Why 1031 Strategy Changes in 2026
A 1031 exchange remains one of the strongest tax-deferral tools in real estate. But in 2026’s higher-rate environment, the playbook needs an update—especially around financing.
The Refinancing Gap (The Core Problem)
Many investors selling today bought or refinanced during the low-rate era. They got comfortable with:
- 65–70% LTV
- Sub-4% interest rates
In 2026, replacement financing may look more like:
- 55–60% LTV
- 6–7% interest rates
That shift creates a “refinancing gap.” Even if the purchase price is similar, the debt service can be dramatically higher, and the available leverage is often lower.
What This Means for Exchangers
1) Less Leverage or More Equity
Many exchangers will need to choose one (or both):
- Accept lower leverage on the replacement property, or
- Bring additional cash equity to close the gap
The classic “trade up” strategy—buying a more expensive asset using maximum leverage—is harder to execute without squeezing debt service coverage.
2) Assumable Loans Become High-Value Targets
Properties with assumable debt can be extremely attractive. If you can assume an in-place loan near 4%, the savings versus market-rate financing can be substantial.
These opportunities are uncommon, but in 2026 they are often worth pursuing aggressively.
Replacement Options That Can Reduce Friction
NNN Properties and Strong Tenant Credit
NNN properties with credit tenants are still among the best exchange targets. When tenant credit reduces income risk, lenders often provide better terms.
A nationally backed tenant (e.g., Walgreens) typically supports stronger financing than a local operator—sometimes helping close the leverage gap.
Delaware Statutory Trusts (DSTs)
For investors who value simplicity, DSTs may be a strong fit. DSTs can offer:
- Fractional ownership in institutional-quality real estate
- Professional management
- Often in-place financing, which reduces the pressure to secure new debt quickly
Practical Action Steps for 2026
- Model your exchange before you list.
Run the numbers using realistic 2026 assumptions for LTV, rates, and DSCR. - Pressure-test your equity gap.
Confirm you can close without taking on leverage that strains cash flow. - Start earlier than usual.
Begin identifying replacement candidates 60–90 days before your expected sale closing.
Schedule a 1031 Strategy Session
We’ll model your specific scenario and identify replacement options that fit your criteria.
Contact us today!
(213) 880-8107 | francisco.williams@williamscap.ai | williamscapitaladvisors.com
