1031 Exchange for REITs? Not Directly, But There’s a Workaround

Real estate investment trusts (REITs) offer a way to diversify your investment portfolio and potentially generate passive income. If you’re looking to leverage the benefits of a 1031 exchange – deferring capital gains taxes on the sale of investment property – you might wonder, “Can I use a 1031 exchange for REITs?”

The short answer is no… but there’s a strategic workaround.

REITs and 1031 Exchanges: The Mismatch

The IRS considers REITs as personal property, not real property. For a 1031 exchange to be valid, you must exchange one piece of real property for another that’s considered “like-kind.” Since REITs aren’t real estate, they don’t fit this criteria.

The Delaware Statutory Trust (DST) Solution

Here’s where the workaround comes in: Delaware Statutory Trusts (DSTs). These unique entities hold real estate assets, and fractional ownership interests in a DST are considered like-kind to real property.

By following this two-step process, you can essentially achieve the goal of using your 1031 exchange proceeds to invest in a REIT:

  1. 1031 Exchange into a DST: You sell your investment property and use the proceeds to purchase an ownership interest in a DST. This allows you to defer capital gains taxes.
  2. DST Invests in REITs: The DST, as the owner of the real estate, can then invest in REITs. You indirectly gain exposure to REITs through your ownership stake in the DST.

The Benefits of this Strategy

  • Tax Deferral: The primary benefit of using a 1031 exchange is deferring capital gains taxes, allowing you to preserve more of your investment capital.
  • Diversification: By investing in a DST that holds multiple properties or a variety of REITs, you can diversify your portfolio and potentially reduce risk.
  • Passive Income: REITs are designed to generate income through dividends, offering a potential source of passive income.

The Importance of Expert Guidance

Navigating 1031 exchanges and DST investments can be complex. It’s crucial to work with an experienced 1031 exchange professional who understands the intricacies of these transactions and can guide you through the process.

WealthBuilder 1031: Your Trusted Partner

At WealthBuilder 1031, we specialize in helping investors leverage 1031 exchanges to achieve their financial goals. Our team of experts can help you identify suitable DST investments, navigate the exchange process, and structure your investments in a tax-efficient manner.

Ready to Explore Your Options?

If you’re considering a 1031 exchange and want to explore the possibilities of investing in REITs, contact WealthBuilder 1031 at (888) 508-1901 for a free consultation. We’ll help you understand your options and develop a personalized strategy to maximize your investment returns.

Get Started Today

It is easy to get started on your exchange. You can either call our office directly at 888-508-1901, or you can fill out our Start Your Exchange form.
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