1031 Exchange into REIT

[Pete Harper]

I'm doing some estate planning. My kids are in horror of inheriting and managing our real estate portfolio that includes multiple 1031 exchanges. These exchanges have almost no cost basis so they face substantial state and federal taxes if sold. Speaking with an advisor he mentioned doing a 1031 exchange into a upREIT. The advisor said I could sell the property and do a 1031 exchange through an intermediary into a qualifying REIT. When we die the REIT would get a step up in cost basis so our kids would not be liable for the original taxes. They then have the option of collecting dividends from the REIT or selling shares at the step up cost basis. Since my kids are all live tin Texas they avoid state taxes associates with original 1031.

Is my understanding correct?

[Jon Taylor]

Connor is right, you cannot 1031 exchange directly into a REIT.

In order to perform a tax deferred exchange into an REIT, you will take advantage of IRS tax code 721.

This requires that the buyer of your current property be a REIT, and allows you to exchange the value of the asset for equivalent ownership in the REIT.

Occasionally, a REIT may be interested in purchasing the property that you own currently; or you may work with the REIT directly to own a property that they would want to purchase in the future; or as Connor mentioned the most common way for retail investors to participate in this exchanges through the DST market.

The top 4 DST sponsors all manage, privately traded REITs.

You really need to have a fundamental understanding of the REIT before taking this step, as it will be the last tax deferred transaction you can control with that equity. I posted a fairly lengthy post on this forum on how to review a REIT.

If you haven’t read it yet, DM me and I’ll send it to you.