An Real Estate Investment Trust (REIT) is similar to a stock bond mutual fund however instead of holding bonds or stocks it is a real estate investment trust. REITs rarely own single-family rentals , instead they put their money into an investment portfolio that includes institutional property which they buy and sell at any time. For investors in real estate, it gives the advantages of a diverse portfolio which is professionally managed with the certainty of knowing that REIT will distribute nearly all the net earnings to investors.
For those who follow REITs they will know that REITs regularly employ the 1031 option for selling their properties and later purchasing real estate, or vice versa when they are performing reverse 1031. This tax advantage on the REIT or entity level is transferred into the investors at an individual level. However, even though REITs are able to make an exchange under 1031 law at the level of an entity the individual REIT shares are regarded as personal property and don’t be eligible for an exchange under 1031 since only real property can be considered eligible. To be able to defer tax in the 1031 exchange tax payer must trade real property in exchange for “like-kind” tangible property.
In this article, we’ll examine methods for executing an exchange of 1031 or similar exchange to REIT shares through Section 721 exchange. If you require assistance in your transaction, make an appointment with us.
What Is An Exchange Of REIT Shares To 1031 Shares?
Yes however, it’s not directly. You will need an intermediary in the process. IRS 1031 exchange regulations only allow exchanges of similar-kind real estate properties that is used for investment or business reasons. The exchanges can’t be done directly by converting real property exchange funds to securities such like Real Estate Investment Trust (REIT) shares. However, they are able to be converted from DST to DST to REIT.
In 2004 the IRS released Revenue Ruling 2004-86 which clarified that the Delaware Statutory Trust structure (commonly called DST) DST) to be a kind of investment that can be used to fund an exchange of 1031. The structure allows that an investor could sell one property to convert it into an DST. Although this could be a two-step process this could be the best method to make the REIT exit.
The initial step of this transaction will grant an investor the right to the real estate by way of an interest that is beneficial to the trust, which qualifies as an ordinary 1031 exchange. In diversifying an exchange to several DST offerings Investors are just an inch closer to owning shares of REITs.
The second stage of this deal would be the liquidation of DST investments, and also the successful completion by the sponsor of a 721 swap, commonly referred to as an upREIT. The DST property may be later added to an UPREIT structure as per Section 721, which allows the taxpayer to ultimately purchase OP Units that are essentially the same as an interest in the REIT the REIT itself.
In other words, if you have real estate property and wish to sell it tax-efficiently then you first) sell your property 2.) let the proceeds go to a Qualified Intermediary , as the norm, and then) convert the sale proceeds into an DST that will become an four) REIT within a few years. After it’s in the REIT have OP Units of the REIT. This is like being a shareholder in the REIT. If you’ve not paid any taxes at the beginning or at the time of conversion. You are now able to sell or give away the units or units in the REIT. You only have to be taxed if you sell. If you don’t sell, on your death, your beneficiaries will receive the increased cost basis.
What Happens After Doing An Exchange Of 1031 Into An REIT?
When you complete the section 721 conversion to REIT shares, then you will never do another 1031 conversion to use that equity. If you sell shares of the REIT, any gains are subject to the different taxation regimes, both federal and state. Prior to completing a 1031 swap to DST DST and later into REIT, take the time to read the memorandum or prospectus , and discuss with your legal and tax experts about your particular circumstance.
The main reasons why people prefer 721 exchanges is because they can gain liquidity or gain access to capital, which is not the case for stand-alone DSTs They also appreciate the possibility of flexibility to estate planning, and the fact that it is built in an institutional portfolio with diversified assets which, in theory, should perform better than an entire group made up of DSTs and the advantage of not having to locate a new property every five years or as. The sole reason to stay clear of the 721 exchange is that you will never be able to make another exchange under 1031 and when the REIT that you acquire is a snoozer or is an unprofitable investment, then selling will trigger an income tax.
How does it affect you for you? Tax & Law Research Inc. has been aware of tax-efficient DSTs that convert into REITs for a long time. We’ve not recommended them until recent. We believed that standalone DSTs were superior. However, the market and sponsors have evolved. The reason we’ve been looking at a certain portion of portfolios ending being a REIT due to the fact that the standard of the final REIT’s destination has significantly improved in the past few years. The REIT you choose to invest in has become more predictable, and is essential in order to ensure that you’re married for the rest of your life.
Tax & Law Research Inc. Can Help With 1031 Exchanges
We always suggest to talk to an accountant or tax lawyer who knows about 1031 Exchanges. Our experts will give you the most current information on every investment strategy, and can help to determine which strategy will work best for you and your family.
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