How does a REIT qualify for a 1031 exchange?
The Internal Revenue Code 1031 allows the exchange of many types of real property as “like-kind” properties. Many investors wonder if REITs qualify for 1031 exchanges since REITs provide diversification.
Unfortunately, REITs cannot be exchanged for 1031 replacement property. 1031 exchanges are available for pooled real estate investment portfolios.
REITs and 1031 Exchanges
The real estate investment trust, or REIT for short, allows taxpayers to pool their resources by purchasing shares in a commercial REIT. REITs are often referred to as ‘mutual funds of real estate since they acquire, own, and manage commercial properties for their shareholders. Generally, the shares owned by investors in a REIT are considered personal property, not real property, and are not eligible for tax deferral. An exchange of real property for real property must be considered “like-kind.”. REITs are trusts that hold real estate – not real estate itself. The IRS approved a belief similar to this one that now qualifies for 1031 exchanges in 2004.
Alternative to REITs that qualify for the 1031 exchange
TIC Alternative
The benefits of investing in TIC properties are the same as those of investing in REITs. The IRS does not permit investments in REITs under 1031 exchanges.
DST Alternative
As an exception to the “like-kind” rule for real estate, the IRS approved the Delaware Statutory Trust in 2004. Like Real Estate Investment Trusts, Delaware Statutory Trusts have similar benefits. DSTs are trusts that own one or more properties, similar to REITs. With some REITs comprising 10 to 20 properties, investors can enjoy the same diversification as REITs. A DST can consist of various property types, including net leases, solar farmland leases, significant multi-family developments, storage unit complexes, and many more.
The 1031 Exchanges Place is not only able to help you better understand DSTs and determine if they are a good investment fit for you, but we can also provide you with a curated selection of the best deals available today.
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