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ANALYSIS: We Need To Talk About 1031 Exchanges
Tom Burroughes
23 June 2026
When taxes take a sizeable bite from capital gains in real estate, it is easy to see why a structure dating back a century – the 1031 exchange – is creating more of a buzz when HNW individuals fret about tax bills arising from property sales. in exchange for ownership in the REIT. It is also referred to as a “Section 721 Exchange” – like a 1031 Exchange because it can allow property owners to defer capital gains on appreciated real estate.) Reynolds wrote in a LinkedIn post in May: “Take it out of the context of real estate for a moment. A client comes to you with an exit planning event representing 40 per cent of their net worth. Concentrated capital. Severe tax consequences – can approach 40 per cent of the gain. Technical and regulatory nuance. A compressed, non-negotiable timeline. For this client, it may be the single most important financial decision of their life. “What would you do? You'd deploy every resource you have: Exit planning team. Tax counsel. Full menu analysis. Documented decision-making at every step. Ongoing monitoring through every transition that follows. That's a 1031 exchange,” he wrote. Wagging the dog, and acting in a rush
There are opportunities for smart investors and advisors. However, there are also risks for not understanding the fine print, advisors warn. When real estate assets often comprise a high chunk of a person’s total net wealth, mistakes are costly.
A 1031 exchange lets investors defer capital gains tax on the sale of one investment property by reinvesting the proceeds into a like-kind property. To qualify, the relinquished and replacement properties must be held for investment or business purposes. There’s a time limit: Replacement property must be identified within 45 days, and the exchange must be completed within 180 days.
An estimated $8.6 trillion in equity is held in investment properties by households aged 55 and older and typically moves via the 1031 route.
As an example of what is happening, earlier in June, Centre Street Partners, an investment firm focusing on lower middle-market buyouts, announced the launch of its real estate transaction services platform, Accretus. It launched with the acquisition of Atlanta Deferred Exchange, an Atlanta-based Qualified Intermediary that facilitates 1031 exchanges for property owners and investors.
Another case: in March, Fortress Investment Group said it had launched Fortress Real Estate Exchange, a new 1031 exchange platform that gives advisors and their clients access to “institutional quality real estate investments” through Delaware Statutory Trusts . A DST is a distinct legal entity used for real estate investment, allowing multiple investors to hold fractional, passive ownership in large, institutional-grade properties. DSTs are commonly used in 1031 exchanges.
Advocates of DSTs, which have existed since 2004, say they are robust and proven to be so during the political cycle. A DST is open to accredited investors. Individual accreditation requires $200,000 or more of annual income , $1 million-plus in net worth , or qualifying professional licenses.
Why 1031 exchanges are gaining attention
A lot of Baby Boomers, who have second homes, for example, fear that they if they sell them, it will trigger a tax bill, David Hammerman, chief operating officer for global real estate at Fortress, told Family Wealth Report in a recent interview. This explains why the 1031 exchange route is becoming more of a talking point.
1031 exchanges have been around for more than a century, so are unlikely to be significantly changed by legislators, he said, “They are very tried and tested.”
As for DSTs, the “market is going to be one of the key sources of capital raising in real estate,” he said. Importantly, Hammerman said, DSTs are fixed investment trusts and units are not meant to be sold or redeemed ahead of a structure being unwinded.
“This isn’t a concern in the market and is rather a feature of the product. Investors going into a traditional DST want as long a duration of a product as possible, so they do not have to deal with another 1031 exchange,” he said.
“We view DSTs as a significant market opportunity. One key reason why Fortress is excited about entering the DST market is that the space remains in the early stages of institutionalization – particularly within the traditional DST market, wherein sponsors are not primarily focused on a forced 721a UPREIT transaction as the exit strategy,” Hammerman said.
“With institutionalization, we believe investors will increasingly demand greater transparency, more rigorous underwriting, due diligence and asset management. Market participants have shared their desire for DSTs as part of client portfolios, but that there is frustration with the industry around reporting transparency,” Hammerman said.
Sufficient expertise?
Drew Reynolds, CIO at Realized, says the 1031 exchange route has its value, but he is concerned whether the RIA sector has the advisory infrastructure and expertise to handle capital of this size and complexity. Realized says it helps investors evaluate and design diversified DST portfolios using data and analysis so they can make informed decisions.
“With advisors coming into the space, do they know what they’re doing?” he told FWR in a call. “There is an asymmetry in the transaction on the investor side. The average size of a 1031 exchange is $1.3 million of equity and $1.2 million on the property value side. This is often the single largest asset investors own – up to 30 or 40 per cent of their net worth."
Instead of a more diversified asset allocation process, the process is akin to exit planning, Reynolds said. “This is a very significant decision with long-term implications that may represent different things for different people.”
“It is placed into alternative allocations by default because it is private real estate,” he said.
Another challenge, Reynolds said, is that advisors will typically have encountered the 1031 property issue only once or twice a year and won’t necessarily have the experience and expertise to make the right calls.
There is a risk that the use of exchanges and related structures to mitigate tax bills carries costs that users might not initially appreciate. There are, to coin a phrase, no free lunches in capitalism.
“The 1031 exchange is one of the most powerful tools in real estate, but the danger is letting the tax tail wag the investment dog,” Jason Milton, CEO and co-founder of Custom Capital, who has a background in large real estate deals, told FWR. “A bad asset doesn't become a good asset just because you 1031'd into it. The 45-day identification window tends to push people into rushed acquisitions and weaker assets just to avoid a tax bill, and deferring into an inferior property isn't a win!"
There are several issues that registered investment advisors must understand, he said.
First, a qualified intermediary holds the client's proceeds and it is important to choose the correct one. Milton said that intermediaries have “failed or misused funds, which loses money and blows the exchange at the same time. The IRS rarely issues extensions for missing the 45-day or 180-day windows, so vet the qualified intermediary closely,” he said.
Secondly, DSTs are “marketed as turnkey 1031 solutions but often carry heavy upfront costs and are illiquid,” he said, arguing that advisors and clients should consider a variety of options before committing.
Thirdly, Milton said: “A good question to ask: `Would I buy this if I wasn't time restricted?’ In our opinion, a well-located single-tenant net lease property with a strong tenant and a long-term lease is one of the best homes there is for exchange capital – but it requires diligent, consistent underwriting to uncover properties like that.”
For all the cautionary words, there is no doubt that the sums involved are large, and likely to get larger, particularly amidst multi-trillion dollar wealth transfer where bricks-and-mortar assets are a large part of the pie. Tax mitigation approaches will always get a hearing in such an environment.
“The 1031/DST market is going to grow strongly in the next 20 years…the market can grow to $20 to $30 billion in DSTs, up from about $9 billion today,” Hammerman added.