Can You 1031 Exchange Into a REIT? No—DST and UPREIT Alternatives Explained

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 if you are considering using a REIT for a 1031 exchange. (New to 1031 exchanges? Start with our complete guide for real estate investors.)

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. This makes the question “Can I use a REIT for a 1031 exchange?” quite relevant.

The Delaware Statutory Trust (DST) Solution — and What It Doesn’t Do

You can’t exchange directly into REIT shares. A properly structured Delaware Statutory Trust (DST) may provide similar passive real estate exposure while still qualifying as replacement property for a 1031 exchange: a DST interest that meets the requirements of Revenue Ruling 2004-86 is treated, for federal income tax purposes, as a direct ownership interest in the underlying real estate rather than as a certificate of trust or beneficial interest. Separately, some specialized programs may later offer a §721 contribution to an UPREIT operating partnership — exchanging property (or a DST interest) for partnership units that may become redeemable for REIT shares or cash, depending on the specific program’s operating partnership agreement. That redemption right is not automatic, not guaranteed by §721 itself, and not part of the original 1031 exchange.

Revenue Ruling 2004-86 addresses federal income tax treatment under §1031 only — it says nothing about whether a DST interest is a security under federal or state securities law. Many DST interests are offered through private securities placements and are limited to accredited investors; availability and investor-qualification requirements depend on the specific offering. Section 721 generally provides nonrecognition when property is contributed to a partnership in exchange for a partnership interest. It does not itself create or guarantee any later right to redeem the partnership units for REIT shares or cash.

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, 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. That’s true whether you’re weighing a DST, a possible future UPREIT structure, or a more complex exchange type like a reverse 1031 exchange.

WealthBuilder 1031: Your Trusted Partner

WealthBuilder 1031 can handle the exchange mechanics and coordinate with your licensed securities and tax professionals on a DST or UPREIT structure. We do not sell or recommend DST or REIT investments. Many DST offerings are limited to accredited investors and carry their own risks — talk with your advisor before choosing this path.

Frequently Asked Questions

Can I 1031 exchange into a REIT?

Not directly. REIT shares are securities, not real property, so they don’t qualify as like-kind replacement property under Section 1031. A properly structured DST interest can offer similar diversified real estate exposure while still qualifying for a 1031 exchange.

What’s the difference between a DST and a REIT?

A REIT is a security representing a stake in a company that owns real estate. A DST interest that meets the requirements of Revenue Ruling 2004-86 is treated, for federal income tax purposes, as a direct ownership interest in the underlying real estate itself — which is why it can qualify as 1031 replacement property while REIT shares cannot.

What is a §721 exchange (UPREIT)?

Some specialized programs may later allow an investor to contribute a DST interest to an UPREIT operating partnership under Section 721 in exchange for partnership units, which may become redeemable for REIT shares or cash. That redemption right depends entirely on the specific program’s operating partnership agreement — it isn’t automatic, isn’t guaranteed by Section 721 itself, and isn’t part of the original 1031 exchange.

Do I need to be an accredited investor to use a DST?

Many DST interests are offered through private securities placements limited to accredited investors, though availability and investor-qualification requirements vary by offering. Talk with a licensed securities professional about which DST programs you qualify for.

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 coordinate the exchange mechanics, answering any queries like “Can I use a REIT for a 1031 exchange?”

Chris Peterson — Texas Licensed Attorney & Founder, WealthBuilder 1031

Chris is the Owner and President of WealthBuilder 1031 and a licensed Texas attorney. He graduated from Wheaton College and the University of Texas School of Law and speaks regularly to realtors, accountants, and title companies about 1031 exchanges. Learn more →