1031 Exchange Properties for Sale: Active vs. Passive Replacement Options
Why the traditional property search often fails 1031 investors - and what alternatives exist
If you are searching for "1031 exchange properties for sale" you are likely facing the same challenge most 1031 investors encounter: identifying suitable replacement property within 45 days while competing in a market that does not accommodate your deadline.
The phrase "properties for sale" suggests you expect to find a searchable inventory of property listings that you can choose from for your 1031 exchange. If only the answer were that easy and there was a list of perfect properties to choose from. Finding the right choice for your specific 1031 exchange requires you to consider a broader set of replacement property options than most investors initially consider.
Key Takeaway
This guide examines why 1031 investors often fail to find a traditional property that meets all of their needs within the 45-day window, examines what the IRS actually allows as replacement property, and how to evaluate your options based on preference for control/active-management, investment timeline, and risk tolerance.
What Investors Expect When Searching for 1031 Exchange Properties for Sale
Most investors begin their replacement property search expecting a straightforward process: sell one property, find another, complete the exchange. The reality is more complex. The IRS imposes strict timeline requirements, and finding suitable replacement property within those constraints often proves challenging.
The search phrase "1031 exchange properties for sale" reflects what investors hope to find: a curated inventory of properties specifically marketed to 1031 buyers. While some commercial real estate listings target 1031 investors, there is no central marketplace dedicated exclusively to 1031-eligible replacement properties.
The Challenge with Finding 1031 Exchange Properties for Sale
The IRS imposes strict timeline requirements on 1031 exchanges. You have 45 calendar days from the close of your relinquished property to identify potential replacement properties in writing to your Qualified Intermediary. You then have 180 days total to complete the acquisition. These deadlines include weekends and holidays. The IRS grants extensions only in cases of federally declared disasters.
Missing either deadline disqualifies your exchange and triggers immediate capital gains tax liability. In 2025, failure-to-identify rates increased from 6% to 9%, according to aggregated qualified intermediary data.1 The primary cause: inability to find suitable replacement property in tight inventory markets.
The 1031 Timeline Disadvantage
Timeline Mismatch
Most commercial real estate transactions take 60 to 120 days to close.2 You are searching for properties that can close in half that time while also completing due diligence, securing financing, and negotiating terms.
Competition Dynamics
Other buyers are not operating under a 45-day identification deadline. They can take more time for due diligence and can walk away without tax consequences. Sellers and their brokers often recognize 1031 buyers as motivated, which affects pricing and negotiation leverage.2
Financing Coordination
Arranging debt on replacement property while simultaneously searching adds complexity. The IRS requires you to equal or exceed the debt you paid off on your relinquished property to defer all capital gains.2,3
Market Conditions
1031 exchange transaction volume fell to $11.9 billion in 2024, the lowest level since 2012.4 In 2024, exchange failure rates averaged 8-10%, with tight inventory cited as a primary driver.1
Section Summary:
- • 45-Day Deadline: You must identify replacement properties within 45 calendar days
- • 180-Day Limit: Complete acquisition within 180 total days from sale
- • Rising Failure Rates: 8-10% of exchanges fail due to tight inventory
- • Negotiation Disadvantage: Sellers know 1031 buyers are under deadline pressure
What Most Investors Do Not Know About 1031 Replacement Property
The IRS defines "like-kind" broadly for real property. Nearly all real estate held for investment or business purposes qualifies. You can exchange a rental house for raw land, an apartment building for a retail center, or a commercial property for farmland. Property type does not matter. What matters is that both the relinquished property and replacement property are held for investment or business use.
What may be new information for real estate investors is that fractional interests in qualifying real estate also count as like-kind property.
Key Insight: Fractional Interests Qualify
IRS rules explicitly permit identifying less than 100% interests in a property. Your identification must state the exact percentage interest you intend to acquire. This opens access to structures where multiple investors hold undivided fractional interests in larger properties.
Delaware Statutory Trusts (DSTs) are specifically structured to meet this requirement. Under IRS Revenue Ruling 2004-86, properly structured DST interests qualify as direct ownership in real property, not as partnership interests, for purposes of Section 1031.
The IRS also permits identifying multiple replacement properties using one of three rules:
- Three-Property Rule: Identify up to three properties regardless of their combined value7,8
- 200% Rule: Identify any number of properties as long as their aggregate fair market value does not exceed 200% of your relinquished property value7,8
- 95% Rule: Identify any number of properties at any value, but you must acquire at least 95% of the total identified value7,8
Active vs. Passive 1031 Exchange Replacement Options
When evaluating replacement property options, the fundamental choice is between active ownership (direct property purchase) and passive ownership (DST investments). Each structure carries different trade-offs around control, timeline, risk concentration, and management burden.
Active Replacement (Traditional Property Purchase)
Buying replacement property directly means acquiring fee simple title (or similar ownership structure) in your name or entity. You control property selection, financing terms, management decisions, and exit timing.
This structure offers maximum control. You negotiate lease terms, approve capital improvements, select property managers, decide when to refinance, and determine when to sell or exchange again. If you have specific operational expertise or a value-add strategy, direct ownership is the only structure that allows full implementation.
The trade-offs include your 1031 exchange timeline, concentration risk, and operational burden.
Direct Ownership Trade-Offs
Timeline Risk
You must find property, complete due diligence, negotiate purchase terms, arrange financing, and close within 180 days (with identification within 45 days). Any breakdown in this sequence (seller backs out, financing falls through, title issues surface) can jeopardize your exchange. You bear the full risk of not being able to close.
Concentration
Direct ownership typically means putting all or most of your exchange proceeds into one property. Your return depends entirely on that property's performance: occupancy, rent collection, property condition, local market dynamics, and your ability to manage or oversee management effectively.
Debt Arrangement
You are responsible for securing financing that meets IRS debt replacement requirements. In the current rate environment, commercial real estate financing remains challenging. Lenders impose strict underwriting requirements. You may need to personally guarantee loans, depending on the structure and lender.
Management Responsibility
Even if you hire professional property management, you remain ultimately responsible for operations, capital allocation, tenant relations, and strategic decisions. This requires ongoing time and attention.
Direct ownership suits investors who want full control, have identified deals before listing their relinquished property, possess relevant operational expertise, and are comfortable with concentration risk in exchange for direct decision-making authority.
Passive Replacement (DST Investments)
A Delaware Statutory Trust is a legal entity that holds title to real estate. Multiple investors own fractional beneficial interests in the trust. The trust itself owns the property; investors own percentage interests in the trust that owns the property.
DST sponsors are real estate asset management firms that identify, acquire, finance, and structure properties into DSTs before offering fractional interests to accredited investors. The properties are already owned and operational before investors complete their 1031 exchanges. This inverts the traditional timeline problem.
The Seven Deadly Sins of DSTs (IRS Revenue Ruling 2004-86)
To qualify as 1031-eligible replacement property, DSTs must adhere to these restrictions:
- No additional capital contributions after the offering closes
- Cannot renegotiate or refinance existing debt (except in limited default situations)
- Cannot enter new leases or modify existing ones (except for tenant bankruptcy/insolvency)
- Must distribute all cash (less reserves) to investors on a current basis
- Can only invest reserves in short-term debt securities
- Capital improvements limited to normal maintenance and non-structural upgrades
- Cannot reinvest sales proceeds
These restrictions ensure DSTs operate as passive investment vehicles. They also create the structure's primary trade-offs.
DST Trade-Offs
Limited Control
You cannot influence property operations, sale timing, refinancing decisions, or lease negotiations. The sponsor and trustee handle all decisions. Your role is purely passive. If operational control is important to you, then DSTs likely are not your best option.
Sponsor Dependence
Investment performance depends on the sponsor's acquisition underwriting, property management capability, and exit execution. You are relying on their judgment and operational competence. Sponsor quality varies significantly. Due diligence on sponsor track record, asset management capabilities, and fee structures is essential.
Illiquidity
DSTs typically have 3- to 10-year hold periods. The sponsor controls the exit. If you need to sell your interest before the planned exit, your only option is finding another accredited investor to purchase your interest in a private secondary transaction. No liquid market exists for DST interests.
Restrictions on Improvements
The inability to make structural improvements or pursue value-add strategies means DSTs focus on stabilized, income-producing assets. Appreciation potential comes primarily from market conditions and rent growth, not from operational repositioning.
DST Advantages
Timeline Certainty
DST properties are already acquired and operational. Closing on DST interests typically takes 3-5 business days. This solves the 45-day identification and 180-day closing pressure. You can identify DST interests as backup replacement property while pursuing direct property acquisitions.
Institutional Property Access
DSTs typically hold properties valued at $30 million to $100 million: Class A apartment complexes, distribution centers, medical office buildings, investment-grade net lease retail. Individual investors rarely have capital to acquire these properties directly.
Non-Recourse Debt in Place
DST properties come with financing already arranged by the sponsor. The debt is non-recourse to investors. Each investor's pro-rata share of the DST's debt counts toward IRS debt replacement requirements.5 This eliminates the need to secure individual financing under time pressure.
Diversification Capacity
DST minimum investments typically start at $100,000. This allows spreading exchange proceeds across multiple DSTs with different property types, geographic locations, sponsors, and tenant profiles. Diversification reduces exposure to single-property concentration risk.
DSTs suit investors who prioritize passive income over operational control, face tight exchange timelines, want access to larger institutional properties, prefer diversification over concentration, and are comfortable delegating management decisions to professional sponsors.
Direct Property (Active)
- Full control over property decisions
- You select tenants, manage operations
- Timeline risk (must find and close in time)
- Concentration in single asset
- Arrange your own financing
- Ongoing management responsibility
DST Investment (Passive)
- Professional management handles operations
- Properties already acquired and operational
- Fast closing (typically 3-5 business days)
- Can diversify across multiple DSTs
- Non-recourse debt already in place
- No landlord responsibilities
Key Comparison Factors:
Control vs. Convenience: Direct ownership provides maximum control. DSTs provide maximum convenience. If you have strong opinions about property management, want to implement specific operational strategies, or value the ability to time your own exit, direct ownership is the appropriate structure.
Timeline Urgency: If you have identified suitable direct replacement property before selling your relinquished property, timeline pressure is manageable. If you are starting your property search after your relinquished property closes, the 45-day window creates significant stress. DSTs solve timeline problems but at the cost of reduced control.
Risk Concentration vs. Diversification: Direct ownership typically concentrates capital in one property. DST structures allow spreading capital across multiple properties and sponsors. Concentration increases both upside potential and downside risk. Diversification moderates both.
Financing Structure: Direct ownership requires arranging your own debt. This provides flexibility in choosing leverage levels, loan terms, and lenders but requires time, underwriting, and often personal guarantees. DST debt is pre-arranged and non-recourse, eliminating financing complexity but also eliminating financing flexibility.
Property Size and Quality: Direct ownership gives you access to properties you can afford individually. DSTs provide fractional access to much larger properties. The trade-off is full ownership of a smaller asset versus fractional ownership of a larger asset.
Some investors use a combination approach. They identify direct property options and also identify DSTs as a backup. If a direct acquisition breaks down late in the process, a DST can reduce the risk of an exchange failure.
Why Many 1031 Investors Choose DSTs Over Property Listings
Despite the appeal of direct property ownership, many 1031 exchange investors ultimately choose DST investments. The reasons reflect practical realities of executing an exchange under IRS deadlines.
Eliminates the Property Hunt Stress
No competing with other buyers, no inspection contingencies, no seller negotiation under deadline pressure.
Meets Deadlines with Certainty
DST closings typically complete in 3-5 business days. The property is already acquired and operational.
Professional Due Diligence Already Completed
Sponsors perform institutional-level underwriting before bringing properties to market.
Access to Institutional-Quality Assets
Properties that individual investors could not acquire on their own — Class A apartments, medical office, industrial distribution centers.
Solves Debt Replacement Automatically
Non-recourse financing is already in place. Your pro-rata share counts toward IRS debt requirements.
True Diversification Possible
Split exchange proceeds across multiple DSTs with different property types, markets, and sponsors.
Considering DST Properties for Your 1031 Exchange?
Let our team at Anchor1031 help you evaluate DST options that match your investment criteria, timeline requirements, and risk tolerance.
Schedule Your ConsultationHow to Decide: Buy a Property or Invest in a DST?
Start with honest assessment of your priorities:
If you are retiring from property management and want to eliminate landlord responsibilities, DSTs offer that transition. If you are actively building a portfolio and want maximum operational control, direct ownership maintains that control.
If you have limited time for property management due to career demands or other commitments, passive structures make practical sense. If real estate investment is your primary professional focus and you have relevant expertise, direct ownership allows you to apply that expertise.
If you are planning estate transfers to multiple heirs, fractional DST interests divide more easily than whole properties. If you are planning to remain actively involved in property ownership for many years, direct ownership provides more flexibility.
Consider your realistic timeline situation. If you are reading this before listing your relinquished property, you have time to identify direct replacement options before deadline pressure begins. If you are already under the 45-day clock with limited identified options, DSTs provide viable alternatives that can close quickly.
Evaluate your risk tolerance around concentration. Some investors are comfortable concentrating capital in a single well-chosen property. Others prefer spreading risk across multiple assets even if that means accepting fractional ownership and reduced control.
| If You... | Consider... |
|---|---|
| Want to stay hands-on | Direct property purchase |
| Are retiring from landlording | DST investments |
| Have a specific property identified | Direct purchase |
| Need to meet tight deadlines | DST investments |
| Want maximum control | Direct property |
| Want diversification | DST portfolio |
| Have limited time for management | DST investments |
| Are planning estate transfers | DST portfolio (easier to divide) |
The decision should be driven by careful review of risk factors and making sure the business plan is in alignment with your goals, not by estimated, projected returns. Both approaches can produce acceptable risk-adjusted returns in appropriate circumstances. What matters is which structure aligns with your operational preferences, timeline constraints, and risk tolerance.
The common error is limiting yourself to one approach without understanding both options. The IRS provides flexibility in what qualifies as replacement property. That flexibility exists to accommodate different investor situations and preferences. Understanding the full range of options allows you to make better-informed decisions under the time pressure that all 1031 exchanges create.
Next Steps for 1031 Exchange Investors
Compare Investment Options
See all 1031 exchange investment options side-by-side with detailed analysis.
Explore Alternatives
Not sure a 1031 still makes sense? Compare alternatives including UPREITs and Opportunity Zones.
Work With an Advisor
Learn what to look for in a 1031 exchange advisor.
Frequently Asked Questions
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.
Sources
- Accruit. "2025 1031 Exchange Trends: Fewer Deals, Bigger Values, and a More Selective Market." accruit.com
- APX 1031. "Common Challenges of a 1031 Exchange and How to Overcome Them." apx1031.com
- CoStar. "Deal Volume in 1031 Property Exchanges Falls to 12-Year Low." costar.com
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.