The importance of moving from concentration to portfolio
By Andrew J. Paulson, Vice President, Real Estate, Whittier Trust
For many real estate investors, wealth is often concentrated in a single property or a narrow asset class. While concentration can create substantial gains, it can also expose investors to unnecessary risk, particularly when a large portion of income depends on one primary tenant, one lease, or one market cycle. Increasingly, investors are recognizing the importance of a smart real estate diversification strategy, repositioning concentrated holdings into diversified portfolios designed for long-term stability and growth.
At Whittier Trust, real estate has been central to our platform for more than a century. Founded from the entrepreneurial success of Max Whittier in Southern California’s real estate and oil industries, the firm has evolved into a multi-family-office and wealth management company serving generations of families. Today, our services span five core disciplines: investment management, trust services, family office services, philanthropy, and real estate.
That integrated structure is what distinguishes Whittier Trust. While many wealth management firms focus exclusively on securities and financial planning, our real estate group actively manages approximately $2 billion in real estate assets across multifamily, industrial, office, retail, and flex-space properties throughout the United States. Our team’s institutional and private-market experience allows us to advise clients on investments, as well as on strategic portfolio construction and risk management.
One of the most effective tools available for repositioning a real estate portfolio is the Section 1031 exchange.
Using a 1031 Exchange to Reposition a Portfolio
In its simplest form, a 1031 exchange allows an investor to sell an investment property and reinvest the proceeds into another qualifying property while deferring capital gains taxes. By preserving equity that would otherwise be paid in taxes, investors can redeploy more capital into income-producing assets and compound returns over time.
Beyond tax deferral, a 1031 exchange can serve as a sophisticated portfolio management strategy.
A common scenario involves investors who own a large single-tenant property, such as a net-leased industrial or retail asset, that has appreciated significantly over time. While these properties can provide predictable cash flow, they also carry concentrated risk. If the tenant vacates at lease expiration, the owner may face extended vacancy periods, substantial leasing costs, or declining asset value.
Through a 1031 exchange, investors can transition from a concentrated single-tenant position into diversified multifamily or multi-tenant industrial and retail properties that may offer more stable occupancy, multiple income streams, and greater long-term flexibility.
In a typical exchange, the investor sells the “relinquished” property and the proceeds are transferred to a Qualified Intermediary (QI), sometimes called an “accommodator.” The QI holds the funds and facilitates the transaction to ensure compliance with IRS regulations. The investor then acquires one or more “replacement” properties that qualify as like-kind real estate held for investment or business purposes.
The structure is highly technical, and strict timing requirements apply.
The Timeline: Using a 1031 Exchange Strategy for Ultra High Net WorthFamilies
A successful 1031 exchange depends on meeting two non-negotiable IRS deadlines:
- 45-Day Identification Period: Investors must identify potential replacement properties in writing within 45 days of the sale closing. Generally, up to three properties may be identified without regard to value.
- 180-Day Closing Period: Investors must complete the acquisition of the replacement property or properties within 180 days of the original sale.
Missing either deadline can disqualify the exchange and trigger immediate tax liability.
For that reason, preparation is critical. At Whittier Trust, we often begin evaluating replacement opportunities months before a property sale closes to ensure clients are positioned to execute within the required timeframes.
Diversification Through Delaware Statutory Trusts
While many investors use a 1031 exchange to acquire directly owned replacement properties, others seek a more passive approach through a Delaware Statutory Trust (DST).
A DST allows multiple investors to own fractional interests in institutional-quality real estate, such as large multifamily communities or industrial portfolios. Because DST interests qualify as like-kind property under Section 1031, they can serve as replacement assets in an exchange.
For some investors, DSTs offer several advantages:
- Passive ownership with professional real estate asset management services
- Access to larger institutional-grade properties
- Diversification across multiple assets or markets
- Limited liability protection
- Non-recourse financing at the trust level
DSTs can be particularly attractive for investors seeking to reduce day-to-day management responsibilities while maintaining real estate exposure and tax deferral benefits.
Important Rules and Common Pitfalls
Although the concept of a 1031 exchange may appear straightforward, execution requires careful coordination and planning.
To fully defer taxes, investors generally must:
- Purchase replacement property equal to or greater in value than the relinquished property
- Reinvest all net sale proceeds
- Replace both the equity and debt from the original property
- Ensure both properties are held for investment or business purposes
One common issue involves “mortgage boot,” which occurs when an investor reduces debt during the exchange or retains a portion of the proceeds. In these situations, the difference may become taxable.
Entity structure also matters. The taxpayer selling the relinquished property must be the same taxpayer acquiring the replacement property. Failure to maintain consistency can jeopardize the exchange.
Because of these complexities, expert guidance and management are essential. From identifying replacement strategies to coordinating with intermediaries, lenders, attorneys, and tax advisers, careful oversight can help investors avoid costly mistakes while maximizing the long-term benefits of tax deferral and portfolio diversification.
Moving From Concentration to Portfolio
The most successful real estate investors understand that wealth preservation is not simply about owning property. Instead, it is about owning the right mix of assets aligned with long-term objectives.
A 1031 exchange can provide investors with an opportunity to evolve from concentrated ownership positions into more diversified portfolios designed to mitigate risk, improve cash flow stability, and create greater flexibility across market cycles.
At Whittier Trust, we view real estate not as a standalone asset, but as an integral component of a comprehensive wealth management strategy. By combining investment expertise with long-term planning, we help clients navigate the complexities of real estate ownership while positioning their portfolios for future growth.
—
Andrew J. Paulson serves as Vice President, Real Estate, for Whittier Trust and is based in Pasadena, California. He is responsible for directing and overseeing real estate portfolios for clients, servicing their real estate needs, including acquisitions, dispositions, financing, leasing, and sourcing real estate investment opportunities.