1031 Exchange Strategies

Maximizing Tax Efficiency Through Strategic 1031 Exchanges

At Strand Capital, we specialize in helping investors optimize their real estate portfolios through tax-advantaged strategies, including 1031 exchanges. By deferring capital gains taxes on real estate sales, investors can preserve more capital, reinvest in higher-quality assets, and accelerate portfolio growth.

This page provides an overview of 1031 exchange strategies, including traditional exchanges, Drop & Swap transactions, 721 Contributions (UPREITs), and passive investment opportunities—all designed to help real estate investors build tax-efficient, long-term wealth.

What is a 1031 Exchange?

A 1031 exchange—named after Section 1031 of the Internal Revenue Code—allows real estate investors to defer capital gains taxes by reinvesting the proceeds from a property sale into a “like-kind” property. This strategy can be used to:

Defer taxes and maximize capital reinvestment
Scale into larger, more valuable properties
Improve cash flow and portfolio diversification
Transition from active to passive real estate investing

How to Use a 1031 Exchange for Tax Benefits as a Passive Investor

For investors looking to generate passive income while still leveraging 1031 exchange benefits, there are several strategies available. These approaches allow investors to defer taxes while shifting from active real estate management to a more hands-off, professionally managed investment structure.

1031 Exchange into a Delaware Statutory Trust (DST)

A DST is a passive investment vehicle that allows multiple investors to own fractional interests in institutional-grade real estate.
Investors exchange into a DST rather than purchasing a new individual property, eliminating active management responsibilities.
DSTs qualify for 1031 exchanges, making them an excellent way to defer taxes while earning passive income.

721 Exchange into a REIT (UPREIT)

Investors contribute their real estate holdings into an umbrella partnership real estate investment trust (UPREIT) in exchange for shares in the REIT.
The 721 exchange defers capital gains taxes while providing passive exposure to a diversified real estate portfolio.
UPREIT shares offer greater liquidity compared to direct property ownership.

1031 Exchange into a Managed Syndication

Some real estate syndications structure investment opportunities to allow 1031 exchange participation.
This enables investors to defer taxes while earning passive returns from a diversified, professionally managed portfolio.
Investments in syndications typically offer consistent cash flow and appreciation potential without the operational burden of direct ownership.

Shifting from active property management to passive investing through a 1031 exchange allows investors to preserve wealth, reduce tax burdens, and generate passive income without the headaches of direct ownership.

Key 1031 Exchange Strategies

Traditional 1031 Exchange

The most common strategy involves selling an investment property and acquiring a replacement property within strict IRS timelines:

45-Day Rule: Identify potential replacement properties within 45 days of selling your asset.
180-Day Rule: Complete the purchase of the replacement property within 180 days of the sale.

This strategy is ideal for investors looking to upgrade their portfolio, improve cash flow, or consolidate assets while deferring capital gains taxes.

Drop & Swap: 1031 for Partnerships & LLCs

For real estate held in partnerships or multi-member LLCs, executing a 1031 exchange can be complex—especially when partners have different investment goals. The Drop & Swap strategy allows partners to:

“Drop” ownership into individual interests (by converting an LLC interest into direct real estate ownership).
“Swap” the individual interests into new properties via a 1031 exchange.

This technique provides flexibility for investors who want to exit or reinvest separately while preserving tax benefits.

721 Exchange: Converting Real Estate into Shares (UPREITs)

For investors looking to transition from active property ownership to passive investing, a 721 exchange (UPREIT) can be a powerful tool. Instead of exchanging into another physical property, investors contribute their real estate assets to a Real Estate Investment Trust (REIT) in exchange for ownership shares.

Benefits of a 721 Exchange:

Defer capital gains taxes while diversifying into a REIT portfolio
Gain liquidity through ownership in an institutional-grade real estate fundEliminate
property management responsibilities

This strategy is best suited for investors looking to move from direct ownership to passive, institutional-grade investments while maintaining tax deferral benefits.

Is a 1031 Exchange Right for You?

Navigating a 1031 exchange requires careful planning, strict compliance with IRS guidelines, and a strategic approach to replacement property selection. At Strand Capital, we work with investors to:

Identify high-yield replacement properties
Ensure 1031 exchange compliance with IRS regulations
Optimize tax deferral strategies to maximize long-term wealth creation

If you’re considering a 1031 exchange or exploring advanced strategies like Drop & Swap, DSTs, or 721 Contributions, contact Strand Capital today to learn how we can help you structure a tax-efficient investment strategy tailored to your goals.

Sources

Investopedia – 10 Things to Know About 1031 Exchanges
Kiplinger – Drop & Swap 1031 Exchange Guide
1031 Crowdfunding – Everything You Should Know About UPREITs

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