Are REITs Eligible for 1031 Exchanges?

Real estate investment trust

Many people have questions about what to do for their replacement property. Some people ask if they can sell their relinquished property and put the money into a REIT (Real Estate Investment Trust) with no tax consequences.

DSTs & Single Tenant Property

Generally, I prefer to see people invest into DSTs (Delaware Statutory Trusts) because there is more certainty that they qualify as like-kind real estate.

Another alternative is to exchange into a single tenant Net Net Net leased property such as a CVS or Walgreens that you own by yourself, because you maintain more control, but still have a less management-intensive property to deal with.

UPREIT

If you want to go the REIT direction, then an UPREIT (Umbrella Partnership Real Estate Investment Trust) may qualify, but be mindful you must first purchase and hold your like-kind fractional interest (tenant-in-common interest) in the replacement property real estate for a period of time before contributing it to the UPREIT partnership pursuant to Section 721 of the Internal Revenue Code.

My concern has been that people do NOT hold their fractional interests in the replacement property real estate for a sufficient period of time doing the §721 contribution and that partnership interests are specifically excluded from 1031 treatment. So if you immediately convert your replacement property into a non-qualifying partnership interest you may jeopardize the tax deferral under §1031.

Delaware Statutory Trust Alternative

A direct purchase of a REIT won't qualify for 1031 because they're either a beneficial interest in a trust or they’re some kind of other excluded property (stock or some kind of interest in a business entity). But the close cousin to the REIT, a Delaware Statutory Trust (DST), will qualify. A Delaware Statutory Trust is a smaller portfolio of real estate and the IRS says that when you buy an interest in a properly set-up Delaware Statutory Trust you are deemed to own the underlying real estate of the trust. So instead of thinking about REITs, change your thought pattern to Delaware Statutory Trusts to make sure that your replacement property is considered to be a like-kind interest in real property that qualifies under section 1031.

  • 1031 Hotline: If you have questions about REITs, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

 

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