Sale-Leaseback with Like-Kind Exchange
Attorneys, accountants, and real estate professionals are increasingly recommending a sale-leaseback with a 1031 real estate exchange to their clients. As capital markets improve, sale-leaseback transactions are rebounding. Recent trends show momentum building in late 2025 and are expected to accelerate further into 2026 as companies seek innovative ways to access capital.[1]
Businesses and investors are increasingly turning to creative strategies like sale-leaseback transactions to release trapped equity, boost liquidity, and address financing needs—without taking on conventional debt.
In a sale-leaseback, the property owner sells the asset to an investor or institution and immediately leases it back, retaining full operational use while unlocking capital (all or part of the property’s value) for business expansion, operations, debt reduction, or other reinvestments.
When structured properly, this sale often qualifies as the “relinquished property” in a Section 1031 like-kind exchange. This allows the seller to defer capital gains taxes entirely, enabling the full proceeds to be redeployed into one or more like-kind replacement properties, notably into a Delaware Statutory Trust (DST) for passive investment. The result is continued tax-advantaged wealth accumulation and portfolio growth, all while the original business or operation continues uninterrupted in the same location—often under a long-term lease (commonly triple-net to control costs).
Often, small and mid-market companies treat sale-leaseback results as a path to a like-kind DST exchange, and this is the focus of this article. In contrast, larger development projects, such as distribution and data centers, and manufacturing facilities, are purpose-built for sale-leaseback net leasing, with Real Estate Investment Trust (REIT) and Delaware Statutory Trust (DST) Sponsors in mind.
This approach offers a win-win: companies maintain operational continuity at their locations, while investors gain stable, long-term income streams from creditworthy tenants. As borrowing costs ease and transaction volumes rise, sale-leaseback 1031 exchanges are proving to be a highly effective tool for optimizing balance sheets and navigating the current economic environment.
Key Benefits for Sale/Leaseback into Section 1031 Exchanges-DST:
- The company continues to operate at the exact location without disruption.
- The underlying subject property often becomes a long-term (15-20 yrs), triple-net lease.
- Driving flexibility in a stabilizing economic environment with favorable interest rates (shifting to non-recourse lending).
- Defer taxes while potentially accessing some liquidity for other uses.
- Improved balance sheet efficiency (by shifting from owned assets to deductible lease expenses).
- Ability to purchase diversification across geographies and sectors
- The Buyer, a larger investor or institution, often has preferred financing and professional property management vendor relationships that may be afforded to the tenant.
The Process:
Attorneys and accountants should be engaged to aid in the deployment of the tax strategy. The business sells its commercial property to an investor, aided by a 1031 exchange experienced commercial real estate broker, and reinvests the proceeds in a DST-like-kind investment portfolio, to defer capital gains taxes. The company continues to operate at the property as before the sale. Assuming tax code compliance, this series of exchange transactions can defer capital gains taxes, depreciation recapture, and potentially other taxes.
The Like-Kind Investment Market:
The SREI Group is uniquely positioned with knowledge, skills, and tools to consult advisors and clients alike in support of the like-kind securitized real estate purchase, thereby concluding the exchange.
The DST real estate market reached approximately $8.41 billion in equity in 2025. This represented a substantial 49% increase from the $5.66 billion reached in 2024, driven by strong demand for passive investments, tax-deferral strategies, and improving economic conditions that boosted transaction activity.
For 2026, industry projections indicate continued robust growth of around 30% year over year, fueled by stabilizing interest rates, tapering of new supply in key sectors like multifamily, and sustained investor interest in diversification and institutional-grade properties. This outlook positions 2026 as potentially favorable for entry, with expected improvements in rent growth, occupancy, and overall market stability across industrial, net lease, and recovering multifamily assets.[2]
Other DST Benefits:
The benefits extend beyond the tax-deferral characteristics. Properties are initially identified, qualified, and purchased by a DST Sponsor organization, which uses its industry-level borrowing qualifications, often resulting in more favorable terms. Typically, with its professional management team, the Sponsor continues to oversee the property, affording the investor a more passive investment opportunity. Depending on the nature of the property, the tenant is often a more favorable (lower) credit risk, which supports the property’s ongoing financial strength. DST offerings are designed to generate revenue for DST investors through regular distributions and/or appreciation at the full-cycle sales event (though not all offerings are the same).
A Tool for Diversification:
A unique benefit of a DST that’s not readily available to single-property owners is greater flexibility in property types, including multifamily, self-storage, and single-tenant NNN. Consider how you might build a multi-offering purchase portfolio across different market segments or regions, accounting for each demographic and natural climate condition. With fractional ownership, investors diversify their portfolios and potentially reduce their risk.
[1] https://www.credaily.com/briefs/delaware-statutory-trust-surge-draws-cre-investors/
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