1031 Exchange Alternatives: What Are Your Options Beyond a Traditional Exchange?
A comparison of tax-deferred strategies when a traditional 1031 exchange isn't the perfect fit
A 1031 exchange is a well-established way to defer capital gains when you sell investment real estate and reinvest into other investment real estate. As beneficial as it is, it poses unique challenges for investors. It requires like-kind real estate, strict timing, and procedural compliance.
Many investors begin to reassess their strategy as their portfolios mature. A major intergenerational wealth transfer is underway, and real estate owners are increasingly focused on simplifying holdings, deferring taxes where reasonable, and planning for ownership transitions.
Key Takeaway
This article covers the main alternatives investors consider when a traditional 1031 exchange is not a perfect fit. Each option has a different structure, tax treatment, and risk profile. The goal is to provide clarity on trade-offs rather than a list of reasons one choice is "better" than another. Each investor's situation is different so there is no one-size-fits-all answer.
When to Consider Alternatives to a 1031 Exchange
A traditional 1031 exchange has two defining constraints: time, value, and asset type. You generally have 45 days to identify replacement property and 180 days to close. You must purchase a property worth at least as much as the property you sell and you must reinvest into like-kind real estate to achieve full deferral.
Alternative options like DSTs can address some of these challenges. For example:
Scenarios Where Alternatives Make Sense
Timeline Pressure
The identification and closing windows are fixed. If you are selling into a market where suitable replacements are scarce or slow to transact, the 1031 clock can force decisions you would not otherwise make.
Desire to Reduce Direct Involvement
Many investors are not trying to "quit" real estate. They are trying to reduce management burden, concentration risk, and transaction friction.
Desire to Exit Real Estate
A 1031 exchange keeps you in real estate by design. If your plan is to diversify into other asset classes, you need a different structure like a DST, perhaps one with a 721 exchange that potentially lets you take your hands off the wheel indefinitely.
Liquidity and Estate Planning Constraints
Direct ownership is illiquid and hard to divide among heirs. Some alternatives are designed to improve divisibility or provide a clearer path to liquidity.
In practice, the right choice depends on your goals (stay in real estate vs. exit), your timing, and your tolerance for complexity and structural risk.
Complete Guide to 1031 Exchange Alternatives
Delaware Statutory Trusts (DSTs)
A Delaware Statutory Trust is a passive trust that owns one or more real estate assets. Under current IRS rules, DST interests can qualify as like-kind replacement property for a 1031 exchange.[1] DSTs are therefore not an "alternative to 1031" in the tax-code sense. They are an alternative to buying and operating another whole property.
Structure
You purchase a beneficial interest in a trust that holds real estate. A sponsor arranges acquisition, financing, property management, and eventual sale. Investors are passive. Decision rights are limited by design.
Why Investors Use DSTs
The core appeal is operational. A DST can replace an actively managed property with a professionally managed, passive holding. DSTs also allow diversification by splitting exchange proceeds across multiple properties and markets rather than concentrating into a single replacement.
Timing and Mechanics
DSTs still follow 1031 requirements, including use of a qualified intermediary and the standard 45/180 deadlines. The practical difference is execution speed. Some DST offerings can close quickly, which can matter late in the identification window.[2]
Trade-offs
The main trade-offs are control and liquidity. You cannot refinance, sell, or reposition the property yourself. You are dependent on sponsor execution and market conditions at exit. DST interests are illiquid, and hold periods commonly span several years.[2] Fees also exist at multiple layers (acquisition, asset management, disposition), and they reduce net results even when a property performs as expected.
DSTs tend to fit investors who want to stay in real estate and preserve 1031 deferral, but do not want another operational asset.
721 UPREIT Exchanges
A 721 exchange (often called an UPREIT structure) is typically used as an exit path from direct ownership into a REIT operating partnership. Instead of exchanging into another property, the investor contributes property (or a DST's property) to a REIT operating partnership in exchange for operating partnership units.
How It Differs from a 1031 Exchange
A 1031 exchange keeps you in real estate you directly own (or own fractionally through a 1031-eligible structure). A 721 exchange shifts you into an interest tied to a broader REIT portfolio and management platform. Deferral continues until the operating partnership units are redeemed or converted and sold.[2]
Why Investors Use It
The emphasis is usually diversification, divisibility, and eventual liquidity. Operating partnership units can be divisible in ways that direct property is not, which can help in estate planning when multiple heirs have different preferences.[1]
Key Limitations
You give up property-level control. You also generally give up the ability to keep "exchanging" indefinitely, because operating partnership units are not the same as replacement real estate for another 1031.[2] Tax consequences depend on the structure and timing of redemptions or conversions.
This structure tends to fit investors who want to remain exposed to real estate, but want to reduce concentration and improve long-term estate and liquidity flexibility.
Opportunity Zone Investments
Opportunity Zone investing is not a 1031 exchange substitute. It is a separate regime with different requirements and benefits. You invest eligible capital gains (not necessarily only real estate gains) into a Qualified Opportunity Fund (QOF) within a defined period, and you receive tax benefits tied to deferral and long-term holding.
Core Benefits Under Current Rules
The original gain you invest is deferred until the earlier of disposition of your QOF interest or December 31, 2026.[4] If you hold the QOF investment long enough, you may also exclude post-investment appreciation from capital gains tax under the long-term election rules.[4]
What Has Changed
The earlier 10% and 15% basis step-ups depended on meeting holding thresholds before 2026. For new investors entering in 2024 or 2025, those step-ups are effectively unavailable because the time window is too short.[4]
Investment Reality and Risk
QOZ investments commonly involve development or substantial improvement requirements and are tied to designated zones, which can create project-level risk that differs from stabilized core real estate. QOF compliance requirements are strict, and failure can erode tax benefits.[4]
Opportunity Zones tend to fit investors with long horizons who can accept higher project risk and who value the specific appreciation-exclusion feature more than the flexibility of a 1031 exchange.
IMPORTANT: Two Different "DSTs" — Don't Confuse Them
Many investors confuse these two completely different strategies because they share the same acronym.
| Delaware Statutory Trust | Deferred Sales Trust | |
|---|---|---|
| Acronym | DST | DST |
| What it is | Fractional ownership in real estate | Installment sale via irrevocable trust |
| 1031 Eligible? | ✓ Yes | ✗ No |
| Tax Treatment | Full 1031 deferral | Spread gain recognition over time |
| Must Buy RE? | Yes (fractional interest) | No |
| Best For | Passive 1031 investors | Exiting real estate entirely |
Deferred Sales Trust (DST — different acronym!)
A "Deferred Sales Trust" is typically marketed as a way to defer capital gains using installment sale rules under IRC Section 453. However, it comes with serious risks and they exist in a legal gray area. The way they work is the seller transfers property to an irrevocable trust, the trust sells the property, and the seller receives a promissory note for payments over time.
Warning: Deferred Sales Trusts exist in a legal gray area and require careful due diligence.
Tax Treatment
The installment method spreads recognition of gain as payments are received. This is a deferral strategy, not an elimination strategy. Interest on the note is generally ordinary income.
Why Investors Consider It
The main appeal is flexibility. There is no 45/180-day clock. Proceeds can be invested beyond real estate. Payment schedules can be structured to match retirement income needs or other timing preferences.[5]
Structural and Diligence Issues
Deferred Sales Trusts exist in a legal gray area and have even been called an improper use of the tax system by certain states like California. Expect to be heavily scrutinized by State tax boards or the IRS. Because they exist in a legal gray area they have to be structured properly to even be considered. The trustee must be independent, and the arrangement must reflect real economic substance. There are a lot of marketing claims made about these arrangements that turn out not to be true.
Work very closely with a CPA and/or trusted attorney if considering this structure. The specific trust-based arrangements used in "Deferred Sales Trust" marketing deserve careful review by independent tax counsel.
This is typically considered when an investor is exiting real estate and values flexibility more than the procedural/tax certainty of a 1031 exchange.
Installment Sales (Seller Financing) Under IRC Section 453
The simplest Section 453 structure is a direct installment sale with seller financing. You sell the property, accept a note, and receive principal and interest over time.
Tax Treatment
Under IRS guidance, if at least one payment is received after the year of sale, gain is generally recognized proportionally as payments are received. The mechanics use a gross profit percentage to allocate principal payments between return of basis and taxable gain. Interest is taxed separately.
Benefits
This approach avoids 1031 procedural constraints. It aligns tax payments with cash received. It can create predictable income in retirement. It also works in markets where seller financing is needed to complete a transaction.
Risks
The risk is credit risk. You are relying on the buyer to perform for years. Default risk is real, and foreclosure is expensive and time-consuming. You also do not receive full deferral. Gain is recognized over time, and interest income may be taxed at higher rates than capital gains.
Installment sales fit situations where the buyer needs financing and you want an income stream, and where you are comfortable underwriting buyer risk.
Charitable Remainder Trusts (CRTs)
A Charitable Remainder Trust is an irrevocable trust designed to provide an income stream to the donor (or other non-charitable beneficiaries) for a term of years or for life, with the remainder going to charity.
How It Works
Appreciated property is transferred to the CRT and sold by the trust. Because the CRT is generally tax-exempt, the sale does not trigger immediate capital gains tax at the trust level. The donor receives distributions under the trust's payout terms and may receive an income tax charitable deduction based on the projected remainder value.
Trade-offs
CRTs are not a tax trick. They are a charitable vehicle. The remainder ultimately goes to charity, not heirs. The trust is irrevocable. You receive income, not principal. For investors with philanthropic intent, the structure can convert concentrated appreciated real estate into diversified assets inside the trust while providing an income stream.
CRTs tend to fit investors who are ready to exit real estate, have charitable goals, and are comfortable trading away principal ownership in exchange for income and charitable impact.
How to Choose the Right Alternative
The choice is usually driven by three decisions: whether you are staying in real estate, how much liquidity you need, and how much structural complexity you can tolerate.
If you want to stay in real estate and keep 1031 treatment
DSTs are often the most direct alternative to buying a property with the key benefits being the ability to go passive, access institutional real estate, and diversification. The main downside is lack of decision making power.
If you want broad real estate exposure with improved divisibility
A 721/UPREIT path may be relevant for a clearer path to liquidity and estate flexibility. The downside being a lack of ability to reposition without paying taxes because there is no 1031 after a 721.
If you want a long-horizon strategy tied to opportunity zone rules
QOZ investing can be appropriate if you are comfortable with project and compliance risk, but it is not a direct replacement for 1031. It is a great option for capital gains generated from other assets like stocks, bonds, partnerships, etc.
If charitable intent is central
A CRT can convert appreciated property into income and a charitable remainder, with the trade-off that the principal does not go to heirs.
| If Your Priority Is... | Consider... |
|---|---|
| Staying in real estate passively | DST 1031 Exchange |
| Eventual liquidity | 721 UPREIT |
| Long-term tax-free growth | Opportunity Zone |
| Exiting real estate entirely | Deferred Sales Trust or Installment Sale |
| Philanthropic goals | Charitable Remainder Trust |
Comparison Table: 1031 Exchange vs. Alternatives
| Option | Tax Deferral | Must Buy RE? | Liquidity | Complexity | Best For |
|---|---|---|---|---|---|
| Traditional 1031 | Full | Yes | Low | Medium | Active investors |
| DST 1031 | Full | Yes (fractional) | Low | Low | Passive investors |
| 721 UPREIT | Full | No (REIT units) | Medium | Medium | Estate planning |
| Opportunity Zone | Partial + Exclusion | Yes (OZ) | Low | Medium | Long-term growth |
| Deferred Sales Trust | Spread over time | No | Medium | High | Exiting RE |
| Installment Sale | Spread over time | No | Medium | Low | Seller financing |
| CRT | Charitable deduction | No | Low | High | Philanthropy |
Why Most Investors Still Choose 1031 Exchanges (With DSTs)
Traditional 1031 exchanges remain common because the rule set is established, the deferral can be full, and the strategy can be repeated. DSTs extend that framework to investors who want to reduce operational burden without exiting real estate.
Full Deferral
Not partial — 100% of gain deferred when done correctly
Stay Invested in Real Estate
Inflation hedge, tangible asset, familiar asset class
Passive Options Available
DSTs provide 1031 benefits without landlord duties
Proven IRS Guidance
Established rules, predictable outcomes
Flexibility to Exchange Again
Can continue deferring with future exchanges
Alternatives are valuable in specific circumstances. They also introduce different risks: sponsor and liquidity constraints (DSTs), platform and conversion constraints (721/UPREIT), project and compliance risk (QOZ), credit risk (installment sale), structural/audit risk (trust-based installment structures), and irrevocability with charitable remainder (CRT).
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About Thomas Wall
Thomas Wall has nearly a decade of experience in alternative investments and real estate. He has helped financial advisors at banks and wirehouses navigate a broad spectrum of equity, debt, and retirement investments at AIG which contributed to over $200MM of capital invested. From there, Thomas specialized in helping real estate investors navigate the transition from active management to passive real estate investing. He advises high-net-worth investors on 1031 exchanges, DSTs, private real estate offerings, and REITs. He has helped investors through hundreds of 1031 exchanges, placing over $230MM of equity into real estate.
Disclosure
Tax Complexity and Investment Risk
Tax laws and regulations, including but not limited to Internal Revenue Code Section 1031, bonus depreciation rules, cost segregation studies, and other tax strategies, contain complex concepts that may vary depending on individual circumstances. Tax consequences related to real estate investments, depreciation benefits, and other tax strategies discussed herein may vary significantly based on each investor's specific situation and current tax legislation. Anchor1031, LLC and Great Point Capital, LLC make no representation or warranty of any kind with respect to the tax consequences of your investment or that the IRS will not challenge any such treatment. You should consult with and rely on your own tax advisor about all tax aspects with respect to your particular circumstances. Please note that Anchor1031 and Great Point Capital, LLC do not provide tax advice.
The information contained in this article is for general educational purposes only and does not constitute legal, tax, investment, or financial advice. This content is not a recommendation or offer to buy or sell securities. The content is provided as general information and should not be relied upon as a substitute for professional consultation with qualified legal, tax, or financial advisors.
Tax laws, regulations, and IRS guidance regarding 1031 exchanges are complex and subject to change. Information herein may include forward-looking statements, hypothetical information, calculations, or financial estimates that are inherently uncertain. Past performance is never indicative of future performance. The information presented may not reflect the most current legal developments, regulatory changes, or interpretations. Individual circumstances vary significantly, and strategies that may be appropriate for one investor may not be suitable for another.
All real estate investments, including 1031 exchanges, are speculative and involve substantial risk. There can be no assurance that any investor will not suffer significant losses, and a loss of part or all of the principal value may occur. Before making any investment decisions or implementing any 1031 exchange strategies, readers should consult with their own qualified legal, tax, and financial professionals who can provide advice tailored to their specific circumstances. Prospective investors should not proceed unless they can readily bear the consequences of potential losses.
While the author is a partner at Anchor1031, the views expressed are educational in nature and do not guarantee any particular outcome or create any obligations on behalf of the firm or author. Neither Anchor1031 nor the author assumes any liability for actions taken based on the information provided herein.