Incessant Volatility Has Made The 1031 Exchange Market 'Fundamentally Different'

The 1031 exchange has been the backbone of the commercial real estate sales market for decades, allowing property sellers to avoid paying taxes if they can secure another deal to invest their gains into within 45 days.

But in an era where the macroeconomic outlook seems to shift by the day — and interest rates refuse to come down — the six-week window has become a major problem for executing these deals.

Wall Street giants have stepped into the gap. With firms like Apollo Global Management, Nuveen and Fortress Investment Group launching funds targeting 1031 deals in recent years, the amount of securitized 1031 equity is now at an all-time high.

The securitized 1031 market surpassed $8B in 2025 for the first time since 2022 and for only the second time in the history of the market, according to Mountain Dell Consulting. As more institutional property owners become Delaware statutory trust sponsors, this year's DST equity is on track to exceed 2025’s volume. 

There is nearly $3.9B of available equity from about 100 DST offerings, or properties welcoming fractional investors, according to Market Dell’s research. That is the most available equity the DST market has ever seen, above the previous high-water mark of $3.2B in May 2023, Mountain Dell Consulting associate Seth Anderson said. 

DSTs, by far the most common form of securitized 1031 exchange, allow investors to purchase a fraction of a property offered by a sponsor, providing a passive investment opportunity while satisfying the like-kind tax code requirement. 

Fortress Investment Group in March launched a fund leveraging DSTs to give investors access to institutional-grade senior housing, student housing and multifamily properties. Last year, Nuveen launched a DST fund to convert property sellers hoping to avoid capital gains taxes into investors in its $2.1B nontraded REIT.

“A lot of these bigger names, Apollo, Invesco ... names that people know and other financial verticals, came to the space because they kind of had dollar signs in their eyes for what they saw in 2022,” Anderson said. “They wanted a piece of the action.”

For a century, IRS code Section 1031 has allowed investors to defer paying taxes on the disposition of an investment property if they acquire a like-kind investment property within a specified time frame. The tax is usually deferred until the replacement property is sold.

About 10% to 20% of all commercial real estate transactions involved a 1031 exchange as of 2020.

DSTs represent a portion of the 1031 exchange market, which is “fundamentally different than it was even five years ago,” First American Exchange Co. President Julie Baird said.

The 1031 exchange service company saw DST transaction volume increase 55% from 2025 to 2026, Baird said.

Stagnant interest rates and a lack of inventory are pushing 1031 investors to perform more due diligence and consider more replacement property options, including DSTs.

The rise in DST activity suggests investors are placing more emphasis on contingency planning to prevent deals from falling through — especially given the replacement property identification period’s 45-day limit. Investors are having more discussions around backup properties, financing alternatives and exchange structures that provide greater flexibility, Baird said.

Delaware statutory trusts were ruled to be an acceptable form of like-kind exchange under Section 1031 in 2004, but investment in DSTs and other securitized 1031s began surging in 2020. 

DSTs may be an option for 1031 investors who are looking for a replacement property but struggle to secure financing or are dissatisfied with the persistently wide bid-ask gap. 

When interest rates were low in the early years of the pandemic, 1031 exchanges moved quickly, as there was tons of for-sale inventory and financing was easy to secure. Activity fell sharply as interest rates rose in 2023 and 2024. 

As interest rates hold steady, more investors and sellers are coming around to transact in a difficult financial environment, Baird said. 

“In this environment, it's more strategic planning, it's working with the lender, it's really figuring out what asset is going to pencil for their particular transaction,” she said. 

Investors have 45 days from their property sale date to identify potential replacement properties — typically three — and 180 days from the sale date to close the transaction to avoid tax penalties. 

“That 45-day identification window is a real pressure point for exchange transactions,” Baird said.

Rather than treating the identification period as a discovery phase, many investors now use it as a confirmation period for opportunities they have already been evaluating, Baird said. 

As lenders have become more selective about providing financing, investors are spending more time checking for potential issues like missed rent payments before officially identifying a property for exchange, Baird said.

“If you can't close your financing within those time constraints, a deal's not going to work for you,” she said.

About 10% of 1031 exchange deals fall through for a variety of reasons, she said. 

An increasing number of investors are identifying DSTs as backup replacement options, maybe helping them minimize that risk, Anderson said.

Money in the DST market has exploded as more institutional players have entered the DST space. Rather than holding these properties for years, selling them and returning the initial investments, these players are shifting toward a model of rolling up investors into their REIT, he said.

When a DST sells a property, investors can sell their portion, either paying taxes on it or taking operating partnership units in the REIT. The latter is known as an UPREIT exchange.

“There's a lot of options to sift through for [investors], so they're taking their time and they are being careful,” Anderson said.

As a qualified intermediary, First American Exchange Co. will guide investors toward education as necessary, including about DSTs, Baird said.

“There have been some DST sponsors that have had some financial challenges, and so it really is incumbent upon those interested in those types of investments to understand the mechanics of the transaction and who's backing it,” she said.

Exchanges aren’t necessarily becoming harder to complete, but they are becoming less forgiving of inadequate planning, Baird said. 

Many DST deals haven’t existed long enough to see how they really perform, Anderson said. But given the macroeconomic environment, he expects investors to continue seeking as much information as possible before proceeding with a 1031 exchange.

“I do foresee a heightened level of sensitivity for the next three or four years,” he said.