UPREITS and 1031 EXCHANGES

Many real estate investors have heard that it’s possible to trade real estate into a REIT using a 1031 exchange. While this is not true, there is another strategy that allows investors to trade their real estate into a REIT partnership in a manner that is tax deferred.

Are REIT shares like kind to real estate?

A REIT is an entity similar to a mutual fund that owns real estate and is not taxed at the corporate level. Investors who invest in REITs own shares of stock and do not own the real estate directly. Not only are shares of stock personal property and therefore not like kind to real property, but Section 1031 specifically states that stock cannot be traded in a 1031 exchange.

UPREITS

Some REITs own their real estate in an UPREIT or umbrella partnership. If the REIT is interested in buying your real estate, you can contribute the real estate to the UPREIT in exchange for operating units (OP Units) of the UPREIT. This transaction can be structured to be tax deferred under IRC Section 721. Now you own OP Units which give you the right to receive cash flow that is equivalent to owning shares of the REIT stock. Eventually you can convert those OP Units to cash or REIT shares, although when you do so, it will likely be a taxable event. This allows an investor to spread out the tax liability or in some cases hold onto the units so that his or her heirs can inherit them at a step up in basis. It also may give the investor more diversification, since the REIT typically owns many more properties than what the investor owned.

Although REIT shares cannot be traded for real estate in a 1031 exchange, contributing real estate to an UPREIT is another option, provided the REIT is interested in acquiring your properties. This article only mentions the highlights of this structure. The first step is to talk to your tax advisor. If you would like to set up a 1031 exchange or have any questions, please contact us at First American Exchange.

____________________________________

Have additional questions for us? Ask your question here. Want to get started with your exchange? Start yours here.

Stay up to date on the 1031 exchange industry, sign up for updates here.

First American Exchange Company, LLC a Qualified Intermediary, is not a financial or real estate broker, agent or salesperson, and is precluded from giving financial, real estate, tax or legal advice. Consult with your financial, real estate, tax or legal advisor about your specific circumstances. First American Exchange Company, LLC makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions. First American, the eagle logo, and First American Exchange Company are registered trademarks or trademarks of First American Financial Corporation and/or its affiliates.