Equity Recycling: The Modern Strategy for Building Permanent Capital Without Selling
For decades, real estate investors have relied on a simple formula: buy, improve, and eventually sell to unlock equity. But in today’s environment, where taxes are high, liquidity needs vary, and long-term income matters more than ever, selling is no longer the most efficient way to build wealth.
A new approach has emerged: Equity Recycling, a strategy that lets investors unlock capital from existing properties without triggering taxes or giving up ownership. Instead of selling stabilized assets, investors reposition them into long-term, passive structures that generate income, provide liquidity options, and support multi-generational wealth planning.
This article explores how Equity Recycling works, why it is gaining momentum, and how strategies like DSTs, 1031 exchanges, and 721 UPREIT contributions make it a powerful model for modern real estate owners.
The Problem With Selling to Access Equity
Selling a property to access capital seems straightforward, but it comes with major downsides:
Large Tax Bills
Capital gains, depreciation recapture, and potential state taxes can wipe out 20–40% of your profit.
Loss of Income
Selling means giving up a cash-flowing asset that may be difficult to replace.
Restarting the Clock
Every time a property is sold, you reset your compounding. Long-term appreciation is lost forever.
High Transaction Costs
Brokerage fees, closing costs, due diligence, and reinvestment friction eat into returns.
For many owners, especially those nearing retirement or handling legacy assets, selling is an expensive, disruptive solution to a simple problem: needing liquidity or reduced management burdens.
Equity Recycling solves this.
What Is Equity Recycling?
Equity Recycling is the process of unlocking the trapped equity inside your real estate without selling the asset outright. Instead, you transition the property into a more flexible, tax-efficient structure such as a:
1031 exchange into a DST
Contribution into an UPREIT/Operating Partnership (OP Units)
Refinance + reposition strategy within Permanent Capital platforms
This allows you to convert illiquid property equity into passive income, diversified exposure, and estate-friendly ownership, all while keeping taxes deferred and compounding uninterrupted.
Three Core Approaches to Equity Recycling
1. 1031 Exchange Into a DST (Passive Income + Zero Management)
Owners sell appreciated property and reinvest into a Delaware Statutory Trust, qualifying as like-kind under IRS rules.
Benefits:
Full tax deferral
Immediate passive income
Diversification into institutional assets
No responsibility for management
Clean, divisible estate structure
This is the simplest path for owners who want passive income and simplicity.
2. 721 UPREIT Exchange Into an Operating Partnership (Long-Term Permanent Capital)
Owners contribute property directly into a REIT Operating Partnership in exchange for OP Units, often without triggering capital gains.
Benefits:
Tax deferral similar to a 1031
Exposure to REIT-level diversification
Optional liquidity through future conversion to shares
Ability to maintain some upside from the contributed property
Perfect for estate planning and long-term investors
This model is ideal for owners wanting Permanent Capital with optional liquidity.
3. Strategic Refinancing Into Permanent Capital Vehicles
Rather than selling, owners refinance stabilized assets and use the proceeds to:
acquire additional properties
invest into DSTs or REITs
reduce concentration risk
create liquidity while keeping the asset in the family
This approach retains ownership while growing the capital base, an excellent solution for families wanting to compound without selling or triggering taxes.
Why Equity Recycling Is Becoming the Preferred Strategy
✔ Avoids Taxes
Not selling = no capital gains event.
1031 and 721 structures may allow tax deferral indefinitely.
✔ Preserves Compounding
The longer you hold high-quality real estate, the more powerful compounding becomes.
✔ Provides Passive Income
DSTs and REITs shift income from active to passive, freeing your time and lifestyle.
✔ Simplifies Estates
Fractional interests are far easier to divide among heirs than physical real estate.
✔ Offers Optional Liquidity
OP Units may be converted into REIT shares over time, creating built-in exit optionality.
✔ Reduces Concentration Risk
Diversify across geography, tenant type, and lease structure.
Equity Recycling gives investors flexibility without sacrificing return potential.
Real Example: Turning a $4M Property Into a Passive Income Engine
A long-time owner of a $4M industrial building faced:
aging tenant
rising management work
no desire to sell due to large taxable gains
Instead of selling, they executed:
① A 1031 exchange into a DST
② Received fully passive monthly income
③ Preserved 100% of their equity (no tax haircut)
④ Positioned future heirs to inherit a simple, divisible investment
Result:
More income. Less work. No tax hit.
This is the essence of Equity Recycling.
When Equity Recycling Makes the Most Sense
You should consider this strategy if you:
Are nearing retirement
Don’t want to be a landlord anymore
Have highly appreciated property
Want reliable passive income
Are planning your estate
Need diversification
Want to avoid triggering capital gains
This is one of the most powerful and underutilized wealth strategies available to real estate owners today.
Unlock Your Equity, Without Giving Up Your Wealth
Equity Recycling gives you the best of both worlds:
Liquidity, income, diversification, and estate clarity, without selling your best assets.
If you want to explore how DSTs or UPREIT structures can help you transition into Permanent Capital while keeping your wealth compounding, our team is here to guide you.
📧 Solutions@medalistreit.com
🌐 www.medalistreit.com
