In short
The Fed raised rates in September 2026 and the 10-year Treasury sits above 5%. What that does to debt replacement, cap rates and the case for a zero cash flow DST in an exchange.
On September 16, 2026 the Federal Open Market Committee raised the federal funds target range by a quarter point to 3.75% to 4.00%, by a 12 to 0 vote, its first increase since July 2023. The 10-year Treasury yield closed at 5.26% on September 29, and the bank prime rate is 7.00%. The committee’s median projection keeps the funds rate at 4.1% through the end of 2027. For a seller in the middle of an exchange the question is not where rates go next but how to replace the debt you are paying off at today’s cost without turning the exchange into a cash-flow problem.
Where rates stand, from the Fed’s own releases
- Target range 3.75% to 4.00% after the September 16, 2026 statement, which says “inflation remains elevated” and that the move “will support a timelier return to the Committee’s 2 percent goal.”
- The path to get here, from the Fed’s open market operations table: the last increase before this one was July 27, 2023, to 5.25% to 5.50%; cuts from September 2024 through December 2025 brought the range to 3.50% to 3.75%; one increase in September 2026.
- Median projections from the same meeting: funds rate 4.1% at end-2026 and end-2027, 3.9% in 2028, 3.6% in 2029, 3.2% in the longer run; PCE inflation 3.7% for 2026 and 2.3% for 2027; unemployment 4.1%; real GDP growth 2.3%.
- Treasury yields for September 29, 2026 from the H.15 release: 2-year 4.89%, 5-year 5.06%, 10-year 5.26%, 30-year 5.59%; effective federal funds 3.88%; prime 7.00%.
Why the 10-year matters more than the funds rate
Fixed-rate commercial mortgages are priced from longer Treasuries plus a lender’s spread, not from the overnight rate. A 10-year Treasury above 5% means the base cost of a ten-year loan is higher today than at any point in the 2024 to 2025 cutting cycle, even though the funds rate is lower than it was then. The curve is also upward-sloping, with the 30-year above the 10-year, so longer fixed terms cost more. We do not quote lender spreads here because no primary source publishes them; get a term sheet.
Debt replacement at a higher coupon
The tax rule is unchanged by the rate. Under Reg. section 1.1031(d)-2, a liability the buyer assumes or takes subject to “is to be treated as money received by the taxpayer upon the exchange.” The regulation’s example then sets the netting order: debt relieved can be offset by debt assumed on the replacement property or by cash the exchanger adds, but cash received cannot be offset by taking on new debt. Our answer page on whether a DST loan counts as replacement debt applies the rule to trust interests.
A hypothetical: you sell for $2,000,000, pay off an $800,000 loan at 5%, and net $1,100,000 after $100,000 of costs. To avoid boot you need replacement property worth at least $2,000,000 with at least $800,000 of new debt or added cash. At a 7% coupon, $800,000 of interest-only debt costs $56,000 a year against $40,000 before: $16,000 of cash flow gone before you have changed anything else. If the replacement produces $110,000 of net operating income, the rate move alone takes its cash-on-cash return from 6.4% to 4.9% on the $1,100,000 of equity. Run your own numbers with your CPA; the point is that debt replacement is now a cash-flow decision, not just a tax rule.
Cap rates: a mechanism, not a forecast
When the loan constant exceeds the property’s cap rate, borrowing reduces the return on equity instead of raising it. No government source publishes cap rates, so we make no claim about where they sit in any market. The arithmetic is enough: with ten-year money priced off a 5.26% Treasury, a property bought at a cap rate below the all-in loan rate is negatively levered from day one, and the exchange rules push you toward carrying that debt anyway.
Where a zero cash flow DST changes the math
A cash out DST is a zero cash flow Delaware statutory trust backed by a long-term, investment-grade lease, with leverage high enough that a small portion of your proceeds satisfies the debt-replacement requirement, leaving the rest free for low-leverage investments. After the trust’s tax-free refinance, 80% to 90% of the exchange value can be returned to you as cash, which is how the structure lets you sell today and buy later. Those are the features of the product as we offer it; the risks are structural. Every dollar of rent goes to debt service, so there is no current income; the outcome depends on one tenant’s credit for the life of the lease; the interest is illiquid; and the trust cannot refinance or re-lease on its own, as the DST hub explains. In a high-rate year its use is specific: it covers the debt line of the exchange so you are not forced to buy a negatively levered building by day 45.
Refinance timing and assumptions
The committee’s median path has rate cuts in 2028 and 2029, not before. A seller who expects to refinance a replacement property into lower rates is relying on a projection the committee itself revises every quarter. Two alternatives are on firmer ground: a replacement property whose existing low-rate loan can be assumed, covered in can a buyer assume a low-rate mortgage in a 1031, and shorter fixed terms priced off the 2-year and 5-year parts of the curve, which sit below the 10-year.
What to do now
- Get a written debt quote before day 45, not after. The identification should fit the financing, not the other way round.
- Put a DST on the identification list as the fallback that closes in days if the financed purchase slips.
- Model negative leverage honestly: cap rate against all-in loan rate, on the equity you actually net.
- Request a proposal with the loan payoff figure; the debt line decides which structures fit.
