Three Most Important Factors in Deciding to Exchange Your Rental for a Passive 1031 Replacement Program

For many rental property owners, a 1031 exchange is initially driven by one clear motivation: deferring capital gains taxes while repositioning equity. But once that threshold decision is made, a more nuanced question quickly follows—what kind of replacement property best aligns with your next phase as an investor?

Increasingly, landlords are choosing to exchange actively managed rental properties into passive 1031 replacement programs, such as Delaware Statutory Trusts (DSTs) or similar institutional-quality offerings. While tax deferral is the mechanism, the decision itself is rarely about taxes alone. Below are the three most important factors investors should weigh when deciding whether to exchange their rental into a passive 1031 program.

1. Lifestyle and Management Burden

The most common—and often underestimated factor is the true cost of active property management on your time, energy, and lifestyle.

Many long-term landlords reach a point where the operational demands of ownership no longer align with their priorities. Tenant turnover, maintenance calls, regulatory compliance, insurance renewals, rent collection, and property tax appeals can quietly compound into a second full-time job. This is especially true for owners of older properties or assets in tenant-friendly regulatory environments.

Passive 1031 replacement programs fundamentally change that equation. These structures allow investors to retain the economic benefits of real estate ownership, income, depreciation, and appreciation—while eliminating day-to-day management responsibilities. Professional asset managers handle leasing, financing, capital expenditures, and disposition.

For investors approaching retirement, managing multiple properties from afar, or simply seeking a more predictable and hands-off ownership experience, lifestyle improvement alone can justify the exchange.

2. Risk Reallocation and Portfolio Diversification

A second critical factor is how your current rental concentrates risk.

Many individual landlords unknowingly carry significant exposure to a single property, market, tenant base, or financing structure. A large percentage of personal net worth may be tied to one asset in one geographic location, often with recourse debt and aging infrastructure. While that concentration may have paid off historically, it can become a vulnerability over time.

Passive 1031 programs allow investors to reallocate risk across multiple properties, markets, and asset classes—often within a single exchange. Rather than owning one duplex or apartment building, an investor might own fractional interests in multiple institutional-grade assets across different states, economic drivers, and tenant profiles.

This diversification can help mitigate local market downturns, regulatory shifts, or property-specific issues while preserving real estate exposure as a core asset class.

Importantly, this is not about eliminating risk but about reshaping it in a way that aligns with your long-term objectives and tolerance.

3. Income Stability and Capital Planning

The third major factor is how well your current rental supports your income needs and broader capital strategy.

Active rentals often produce uneven cash flow, with income interrupted by vacancies, repairs, or unexpected capital expenses. For investors transitioning from growth-focused accumulation to income-focused preservation, this variability can become problematic.

Passive 1031 replacement programs are typically structured around stabilized properties with long-term financing and professionally underwritten cash flow projections. While returns are not guaranteed, distributions are generally designed to be consistent and predictable.

Additionally, these programs can play a strategic role in broader planning—coordinating with retirement timelines, estate planning, charitable strategies, or future 721 UPREIT conversions. For many investors, the exchange is less about “selling” a property and more about repositioning capital into a structure that better supports the next 10–20 years.

Final Thought

A 1031 exchange into a passive replacement program is not a one-size-fits-all solution. But when evaluated through the lenses of lifestyle, risk structure, and income planning, it often becomes clear why so many experienced landlords choose this path.

The key is not whether passive ownership is “better,” but whether it is better for you—given where you are today and where you want your real estate portfolio to take you next.

This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

DST 1031 properties are only available to accredited investors (typically defined as having a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last two years) and accredited entities. If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney.

There are material risks associated with investing in private placements, Delaware Statutory Trusts ("DSTs") and real estate securities including the potential loss of the entire investment principal, illiquidity, tenant vacancies impacting income and revenue, general and real estate market conditions, lack of operating history, interest rate risks, competition, including the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and investors should read the PPM carefully before investing paying special attention to the risk section.

Risks associated with 1031 exchange- A 1031 exchange has an identification period of 45 days from the sale of the relinquished property to identify a potential replacement property or properties depending on the value of the previous property. To defer all capital gains tax, you must reinvest the entire net proceeds from the sale of the relinquished property into the replacement property and acquire debt on the new property that is equal to or greater than the debt on the property that was just sold and relinquished.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). 1031 Capital Solutions is independent of CIS, CAM and CIA.