How do high interest rates change a 1031 exchange in 2026?

Hans Goldstein structures installment sales for sellers and works alongside their CPAs and brokers. Email hans@goldsteinco.net or call 213-414-2808.

Why do rates matter so much to a 1031?

Because of two rules that have nothing to do with rates. First, your current loan almost never moves with you: commercial notes carry due-on-sale clauses, so it is paid off at closing. Second, to defer all the gain, the replacement has to carry at least as much debt as was paid off, or you add your own cash (the debt replacement rule). So most full-deferral exchanges need a brand-new loan, priced the day you lock it. In 2026 that loan is the part of the deal to price first.

The market as of October 2026

The Fed raised. At its Sept. 16, 2026 meeting, the Federal Reserve raised the fed funds target range by a quarter point to 3.75% to 4.00%, effective Sept. 17 (Federal Reserve FOMC statement, Sept. 16, 2026). The bank prime rate was 7.00% for the week of Sept. 25 to Oct. 1, 2026 (Federal Reserve H.15, Oct. 2, 2026). Bank loans are often priced off prime or Treasuries.

Long rates rose more. The 10-year Treasury yield was 5.24% on Oct. 1, 2026 (FRED, DGS10). CBRE had it "near 4.6% as of mid-July" (CBRE U.S. Cap Rate Survey H1 2026, Aug. 12, 2026), so it rose roughly six tenths of a point in under three months.

Loan quotes now sit at or above many cap rates. The two sources below are measured at different times and in different ways (cap rates are trailing 12-month deal averages as of Feb. 2026; loan quotes are lender ranges as of Oct. 1, 2026), so read them as a rough side-by-side, not a deal quote:

Recent loans were already borrowing through the cap rate. As of June 12, 2026, CRED iQ found in $26.1B of 2026 CMBS loans that "every 'favored' income sector is now borrowing through its cap rate": multifamily at a 5.45% cap against a 5.64% coupon, industrial 6.03% against 6.33%. Retail and office still had positive spreads. And 56% of that new-issue balance was full-term interest-only. Those coupons were set when the 10-year was well under 5%; it is higher now.

Cap rates are not expected to fall soon. As of Aug. 26, 2026, about 60% of CBRE's survey respondents expected no change over six months, the share expecting compression fell from 42% to 20%, and the share expecting expansion rose to 17%. Their median view is that the 10-year has to fall to 3.75% for activity to pick up.

More exchangers are buying debt that already exists. Delaware statutory trust equity raised hit $6.48B through August 2026, up 33% from $4.86B in the same months of 2025, with a full-year forecast of "a little more than $10 billion" (Mountain Dell Consulting via AltsWire). One plausible reason: a trust interest comes with its financing already in place, so the exchanger replaces debt without applying for a loan.

Lots of loans are coming due. As of Feb. 9, 2026, the MBA counted $875B, 17% of $5.0T in commercial and multifamily mortgages, maturing in 2026, including 17% of office balances. CMBS delinquency was 7.85% in August 2026 and 12.00% for office (Trepp, via Commercial Property Executive, Sept. 28, 2026). Credit is still there: in the July 2026 survey, moderate and modest net shares of banks eased standards for nonfarm nonresidential and multifamily loans (Fed SLOOS, July 2026). It is just priced higher.

What does that do to a real exchange?

Here is a deal on my desk, rounded: an office building selling for about $4.0M at about a 6.4% cap rate, with a $2.1M loan taken out seven months before the sale. Equity after the payoff is about $1.9M. Full deferral means a $4.0M replacement with about $2.1M of new debt.

Illustrative: assume the replacement also trades at a 6.4% cap, so net operating income is $256,000 ($4,000,000 x 6.4%). The rates below are points picked from the published October ranges to show the spread, not a quote for this deal. Cash-on-cash is cash flow divided by the $1.9M of equity. Buying all cash would earn the cap rate, 6.4%.

Checks: $2,100,000 x 6.30% = $132,300, and $256,000 minus $132,300 = $123,700, divided by $1,900,000 = 6.51%. The amortizing payment is the standard monthly mortgage payment times 12; part of it is principal, which builds equity but does not show up as cash.

The pattern is the point. Only the lowest rate, interest-only, beats the all-cash 6.4%. Once the loan costs more than the property earns, every borrowed dollar lowers the return on your equity: negative leverage. The deferral is still real; the building just pays you less to carry it.

What are your three choices inside a 1031?

When the new loan would cost more than the replacement earns, an exchanger usually picks one of three:

1. Take the debt anyway. Full deferral, thinner cash flow, and a bet that rates fall before the loan matures. Interest-only terms help cash flow now and push principal to later.
2. Put more cash in. Outside cash offsets debt dollar for dollar, so a smaller loan with the same full deferral. It works only if you have the money and want it tied up in the building.
3. Buy smaller and accept some boot. Less debt, part of the gain taxed now, the rest deferred. On this deal, a $1.5M loan instead of $2.1M leaves $600,000 of mortgage boot (worked here).

Each fits some sellers. Price all three before listing; once the 45-day clock starts, the choice tends to get made by whichever lender answers first.

Is there a way to defer without the new loan?

For a seller who would rather not take on new debt or another building, a structured installment sale is the off-ramp. The buyer pays in full at closing. Part of the price goes to an assignment company, which takes on the obligation and funds it with a fixed annuity from an insurer, and you report the gain under IRC §453 as the payments arrive.

The flip side, stated once: the old loan is still paid off at closing, prepayment penalty included, and that payoff counts as a payment you receive in year one, taxed at the sale's gross profit ratio. What it removes is the forced new debt: no new loan, no new rate, no negative leverage, no landlord job.

The trade-offs: payments are locked in once set and cannot be accelerated or cashed out. They depend on the assignment company and the insurer behind it. There is no published IRS ruling on this specific structure, so your CPA should review it. A commission of about 4% of the amount structured, paid by the insurer, is built into the pricing. The interest in each payment is ordinary income. It must be written into the purchase agreement before closing; money already at a qualified intermediary cannot be structured later. A combination also works: exchange part, structure the rest (1031 and installment sale together).

Run both paths with your own numbers in the advanced calculator, or send Hans the deal and he will lay them side by side for your CPA.

What should you do before you list?

• Get two or three term sheets for the kind of property you would buy, so the rate in your spreadsheet is a real one.
• Compare the rate with the cap rate of what you would buy, interest-only and amortizing.
• Read your current note for prepayment terms. A young loan can carry the largest penalty (prepayment penalties when selling).
• Run the boot math for full, partial and no replacement debt in the 1031 boot calculator.
• Decide the path before the purchase agreement is signed.

Frequently asked

Q: Should I wait for rates to fall before doing a 1031? A: No one knows when or whether they will. As of August 2026, CBRE's respondents mostly expected cap rates to hold, and their median view was that the 10-year needs to reach 3.75% for activity to pick up. Price the deal at today's rates and decide on that.

Q: Do higher rates change the 1031 tax rules? A: No. The tax rules count the amount of debt you replace, not its rate. Rates change the cash flow of the replacement and whether full deferral is worth the loan.

Q: Is interest-only a good answer to high rates? A: It raises cash flow in the early years, and more than half of new 2026 CMBS balance was full-term interest-only as of June 2026 per CRED iQ. The principal is still owed at maturity, so the refinance question moves to later.

Q: Why are Delaware statutory trusts growing in 2026? A: Equity raised was up 33% through August 2026 versus the same months of 2025, per Mountain Dell Consulting. A trust interest arrives with its financing in place, which lets an exchanger replace debt without applying for a loan. You give up control of the property, the loan and the exit (the trade-offs).

What should you read or run next?

• Negative leverage in a 1031 exchange
• Do I need a new loan for a 1031 exchange?
• 1031 vs structured installment sale when rates are high
• 1031 boot calculator
• Advanced calculator
• Delaware statutory trusts explained

Who wrote this?