Short answer: Timing + IRS rules = Flexibility
Longer answer: The tax code lets some sellers choose which tax year to recognize certain gain if they sell in one year but receive payment in the next. That window becomes especially interesting for exchangers after November 17, 2025.
What's Happening?
If you transfer (close on) your relinquished property after November 17, 2025, your 45-day identification period will run into 2026. If you initiate a 1031 exchange but don’t identify replacement property within those 45 days, you’ll receive your sale proceeds back in 2026.
Under the installment sale rules, when you sell in one year and receive cash in the next, you may be able to elect which year to recognize the cash portion of your gain.
Important caveat: Any gain tied to mortgage relief (“boot”) is still taxable in 2025.
Quick Example:
Let’s say you attempt a 1031 exchange, selling your investment property for $500,000 on November 20, 2025. You transfer that money to the QI, but you don’t identify any replacement property within your 45-day window, which takes you to January 4, 2026.
Since the exchange wasn’t completed, your sale proceeds are released to you in 2026.
Let’s break this down a little bit more. Say, for example, this is what you’re working with:
- Sale price: $500,000
- Gain: $250,000 (gross profit ≈50%)
- Outstanding mortgage: $150,000
- Net cash proceeds: $350,000
Under the installment sale rules, you may be able to choose which year to report the cash portion of your gain (either in 2025 or 2026). That means the gain associated with the $350,000 you receive in 2026 could be taxable in either year, depending on what’s most advantageous for you.
However, the gain associated with the $150,000 in mortgage relief (the amount of debt paid off at closing) is still taxable in 2025, since that benefit was received in the same year you sold the property.
So, in this example:
- $150,000 (mortgage relief) = taxed in 2025, with approximately $75,000 of that representing taxable gain (based on a 50% gross profit).
- $350,000 (cash proceeds) = recognized in 2025 or 2026, with approximately $175,000 of that representing taxable gain (based on a 50% gross profit).
This quirk in timing gives sellers a bit of flexibility but only if their sale happens after November 17, when the 45-day identification window stretches into the next calendar year.
Who Should Care?
This impacts investors selling near year-end who want potential timing flexibility on the cash portion of gain. This is also an important thing to keep in mind for brokers/CPAs/attorneys advising clients on year-end sales and exchanges.
Keep in mind, this is not a loophole to create new tax deferral, your 1031 exchange either succeeds or it doesn’t. In the case that your 1031 exchange does not succeed and you’re post-November 17, the installment election may give you a choice on when to recognize the cash portion. But remember, the debt relief (e.g. paying off a loan at sale) is still taxed in 2025.
What to Do Next?
- If you’re selling after November 17, 2025, talk with your tax advisor about the installment election.
- Coordinate with the Qualified Intermediary experts at Banker Exchange and plan your ID timeline.
- Understand your debt payoff to avoid surprises.