What to Know About Real Estate Investment Trusts (REITs) & 1031 Exchanges

Most 1031 exchanges are done for like-kind real estate. One type of property that many investors don’t consider when it comes to 1031 exchanges is the REIT, or Real Estate Investment Trust. REITs can be a great vehicle for deferring your taxes with a 1031 exchange. In this article, we are going to offer up a primer on Real Estate Investment Trusts (or REITs for short) and how they can be used in a 1031 exchange.

Real Estate Investment Trusts Explained

A Real Estate Investment Trust is a company that owns income-producing real estate and distributes dividends to the owners. REITs need to satisfy several guidelines in order to exist. For example a REIT needs to be taxable as a corporation, invest at least 75% of its assets into real estate, and have a minimum of 100 owners. REITs are also divided into different categories based on the type of real estate owned (office REITs, healthcare REITs, etc.).

Real Estate Investment Trusts can be exchanged in a 1031 transaction so long as they are exchanged for similar (like-kind) REITs. Doing so allows you to defer your capital gains taxes on the sale, and keep your hard-earned money working for you in a continued property investment.

MN Real Estate Exchanges

Selling investment real estate comes with a big capital gains tax bill. Why not avoid that tax bill by deferring your capital gains taxes with a 1031 exchange? The qualified intermediaries at CPEC1031 can help you through all the required steps of your like-kind exchange – from the closing of your relinquished property to the purchase of your replacement property. Contact our 1031 exchange professionals today with any questions regarding your transaction. We are located in downtown Minneapolis, but work with clients across the United States.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

Are REITs Eligible for 1031 Exchanges?

Many people have questions about what to do for their replacement property. Some people ask if they can sell their relinquished property and put the money into a REIT (Real Estate Investment Trust) with no tax consequences.

DSTs & Single Tenant Property

Generally, I prefer to see people invest into DSTs (Delaware Statutory Trusts) because there is more certainty that they qualify as like-kind real estate.

Another alternative is to exchange into a single tenant Net Net Net leased property such as a CVS or Walgreens that you own by yourself, because you maintain more control, but still have a less management-intensive property to deal with.

UPREIT

If you want to go the REIT direction, then an UPREIT (Umbrella Partnership Real Estate Investment Trust) may qualify, but be mindful you must first purchase and hold your like-kind fractional interest (tenant-in-common interest) in the replacement property real estate for a period of time before contributing it to the UPREIT partnership pursuant to Section 721 of the Internal Revenue Code.

My concern has been that people do NOT hold their fractional interests in the replacement property real estate for a sufficient period of time doing the §721 contribution and that partnership interests are specifically excluded from 1031 treatment. So if you immediately convert your replacement property into a non-qualifying partnership interest you may jeopardize the tax deferral under §1031.

Delaware Statutory Trust Alternative

A direct purchase of a REIT won't qualify for 1031 because they're either a beneficial interest in a trust or they’re some kind of other excluded property (stock or some kind of interest in a business entity). But the close cousin to the REIT, a Delaware Statutory Trust (DST), will qualify. A Delaware Statutory Trust is a smaller portfolio of real estate and the IRS says that when you buy an interest in a properly set-up Delaware Statutory Trust you are deemed to own the underlying real estate of the trust. So instead of thinking about REITs, change your thought pattern to Delaware Statutory Trusts to make sure that your replacement property is considered to be a like-kind interest in real property that qualifies under section 1031.

• Start Your 1031 Exchange: If you have questions about REITs, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved

Can you 1031 Exchange into Stock?

People sometimes ask if they can do a 1031 into stock. Most people are selling real estate and needing to exchange into other like-kind property. Wouldn’t it be great if we could exchange into stock in IBM or Target or another big Fortune 500 company? This article will discuss the issue of 1031 exchanges and stock.

1031 Treasury Regulations

Unfortunately, when the Treasury regulations were written for the tax code relating to Section 1031 Congress excluded stocks, bonds, and other evidences of indebtedness. So paper such as stock, bonds, and notes are all excluded from 1031 treatment. You can’t exchange into it.

Real Estate Investment Trusts (R.E.I.T.)

What you can exchange it into is other real estate. What some people like to do is acquire a piece of real estate that eventually will be contributed to a real estate investment trust.

They’ll hold that piece of property for a year or two and then contribute it in a section 721 contribution so that piece of real estate that they acquired as the replacement property eventually migrates up to the REIT and turns into shares in the REIT itself. So in a strange roundabout way there's a way to piggyback the section 1031 exchange with a 721 contribution to effectively get to a place where you actually acquired at the end of this shares in an interest in a REIT.

There is no mandated bright line rule that I can direct you to for how long you must hold a property before contributing it to a partnership. Both the tax code and the regulations are void of clarity. There are some tax cases on point; however, most of these authorities are older from before partnership interests were excluded from 1031 treatment in IRC section 1031(a)(2)(D) as a result of the Tax Reform Act of 1984, Pub. L. No.98-369, 98 Stat.494.

• Start Your Exchange: If you have questions about stocks or interests in business entities such as corporations or partnerships involving 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved