1031 Exchange into REIT?

4 Replies

On Brandon’s post How to reach a Million Networth in 7/8 years (2012), Brandon mentioned in the comments an option once he really retired would be to sell his portfolio and do a 1031 exchange into a REIT. Would some please clarify as my understanding is only “like properties”

Hi @Dulce Beltran , you are correct.  Generally speaking, REITs do not qualify as like kind property for 1031 exchange purposes.  The short explanation of why, is that the IRS deems REITs as a business, not real estate, even though the underlying assets are real estate.  The key distinction is that an investor does not hold direct interest in property title under a REIT structure.

There are however, a few ways to potentially exchange into a REIT on an indirect basis. This can be done by either contributing an asset you own to a REIT via a Section 721 UPREIT - however please note that for most investors this may not be feasible as the REIT has to want your asset. The more plausible method is an exchange into a DST and then the DST ultimately executed an UPREIT strategy upon exit, allowing investors the option of receiving REIT shares.

While the REIT shares now potentially offer greater diversification and liquidity, please note that once your shares are sold, you are no longer eligible for another 1031 exchange as you have essentially sold stock, not real estate.

You could consider buying fractional tenant in common shares, as a real estate transaction, and not a security transaction.

Also, a like kind exchange is any kind of real estate to any kind of real estate. You could sell a warehouse, and buy raw land.

@Dulce Beltran , I think it's much more likely that Brandon simply misspoke. While upreits and Syndications being sold into REITS can certainly happen as @Drew Reynolds explains, the most common vehicle to transfer real estate ownership from active to passive is using a1031 exchange to sell actively managed assets and buying passive structures that qualify for 1031 treatment.

The three most common are delaware Statutory Trusts, TIC (Tenants in common) structures under Rev proc 2002-22 or NNN leases. 1031 ing into these is relatively easy, due diligence of publically held companies much easier, and returns because of the tax deferral and added depreciation write off are much higher than paying the tax and investing in the market.

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