1031 Exchange & Property Tax Savings 2025
For many UK-based investors holding rental property in the United States, rising property taxes and higher capital gains exposure have become major cost pressures in 2025. A 1031 exchange remains one of the few legal ways to defer US capital gains tax when selling an investment property. At the same time, understanding how US property tax assessments work can meaningfully improve long-term net returns, especially for remote or small-portfolio landlords.
This guide explains how the 1031 exchange works in 2025, what’s changed, common pitfalls, and practical examples for UK investors with US property holdings.
What a 1031 Exchange Is (2025 Rules)
A 1031 exchange allows an investor to sell a US investment property and reinvest the proceeds into another “like-kind” property without immediately paying federal capital gains tax. The gain is deferred, not erased, and carries over into the replacement property.
Key purposes:
- Defer capital gains tax and depreciation recapture.
- Scale into higher-value properties without losing tax efficiency.
- Consolidate or diversify a US property portfolio.
In 2025, the IRS continues to treat residential rental, multifamily, commercial, and most land assets as like-kind for exchange purposes.
How a 1031 Exchange Works (Step-by-Step)
- Sell the existing US investment property. A qualified intermediary (QI) must hold the sale proceeds. The investor cannot receive the funds.
- 45-day identification period. You must list potential replacement properties in writing and submit them to the QI within 45 days of closing the sale.
- 180-day closing window. You must complete the purchase of the chosen replacement property within 180 days of the original sale.
- Like-kind requirement. Both the relinquished and replacement properties must be held for investment or business use.
- Value and financing rule. To fully defer capital gains, the replacement property must be equal or greater in value, and any outstanding debt replaced with equal or greater debt or cash.
Costs, Limits and Key Rules (2025)
| Item |
Typical Range (USD) |
Notes for UK Investors |
| Qualified Intermediary (QI) Fee |
$800–$1,500 |
Essential; avoid low-cost providers lacking escrow protection. |
| Property Tax Rates (varies by state) |
0.3%–2.5% of assessed value |
Texas, New Jersey, Illinois among the highest. |
| Capital Gains Tax (without 1031) |
Up to 20% federal + state rates |
Deferral applies only if all rules are met. |
| Depreciation Recapture |
Up to 25% |
Deferred in a 1031 but due on final sale. |
Property Tax Savings Opportunities
Even after a successful 1031 exchange, property tax increases can erode rental margins. US states approach assessments differently, but landlords can often reduce bills through:
- Assessment appeals. Most counties allow annual appeals with evidence of lower comparable sales.
- Homestead caps (if the property eventually becomes a primary home).
- Reviewing erroneous classifications. Some counties mis-code structures or land improvements.
- Challenging rental-income-based valuations.
- Monitoring reassessment cycles. Many cities reassess yearly; some every 2–3 years.
Pros & Cons to Consider in 2025
Pros
- Defers capital gains and depreciation recapture.
- Supports scaling from small single lets into stronger rental markets.
- Allows restructuring a portfolio without immediate tax erosion.
Cons / Risks
- Strict deadlines; missing a timeline voids the deferral.
- Property taxes may rise sharply in certain US states.
- Exchange can lead to overpaying if rushed during the 45-day window.
- Depreciation recapture accumulates and becomes payable on final taxable sale.
Practical Example Scenario
Scenario: A UK-based investor owns a rental property in Orlando purchased for $240,000 in 2018. In 2025, it sells for $360,000. After depreciation, the taxable gain would normally exceed $140,000.
The investor completes a 1031 exchange and reinvests into a $430,000 multifamily unit in Tampa. The gain and depreciation recapture are deferred.
Property tax impact: The new Tampa property is reassessed at purchase price, increasing annual tax from $3,100 to around $5,500. The investor files an appeal using nearby comparable sales and reduces the assessed value by 6%, saving roughly $330 a year.
FAQ
Can a UK resident use a 1031 exchange?
Yes. Non-US residents are eligible as long as the property is US-based and IRS rules are followed.
Is the 1031 exchange available for UK property?
No. It applies only to US investment property.
What happens if the purchase price is lower than the sale price?
The difference becomes taxable “boot”, triggering partial capital gains tax.
Can holiday homes qualify?
Only if they’re held primarily for investment, not personal use, and meet IRS occupancy rules.
What if I want to eventually move into the replacement property?
Possible, but you must hold it as an investment for a qualifying period before converting to personal use.
How often can I use a 1031 exchange?
There’s no limit, but each transaction must fully meet IRS requirements.
Does a 1031 help with US estate tax?
Indirectly. At death, heirs often receive a step-up in basis, eliminating deferred gains, subject to current estate tax thresholds.
Conclusion
A 1031 exchange remains one of the strongest tools for deferring US capital gains tax in 2025, particularly for small landlords and overseas investors looking to scale or reposition their portfolios. Combining a compliant exchange with active property tax management helps protect cash flow in states where assessments are rising sharply.
Careful planning, a reputable qualified intermediary, and early identification of replacement properties are the best ways to keep costs down and ensure the tax benefits are realised.
References
- Internal Revenue Service (IRS) – Section 1031 Guidance
- Local County Property Appraiser Offices (varies by state)
- US Department of the Treasury
- State and County Property Tax Administration Websites
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