Best 1031 Exchange Investment Options for Passive Real Estate Investors (2026)
A comprehensive comparison of replacement property options for investors seeking passive income and tax deferral
Selling property is straightforward. The challenge is where to redeploy the capital. A 1031 exchange requires replacing equal or greater debt, maintaining equal or greater equity, and closing within 180 days of sale. Most investors focus on finding replacement property that checks the IRS boxes. Fewer focus on whether that property solves the problems that caused them to sell in the first place.
Key Takeaway
For most passive investors, Delaware Statutory Trusts (DSTs) offer the strongest combination of tax deferral, income stability, and management simplicity. They eliminate landlord responsibilities, provide access to institutional-quality real estate, include pre-arranged non-recourse financing, and can close within days to meet IRS deadlines. However, they trade control for convenience — the right choice depends on your priorities.
The market has shifted. Through Q3 2025, 1031 volume dropped 4.4% year-over-year, but total sales value rose 19.9% (Accruit Technologies, 2025). Investors are doing fewer exchanges but concentrating on larger, higher-quality assets. Rising rates in 2024 forced selectivity.
This article examines replacement property options for passive real estate investors. It covers direct ownership, DSTs, TICs, and 721 UPREITs. Each has different risk profiles, management requirements, execution timelines, and structural limitations. The focus is on how these investments work, where they break, and what trade-offs they impose.
What Makes a "Good" 1031 Exchange Investment?
Most investors start with property type, location, and yield. Those matter. But structure matters more.
A replacement property needs to satisfy IRS requirements, replace debt and equity, fit the exchange timeline, and solve the reason you sold. If you sold due to tenant concentration, buying another single-tenant property just moves the problem. If you sold to reduce management, buying another active property defeats the purpose.
The evaluation framework should address four factors: income stability, risk concentration, management burden, and debt/timeline fit.
Income Stability
Most 1031 exchanges are driven by income replacement. The question is predictability.
Direct ownership produces variable income. Vacancies, rollovers, defaults, and capital expenses create volatility. NNN properties reduce some of this but introduce tenant concentration risk.
A single-tenant NNN has one lease, one income stream, one credit profile. When the tenant performs, income looks stable. When the tenant struggles, income can drop to zero. The property itself has no diversification. Multifamily and institutional portfolios spread risk across tenants, leases, and units. NNN properties concentrate it.
We've worked with investors who exchanged into single-tenant retail NNN properties in 2019. National tenant. Twenty-year lease. Triple-net structure. Everything looked stable. Then COVID hit. The tenant declared bankruptcy. Rent stopped. The investor faced a choice: pour capital into a vacant building to attract a new tenant or sell at a significant loss. The property that promised passive income became an active problem.
TICs improve scale but still depend on one or two properties. Many TIC structures include value-add business plans or refinancing provisions. These introduce execution risk, particularly when debt matures in tight credit markets. DSTs typically focus on stabilized properties with professional management and defined distributions. The structure removes investor control but also removes execution risk. Growth in DST adoption reflects investor preference for cash flow over repositioning strategies.
Risk Concentration
There will always be unpredictable risks in the world of real estate. Overconcentration is what usually leads to catastrophe.
Capital migration in 2025 demonstrates this. Sophisticated investors know this and are moving out of high-tax, high-regulation markets (which they perceive as higher risk) into states with positive demographic trends like the Sunbelt. They are moving out of office in favor of multifamily, industrial, and retail. These shifts are the result of the ripple effects of investor's drive to avoid concentration risk in their portfolios.
A single replacement property concentrates capital in one market, one asset, one tenant base. A market correction, tenant default, or sector decline affects 100% of the investment.
One of our investors sold a San Francisco apartment building in 2021 and exchanged into another apartment building in the same market. The concentration was intentional because he knew the area, understood the fundamentals, wanted to stay local. Within 18 months, property values dropped 15-20% as tech layoffs accelerated, rent control tightened, and operating costs increased. He had strong cash flow but significant unrealized losses. His entire investment was exposed to one market correction.
DSTs allow allocation across multiple properties, asset types, geographies, and sponsors. For example, a $1 million exchange can be split across five DSTs in different markets with different property types. It is important to note that this type of diversification reduces your risk, it does not eliminate it.
Management Requirements
"Passive" can mean different things to different people. For some, it means reduced day-to-day management. For others it means zero management.
Direct ownership requires active involvement. Even NNN leases require oversight including lease renewals, capital planning, financing negotiations, and disposition decisions all require investor action. Tenant calls, property issues, and operational questions flow to the owner.
We had an investor in his late 60s who completed a 1031 into a small office building. He chose direct ownership because he wanted control and believed he could handle the limited management a professional building required. Within the first year, he dealt with HVAC system failure ($45,000), two tenant disputes over common area maintenance charges, a lease renewal negotiation that required legal counsel, and a financing extension when his loan came due during tight credit markets. He told us later: "I retired to get away from this. Now I'm managing a building instead of enjoying retirement."
DSTs are passive by design. The trust structure prohibits investor involvement in management decisions. Sponsors handle operations, reporting, financing, and the eventual sale. Investors receive distributions and tax documents. That's the extent of their involvement. Many investors pursue 1031 exchanges specifically to exit property management. DSTs accomplish this. Direct ownership, even of a net-lease property, does not.
Debt and Timeline Fit
Complete 1031 tax deferral requires replacing equal or greater debt. This becomes problematic when credit markets tighten. Traditional property acquisition requires new financing approvals, personal guarantees, and underwriting that may not complete within 180 days.
DSTs include pre-arranged, non-recourse debt. The financing is in place before the offering comes to market. It's sized to accommodate various equity contributions. No personal guarantee is required.
IRS deadlines are absolute. Investors have 45 days to identify and 180 days to close. In 2024, identification failures rose from 6% to 9% due to limited property supply (Accruit Technologies, 2025). DSTs can close within days of allocation. This execution certainty matters when operating under hard deadlines.
An investor came to us on day 38 of his identification period. He had been working with a broker to find a replacement property. Three deals had fallen through: two due to financing issues and one because the seller backed out. He had $1.8 million in proceeds and no identified properties. We showed him a portfolio of DSTs that could be allocated and closed within the remaining timeline. He identified five DSTs on day 43. All five closed within the 180-day window. Without DST options, he would have faced a failed exchange and a significant tax bill.
Overview of 1031 Exchange Investment Options
Four structures dominate 1031 exchanges: direct ownership, DSTs, TICs, and 721 UPREITs. Each has specific use cases, structural limitations, and risk profiles.
Direct Replacement Properties (Traditional)
The traditional approach: sell one property and buy another. You retain complete control. You select the property, negotiate terms, manage operations, decide when to sell. The ownership structure is familiar. All potential upside and risk goes to you.
The trade-offs are: active management, concentration risk, financing uncertainty, timeline pressure, and execution risk.
Direct ownership works for investors who want control, have property management experience, and can source a deal within 45 days and close within 180 days.
Delaware Statutory Trusts (DSTs)
DSTs provide fractional ownership in institutional real estate through an IRS-approved trust structure. The investor owns a beneficial interest in the trust. The trust owns the property.
Key Benefits:
- Fully passive. Investors have no management duties because asset managers (sponsors) handle all operations, financing, and reporting.
- Access to institutional assets (multifamily, medical, industrial, retail) that individual investors cannot typically access.
- Pre-arranged, non-recourse debt.
- Defined as 1031-eligible by IRS Revenue Ruling 2004-86.
- Investment minimums are usually low ($100,000 is typical) so investors can diversify across multiple DSTs.
- DSTs already own the property by the time they are available to investors so closing risk is greatly reduced.
The trade-offs: complete lack of control. Investors cannot influence operations or decide when to sell. DSTs are illiquid for 5-10 years. Performance depends heavily on sponsor quality. Depending on the structure of the DST (traditional vs 721) may limit future 1031 options.
Concerns: debt structures may have interest rate exposure, sponsor performance varies significantly, exit timing is controlled by sponsor, and diversification across DSTs does not guarantee performance.
DSTs work for investors who want passive ownership, need execution certainty, and are comfortable with illiquidity and limited control.
Tenancy in Common (TIC)
Multiple investors hold deeded ownership in the same property. Each investor owns a percentage. Unlike DSTs, ownership is direct, not through a trust.
More control than DSTs. But more complexity. Most TICs require unanimous consent for major decisions. This creates coordination risk. Financing requires lenders to underwrite multiple owners. Many TIC structures include value-add business plans or refinancing provisions.
TICs work for smaller groups (2-10 investors) with aligned goals and shared property management experience.
721 UPREIT Exchanges
A 721 UPREIT contributes real estate into a REIT's operating partnership in exchange for OP units. The units represent ownership in the REIT's real estate portfolio.
Most investors do a 1031 into a DST first, then convert to a REIT via 721. This is a two-step process (1031 now, 721 later). You cannot 1031 directly into a REIT.
721 UPREITs work for estate planning with multiple beneficiaries, investors who want to exit the 1031 cycle, or those comfortable with REIT volatility and liquidity profiles.
Opportunity Zones (Brief Mention)
Opportunity Zone investments are not a true 1031 exchange. They operate under a separate tax code provision (IRC Section 1400Z) with different requirements and benefits.
The key difference: Opportunity Zones offer deferral of capital gains (not just real estate gains) plus potential reduction and eventual exclusion of gains if held for 10+ years. However, investments must be in designated census tracts, and the tax benefits have specific timing requirements.
When to consider: Opportunity Zones may make sense for investors with new capital gains who can commit to long-term holds in designated areas. For most 1031 exchange investors seeking passive real estate exposure, DSTs remain the more straightforward option.
Why DSTs Are Often the Best 1031 Exchange Investment
1031 volume hit a 12-year low in 2024 (ICSC, 2025). Meanwhile, DST usage increased. This reflects a shift toward passive, professionally managed structures.
No Management
DSTs eliminate all property management: tenant calls, repairs, vacancy management, lease negotiations, lender relations. Sponsors handle operations. Investors receive distributions and tax documents.
Diversification
Capital can be allocated across multiple DSTs. A $1 million exchange can be split five ways: different asset classes, different markets, different sponsors. This reduces single-property risk while preserving tax deferral.
We worked with an investor who sold a $2.3 million industrial property in Phoenix. Instead of buying another industrial property, he allocated across six DSTs: multifamily in Austin, medical office in Tampa, industrial in Dallas, self-storage in Charlotte, retail in Nashville, and senior housing in Phoenix. Different sponsors, different property types, different markets. One DST (retail in Nashville) underperformed due to tenant turnover. The other five performed as projected. The diversification prevented one underperforming asset from affecting his overall returns.
Sponsor Quality and Timeline
Institutional sponsors bring acquisition teams, underwriting discipline, and multi-cycle experience. Sponsor quality matters more than projected yield. DSTs can be identified early and close quickly. The structure is designed for IRS deadline compliance. When you have 45 days to identify and 180 days to close, execution certainty matters.
Debt Replacement
DST debt is non-recourse, pre-arranged, and sized for various equity amounts. This solves the debt replacement requirement without requiring new financing approvals or personal guarantees.
How to Evaluate the Best DST 1031 Exchange Companies
Sponsor quality varies. In order to choose, make sure you pay attention to track record, asset selection, debt structure, fees, and proposed exit strategies.
| Factor | What to Look For |
|---|---|
| Track Record | Years in business, AUM, completed exits. Full-cycle performance through multiple markets. |
| Asset Quality | Property type, location, tenant credit, lease terms. In 2025, multifamily, industrial, and retail are preferred. Office is avoided. |
| Debt Structure | LTV, rate, maturity, recourse terms. Understand how rate changes affect distributions. |
| Distribution History | Consistency over time. High distributions can signal weak fundamentals. Sustainable cash flow matters more than headline yield. |
| Fees | Acquisition, management, disposition. Transparency from your trusted broker is required. |
| Exit Strategy | Hold period, refinance or sale plans. |
Due diligence takes time. Deadline pressure does not eliminate this requirement.
Sample 1031 Exchange Investment Scenarios
Scenario 1: Retiring Landlord
Rental property sale: $800,000 equity. Goal: eliminate management, preserve income.
Instead of buying another rental, the investor allocated across eight DSTs. Multifamily, medical, industrial. Multiple markets.
Result: Passive structure. Tax deferred. Concentration reduced. Income maintained. No management responsibilities.
This reflects a demographic shift. Retiring investors are using 1031 exchanges to exit active property management.
Scenario 2: Large Commercial Exchange
Commercial sale: $2.5 million proceeds, $1.8 million debt to replace.
New financing on a single property would require personal guarantees, extensive underwriting, execution risk. Tight credit markets in 2024 made this challenging.
Solution: Multiple leveraged DSTs. Pre-arranged, non-recourse debt. Collectively satisfied the debt requirement.
Result: Full tax deferral. Concentration reduced. Financing uncertainty eliminated. Deadline met.
Scenario 3: Geographic Reallocation
California investor. High taxes, heavy regulation, management complexity.
Goal: Tax deferral plus geographic repositioning.
Solution: DSTs in Texas, Florida, Southeast. Markets with population growth, business expansion, favorable regulation.
Result: Exit from high-tax state. Geographic risk reduced. Passive exposure to growth markets. Tax deferred.
This reflects capital migration patterns in 2025. Investors are leaving high-tax states for Sunbelt markets.
Common Mistakes Investors Make When Choosing 1031 Investments
Starting Too Late
The 45-day identification period starts at closing. Research should begin before listing. In 2024, identification failures rose from 6% to 9% (Accruit Technologies, 2025). Limited supply caused this. Start early.
We work with investors who start the conversation six months before listing. They understand their options, review current inventory, establish evaluation criteria, and build hypothetical portfolios. When the property sells, they're ready. We also work with investors who call on day 40 of their identification period, panicked and pressured. The second group is more likely to make a rushed, emotion-driven decision.
Repeating the Same Risk
Selling one property for concentration reasons, then buying another single property. Same risk, different address.
Ignoring Debt Requirements
Failing to replace debt creates taxable boot. Equity replacement gets attention. Debt replacement gets forgotten. Both are required.
Chasing Yield
High distributions can hide weak fundamentals. Sponsor quality and property fundamentals matter more than headline rates. 2024-2025 reinforced this.
An investor reviewed two DST options in 2022. Option A: 5.5% projected distribution, strong sponsor, Class A multifamily, 65% LTV. Option B: 7.2% projected distribution, less established sponsor, Class B retail, 75% LTV. He chose Option B for the higher yield. Within 18 months, distributions were cut to 4.8% due to higher-than-expected vacancies and debt service. Option A maintained its 5.5% distribution throughout. He prioritized yield over quality and paid for it.
Incomplete Analysis
Income, appreciation, and tax efficiency need to be evaluated together. Current income alone is insufficient.
How Anchor1031 Helps Investors Select the Right 1031 Exchange Investments
Anchor1031 is not a DST sponsor. We don't sell proprietary products. We provide independent guidance for investors evaluating 1031 replacement options.
The team has participated in $1.2 billion+ in real estate syndications and 300+ 1031 exchanges, preserving $600 million+ in investor wealth. This experience shapes how we approach exchanges: risk first, transparency required, no sales pressure.
What we provide:
- Independent access to multiple DST sponsors for comparison
- Portfolio construction across multiple properties and sponsors
- Suitability analysis based on your goals, risk tolerance, timeline
- Execution support (typically 3-5 business days from allocation to close)
Portfolio Builder technology allows real-time modeling of allocations. You can visualize year-one yield, diversification strategies, and equity/debt matching before committing capital. We work with investors approaching a sale or inside their 45-day identification window. The focus is transparency, not pressure.
Next Steps
If you're approaching a sale or if you are inside your identification window:
- Review 1031-eligible options across multiple sponsors
- Understand the risk/return trade-offs of each structure
- Model allocations using our Portfolio Builder
- Work with advisors who provide transparency and access to a wide marketplace, not sales pitches
Understanding identification rules, debt requirements, and portfolio construction improves your chances of successfully completing your 1031 exchange. Start your education before you close on your sale.
Schedule a Consultation
Get access to current DST inventory and personal, one-on-one guidance from the Anchor1031 team.
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.
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.