
Forcing a Bad Replacement to Meet the Deadline
The 180-day deadline creates urgency, and urgency causes bad decisions. Investors who cannot find suitable replacement properties sometimes acquire assets they would never have considered outside the exchange context — overpaying for mediocre properties just to preserve the tax deferral. In some cases, paying the capital gains tax and redeploying the after-tax proceeds into a better asset is the smarter long-term play. A 1031 exchange is a tool, not a mandate.
Strategic Considerations for 2026 Exchanges
Reverse Exchanges
In a competitive acquisition market, some investors are executing reverse exchanges — acquiring the replacement property before selling the relinquished property. Reverse exchanges are permitted under IRS Revenue Procedure 2000-37, but they are more complex and more expensive to structure. They require a parking arrangement through an exchange accommodation titleholder (EAT), and the entire transaction must be completed within 180 days. For investors who have identified a high-quality replacement property and cannot risk losing it during their sale process, a reverse exchange may be worth the added cost.
Delaware Statutory Trusts as Replacement Property
DSTs have become an increasingly common replacement option for 1031 exchange investors who want to defer taxes while moving into a passive ownership structure. A DST qualifies as like-kind replacement property under IRS Revenue Ruling 2004-86, allowing investors to exchange into fractional interests in institutional-quality properties — often assets they could not access individually. For Florida investors approaching retirement or seeking to reduce management responsibilities, DSTs offer a legitimate pathway within the 1031 framework.
Build-to-Suit Exchanges
Investors can use 1031 exchange proceeds to construct improvements on a replacement property, provided the construction is completed within the 180-day exchange period. In Florida's current market, where build-to-suit development activity is concentrated in industrial and medical office sectors, this can be a powerful strategy for investors who want to create custom assets tailored to specific tenant demand. The structure requires careful coordination with the qualified intermediary and often involves an exchange accommodation titleholder.
Working With a Team That Has Done This Before
A 1031 exchange is not a solo operation. It requires coordination between the investor, their CPA or tax advisor, a qualified intermediary, legal counsel, and ideally a commercial real estate team that understands both the transaction mechanics and the local market dynamics.
At FlaREGS, our role is the market side of that equation. We help clients identify replacement properties that make strategic sense — not just properties that technically qualify. With four decades of experience in Florida's commercial markets and deep knowledge of Central Florida's secondary corridor, our team brings a perspective that national platforms and out-of-state brokers simply cannot replicate.
If you are considering a 1031 exchange in 2026 or want to evaluate whether your current portfolio is positioned for tax-efficient growth, contact our team for a consultation.
Frequently Asked Questions
Can I do a 1031 exchange on residential rental property in Florida?
Yes. A 1031 exchange applies to property held for investment or use in a trade or business. Residential rental properties qualify as long as they are held for investment purposes — not as a primary residence or vacation home used personally for more than 14 days per year or 10% of the days it is rented. Single-family rentals, duplexes, and apartment buildings all qualify, and they can be exchanged into commercial property and vice versa, since the IRS defines "like-kind" broadly for real estate.
Are 1031 exchanges going away in 2026?
As of March 2026, there is no enacted legislation eliminating or restricting 1031 exchanges for real property. While various proposals have surfaced in Congress — including deferral caps and income-based limitations — none have passed. The commercial real estate industry continues to advocate strongly for preserving 1031 treatment. Investors should plan based on current law while staying informed about potential changes.
What happens if I can't find a replacement property within 45 days?
If you fail to formally identify a replacement property within the 45-day identification period, the exchange fails and the capital gains tax becomes due on the sale of your relinquished property. There are no extensions or hardship exceptions to this deadline. This is why experienced exchange investors begin their replacement property search well before closing on their sale — and why working with a local market team that can surface qualified properties quickly is a significant advantage.
Do I have to pay state taxes on a 1031 exchange in Florida?
No. Florida has no state income tax, which means there is no state-level capital gains tax to defer or pay. This is a meaningful structural advantage compared to states like California, New York, or New Jersey, where investors may owe state capital gains taxes even when deferring federal taxes through a 1031 exchange. For investors relocating assets into Florida from high-tax states, this creates a compounding benefit over multiple exchange cycles.