In a 1031 exchange, you need to be careful when picking replacement property, as it must be considered to be real property.
There are other securitized real estate investments that are considered to be an interest in real property. These are often called a Delaware Statutory Trust or “DST.”
Delaware Statutory Trust Rev. Rul. 2004-8618 (the DST guidance) addresses whether a DST will be treated as an investment trust or business entity for federal income tax purposes.
If the DST is treated as an investment trust, interests in the DST will be treated as interests in the property owned by the DST for purposes of section 1031, and therefore beneficial owners can exchange their relinquished property for interests in the DST.
See: 2004-2 C.B. 191
As you may now know the IRS generally won’t allow one to exchange from real property into a partnership or even certain de facto partnership disguised as a tenants-in-common arrangement.
The newest Treasury Regulation that defines what real property is states that:
(5) Intangible assets—(i) In general. Intangible assets that are real property for purposes of section 1031 and this section include the following items: Fee ownership; co-ownership; a leasehold; an option to acquire real property; an easement; stock in a cooperative housing corporation; shares in a mutual ditch, reservoir, or irrigation company described in section 501(c)(12)(A) of the Code if, at the time of the exchange, such shares have been recognized by the highest court of the State in which the company was organized, or by a State statute, as constituting or representing real property or an interest in real property; and land development rights. Similar interests are real property for purposes of section 1031 and this section if the intangible asset derives its value from real property or an interest in real property and is inseparable from that real property or interest in real property. The following intangible assets are not real property for purposes of section 1031 and this section, regardless of the classification of such property under State or local law—
(A) Stock not described in paragraph (a)(5)(i) of this section, bonds, or notes;
(B) Other securities or evidences of indebtedness or interest;
(C) Interests in a partnership (other than an interest in a partnership that has in effect a valid election under section 761(a) to be excluded from the application of all of subchapter K);
(D) Certificates of trust or beneficial interests; and
(E) Choses in action.
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