Best 1031 Exchange Investments: Every Replacement Option, Compared

There is no single best 1031 investment. There is the option that fits how much work you want, the debt you have to replace, how long you plan to hold, and how you want to exit. Here is every common route compared on those terms, including the ones that look like 1031 investments and are not.

The short answer

A 1031 exchange lets you defer the gain when you sell real property held for investment or business use and buy other real property held the same way (26 U.S.C. §1031). Since 2018, only real property qualifies. Within that rule, the common replacement routes are:

1. Direct ownership: a rental house, multifamily building, commercial or industrial property, or land, in your name or your LLC's.
2. Single-tenant net lease (NNN): a building leased to one tenant who pays most operating costs.
3. Delaware statutory trust (DST) interests: a fractional interest in a trust that owns institutional property, treated as real property for §1031 under Rev. Rul. 2004-86.
4. Tenancy-in-common (TIC) interests: a fractional deeded interest, structured with the Rev. Proc. 2002-22 ruling guidelines in mind.
5. A vacation or second home you rent out, within the Rev. Proc. 2008-16 safe harbor.

Shares in a REIT, units in a fund or LLC, and stocks are not real property and generally do not qualify. Opportunity Zone funds are a different deferral regime, not a 1031.

Leah's role is the exchange itself: setting it up before closing, holding the timeline, and making sure the proceeds never reach you. She does not sell or recommend investments, and nothing here is investment advice.

At a glance: how the routes compare

Matching the route to what you want

Direct real estate: rentals, multifamily, commercial and land

Direct ownership is the default route and the one with the most control. You choose the property, the financing and the manager, and you can exchange again later. The trade-off is the work, and the concentration in one or a few buildings.

• What qualifies. Real property held for investment or for use in a business, as defined in Treas. Reg. §1.1031(a)-3. Land, buildings, and permanent structures qualify; property held primarily for sale, such as a flip, does not.
• Like-kind is broad. A rental house can be exchanged for a warehouse, land for an apartment building. See what qualifies as like-kind property.
• U.S. for U.S. Real property in the United States and real property outside it are not like-kind (§1031(h)).

Single-tenant net lease (NNN)

In a net lease, the tenant typically pays taxes, insurance and maintenance, and the owner collects rent. It is the usual answer for owners who want to keep direct title but stop managing tenants. What decides the result is the tenant: its credit, the remaining lease term, the rent increases, and what the building is worth if the tenant leaves. You still buy it like any other property, with your own lender and attorney.

Delaware statutory trusts (DSTs)

A DST lets you buy a fractional interest in a trust that owns one or more larger properties. The IRS treats the interest as real property for §1031 if the trust follows the restrictions in Rev. Rul. 2004-86: for example, no new capital after the offering closes, no renegotiating the loan or leases, and no new purchases.

• They are securities. DST interests are typically offered privately under Regulation D to accredited investors and sold through broker-dealers or advisers. FINRA expects broker-dealers to investigate Reg D offerings before recommending them (Regulatory Notice 10-22), and the SEC's investor bulletin on private placements explains the risks.
• Cash flow depends on the offering. Income DSTs distribute net rent, usually monthly, and Rev. Rul. 2004-86 requires that cash beyond reserves be distributed currently. Zero-cash-flow DSTs, which are the structures Leah works with, apply rent to debt service and pay nothing during the hold; their return is the deferred tax, debt paydown and value at exit.
• No control and limited liquidity. You cannot vote on a sale or refinance, and there is generally no ready market for the interest.

Full explanation: how a DST 1031 exchange works.

"Best DST companies": how to compare sponsors

This page does not rank DST sponsors. Here is what to ask about any of them, in writing:

1. The offering documents. Read the private placement memorandum: the property, the lease, the loan, the fees and loads, the reserves, and the risk section.
2. The loan. When does it mature compared with the planned hold? Is it fixed or floating?
3. The track record. How did the sponsor's earlier programs end, full cycle, including any that were sold at a loss or restructured?
4. The person selling it. Look up the broker-dealer and the representative on FINRA BrokerCheck, and any adviser on the SEC's adviser search.
5. The exit. Many DSTs plan a sale; some contemplate a later contribution to an operating partnership under §721. Ask what happens to your next exchange in each case.

Tenancy in common (TIC)

A TIC interest is a deeded, undivided fractional interest in a property shared with other owners. Rev. Proc. 2002-22 lists the conditions under which the IRS would consider a ruling that a TIC arrangement is not a partnership, such as limits on the number of co-owners and unanimous approval of major decisions. Sponsored TIC offerings are usually securities, like DSTs (NASD Notice to Members 05-18). Family or partner TICs are also common when co-owners want to go separate ways in an exchange; that planning starts well before the sale.

Vacation and second homes

A vacation home can be relinquished or replacement property inside the Rev. Proc. 2008-16 safe harbor: for the replacement, you own it for at least 24 months after the exchange, and in each of the two 12-month periods you rent it at fair rent for at least 14 days and limit your own use to the greater of 14 days or 10% of the days it is rented. Outside the safe harbor, it depends on the facts.

What looks like a 1031 investment but is not

• REIT shares and fund units. Not real property. A route sometimes described as "1031 into a REIT" is really two steps: a 1031 into real property or a DST, then a later contribution to an operating partnership under §721, which has its own consequences.
• "1031 exchange funds" and LLC units. An interest in an entity is not an interest in real property. Ask exactly what you would own.
• Opportunity Zone funds. Gain invested in a qualified opportunity fund is deferred under §1400Z-2, a separate regime with its own rules and timing. It is not a like-kind exchange, and the rules changed in 2025, so check the current version with your CPA.
• Your own home. A primary residence is not held for investment. The home sale exclusion is a different rule.

Mistakes that cost investors the exchange

• Choosing the investment after day 45. The identification must be in writing by midnight of day 45. Shop before you close.
• Buying less than you sold. Trading down in value or debt generally creates taxable boot, even inside a valid exchange.
• Letting the money touch your account. The proceeds go from closing to the qualified intermediary, never to you (Treas. Reg. §1.1031(k)-1).
• Treating a sales pitch as advice. Whoever sells you a replacement investment is paid for the sale. Have your CPA and, for securities, your own adviser review it.

Frequently asked questions

What is the best investment for a 1031 exchange?

There is no single best one. Direct property gives control and more work; a net lease gives direct title and less work; a DST gives no work and no control. The right choice depends on how much management you want, the debt you have to replace, your timeline, and how you plan to exit. Leah does not recommend investments; she runs the exchange around the one you choose.

Can I do a 1031 exchange into a REIT?

Not directly. REIT shares are not real property. Some investors exchange into a DST or real property first and later contribute it to a REIT's operating partnership under Section 721, which is a separate transaction with its own tax consequences.

Are DSTs a good 1031 investment?

They suit some investors and not others. They remove management and can replace debt, but they are illiquid securities, you have no control over the property, and results depend on the specific offering. Read the offering memorandum and check the seller on FINRA BrokerCheck.

Can I use a 1031 exchange to buy a vacation home?

Yes, if it meets the Rev. Proc. 2008-16 safe harbor for the replacement: you own it for at least 24 months, and in each 12-month period you rent it at fair rent for 14 days or more and limit your personal use to the greater of 14 days or 10% of the rental days.

Can I exchange into land?

Yes. Land held for investment is like-kind to a building held for investment. Land you hold primarily to subdivide and sell may not qualify.

Can I exchange into property outside the United States?

No. Real property in the United States and real property outside it are not like-kind.

What are 1031 exchange funds?

The term is used loosely. Units in a fund, LLC or partnership are not real property and generally don't qualify. DST and TIC interests are the main fractional formats that can, when structured correctly.

Sources

• 26 U.S.C. §1031: like-kind exchanges; real property only; U.S. and foreign property not like-kind.
• Treas. Reg. §1.1031(a)-3: definition of real property.
• Treas. Reg. §1.1031(k)-1: deferred exchanges, identification, qualified intermediaries.
• Rev. Rul. 2004-86: DST interests as real property for §1031.
• Rev. Proc. 2002-22: tenancy-in-common ruling guidelines.
• Rev. Proc. 2008-16: dwelling units (vacation homes) safe harbor.
• 26 U.S.C. §721: contributions to a partnership.
• 26 U.S.C. §1400Z-2: qualified opportunity funds.
• 17 CFR §230.501: accredited investor definition.
• FINRA BrokerCheck and SEC adviser search.
• FINRA Regulatory Notice 10-22 and NASD Notice to Members 05-18.
• SEC investor bulletin: private placements under Regulation D.

Educational information, not tax, legal or investment advice.