The 1031 Exchange Market: From Transactional Tax Deferral to Institutional Portfolio Strategy

The 1031 exchange, named after Section 1031 of the Internal Revenue Code, is a powerful tax-deferral strategy that allows real estate owners to defer capital gains taxes when selling investment or business property, provided the proceeds are reinvested into “like-kind” property. Long used by real estate investors to preserve capital and compound wealth, the 1031 exchange market has evolved from a niche tax-deferral mechanism used primarily by hands-on landlords into a sophisticated, institutional ecosystem offering multiple exit and reinvestment pathways. While the statutory framework of Section 1031 has remained relatively stable since its establishment in 1921, market innovation driven by investor demand for transparency, scale, and flexibility has fundamentally reshaped how exchanges are executed and what replacement options look like.

Historically, most 1031 exchanges involved direct property-to-property swaps. Investors would sell a small apartment building, retail strip, or office property and reinvest in another directly owned asset. The emergence of qualified intermediaries professionalized the process, but ownership and management responsibilities largely remained with the investor. As real estate values increased and investors aged, priorities shifted away from operational control toward passive income, diversification, and estate planning efficiency.

Delaware Statutory Trusts

Delaware Statutory Trusts (DSTs) became a pivotal innovation in this transition. DSTs allow investors to acquire fractional beneficial interests in large, institutional-quality real estate that generally maintain eligibility as like-kind replacement property. DSTs solved several structural problems: They enabled diversification across assets and geographies, eliminated day-to-day management, and allowed precise matching of exchange equity within strict Internal Revenue Service timelines. As DST adoption grew, sponsors scaled offerings into portfolios of multifamily, industrial, medical office, and net-leased properties, often using institutional financing and professional asset management.

721 exchanges

More recently, market evolution has extended beyond DSTs into 721 exchanges. In a 721 exchange, an investor contributes real estate (or DST interests) into an operating partnership of a Real Estate Investment Trust (REIT) in exchange for operating partnership units, typically on a tax-deferred basis. This provides a longer-term exit from traditional 1031 strategies by allowing investors to transition from illiquid real estate into diversified, potentially liquid REIT exposure. For many investors, the combination of a 1031 exchange into a DST followed by a future 721 exchange has become a strategic bridge from active ownership to institutional, securities-like real estate exposure. It also often comes with estate planning advantages, such as potential step-up considerations at death and increased flexibility for beneficiaries.

An evolving market

Distribution and pricing dynamics have also changed meaningfully. Historically, DSTs were distributed primarily through broker-dealer networks, with layered dealer-manager fees and selling commissions embedded in offerings. In recent years, direct-to-consumer and Registered Investment Adviser–focused distribution models have emerged alongside the entrance of large asset managers, private equity firms, and real estate platforms. These players bring scale, brand credibility, and institutional discipline while putting pressure on traditional fee structures. As a result, upfront loads have compressed, fee transparency has improved, and sponsors increasingly compete on net-of-fee return profiles rather than headline yields alone.

This institutionalization has coincided with increased investor sophistication and additional tax deferral options. Investors now scrutinize fee drag, leverage assumptions, exit cap rates, and alignment of interest, rather than viewing DSTs or 721 pathways as purely tax-driven decisions. The introduction of Qualified Opportunity Zones and the increased popularity of tax-loss harvesting strategies have expanded the tax deferral toolkit, enabling investors to substitute or potentially combine benefits to achieve more comprehensive solutions.

A closer look at the current DST activity illustrates a market coming off a record year in 2025 that raised $8.41 billion in equity, a 49% increase from $5.66 billion in 2024 following a reset in 2023, according to an AltsWire article. As we look forward to 2026, lower and stabilizing rates are expected to continue to support increased transaction volumes and renewed 1031 exchange activity, according to IPX1031.

Source: Cerity Partners, as of December 31, 2025

Today, the 1031 exchange market is less about transactional tax deferral and more about long-term portfolio design. DSTs, 721 exchanges, and direct distribution models collectively reflect a market moving toward lower friction, greater transparency, and institutional-grade real estate access, positioning the 1031 exchange as an integrated component of modern wealth and estate planning rather than a onetime reinvestment tool.

To understand how these strategies may fit into your broader financial picture, reach out to your Cerity Partners advisor or request an introduction today.