Real Estate Investment Trusts or REITs are one of the most popular forms of real estate investment. REITs have some similarities to DSTs since both are structured as a trust and have in-place management and other features that can cause investors to confuse the differences. REITs, DSTs and triple net properties can be suitable options for investors who are seeking investment properties requiring minimal management responsibilities. For investors considering a 1031 Exchange, REITs have a significant downside when compared to DSTs however. Investors should take careful note that, upon the sale of REIT interests, any gains will be subject to taxes and cannot be deferred through a 1031 Exchange. IRS Revenue Ruling 2004-86 permitted the Delaware Statutory Trust (DST) structure to be treated as a “like-kind” property for both replacement and relinquishment purposes. If an investor is considering an exit strategy, a DST can therefore be an option that may allow the investor to defer taxes upon sale and also permit another 1031 Exchange deferral when the DST is eventually sold.
REITs can provide a tax-free exchange option if gains from the sale of a business property are rolled over into a REIT via a 721 Exchange. Section 721 of the Internal Revenue Code (aka “UPREIT”) allows an investor to exchange a business use property for shares in a REITwithout triggering a taxable event. Many REITs utilize section 721 as a method to acquire property from investors who are interested in selling their investment real estate but do not want to or are unable to find a suitable replacement property as part of a 1031 exchange. However, Section 721 is a one-way street and an investor will forfeit the option to further defer taxes via a future 1031 Exchange when the REIT shares are sold.
Investors should therefore fully understand the consequences of exchanging property into investments described as a “1031 Exchange REIT” or similar. A DST provides added tax deferral benefits as compared to a REIT.
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FGG1031 is an affiliate of First Guardian Group and is headquartered in San Jose, California. Our team consists of highly experienced real estate and investment professionals who have provided services to thousands of clients across the US for more than 12 years.
At FGG1031 we specialize in providing a custom 1031 exchange experience by working with the investor one-on-one throughout the entire 1031 exchange process. We provide advice on selecting suitable 1031 Exchange options including properties structured as a Delaware Statutory Trust (DST) as well as access to the wholly owned real estate across the US.
Word Citation: investments properties,1031 exchange reit, triple net leased property, exchanging property, investor exit strategy
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