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1031 EXCHANGE ISSUES WITH REITs

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.

Please contact us to answer related questions.

 

About FGG 1031:

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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Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing. Paul Getty’s transaction experience includes buy and sell side representation, sourcing, and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.

Prior to founding First Guardian Group/FGG1031, Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.

Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of the Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC.

Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is the author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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