Many taxpayers have questions about 1031 exchanges involving DSTs or REITs. In this article, we are going to discuss when (if ever) you can 1031 exchange out of REITs or DSTs into traditional real estate.
DSTs and REITs
Some DSTs are designed to be like a mini-REIT – a portfolio of a handful of properties. That portfolio is going to have investment benchmarks. When the portfolio meets those benchmarks, the syndicator will sell the portfolio and all of the investors will have the opportunity to either cash out (and pay their taxes) or to do another 1031 exchange. That may happen a few years from now or a decade or more later. These types of products have a built-in “exit” that offer investors the opportunity to do another 1031 exchange down the line.
Other sponsors have DSTs that are designed after a period of time not to be sold, but to go up into a REIT. So the property that is in the DST is going to be absorbed under section 121, which is the contribution of property of a partnership (known as an UPREIT partnership). The plan is to absorb the property into the UPREIT so the investors then find themselves in the equivalent of a big, diversified REIT. This situation is kind of like the Hotel California – you can check out, but you can never leave (without triggering capital gains taxes).
Questions? Give Us a Call
If you’re considering whether to exchange into traditional real estate, REITs, or DSTs, please give us a call today to discuss. Our qualified intermediaries have been facilitating these types of transactions for more than twenty years and can help you through all the ins and outs of your situation. Contact us at our Minneapolis office to learn more!
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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