Can You Do a 1031 Exchange into a REIT? Here’s What Investors Need to Know

If you’re considering a 1031 exchange and eyeing Real Estate Investment Trusts as a potential investment, you might want to pause before making any moves. While REITs can be attractive for their liquidity and diversity, they present a unique challenge when it comes to 1031 exchanges.

Here’s the short answer: No, you cannot directly exchange investment property for REIT shares through a 1031 exchange. But don’t click away just yet – there are some alternatives worth considering.

Why REITs Don’t Qualify for 1031 Exchanges

The IRS draws a clear line here: REIT shares are considered personal property, not real estate. Even though REITs invest in real estate, buying shares in a REIT is more like purchasing stock than property. For a 1031 exchange to work, both the relinquished and replacement properties must be considered “like-kind” – and REIT shares simply don’t meet this requirement.

Alternative Solutions

If you’re attracted to the benefits of REITs but still want to take advantage of tax deferral, consider these options:

• Delaware Statutory Trusts (DSTs) offer a similar investment structure to REITs but qualify for 1031 exchanges. Like REITs, DSTs provide professional management and the potential for regular income. Unlike REITs, DST interests are considered real estate for tax purposes, making them eligible for 1031 exchanges.
• Another option is investing in a Tenant-in-Common (TIC) arrangement, which allows you to own a fractional interest in larger commercial properties while maintaining 1031 exchange eligibility.

Making the Right Choice

Before deciding on any investment strategy, consider your goals:

• If you’re seeking passive income and professional management, a DST might be your best bet
• If you want more control over your investment, traditional real estate might be preferable
• If liquidity is your primary concern, you might need to weigh the tax benefits of a 1031 exchange against the accessibility of REIT investments

Remember, any significant investment decision should involve careful consultation with your tax and legal advisors. While REITs might not work, plenty of other options can help you defer taxes while achieving your investment objectives.

Need help exploring your 1031 exchange options? Contact WealthBuilder 1031 at 888-508-1901 for a personalized consultation. We’ll help you navigate the complexities of tax-deferred exchanges and find the right investment strategy for your portfolio.