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Exchange from Real Estate into a REIT...

Tee-Shot #20 stated that you absolutely CANNOT exchange out of real estate and into a REIT. This is still true, except in the following limited situation:

Many real estate investors find themselves in a position whereby they want to sell their investment property (or perhaps have already done so) and then cannot find a suitable replacement property to exchange into and thereby defer their capital gains taxes. Some investors simply no longer want the responsibilities of being a landlord or the hassles of property maintenance. And still others wisely want to diversify their real estate portfolio.

Is it possible to sell your relinquished or Old Property and do a Section 1031 exchange and buy into something other than real estate...? What about alternative investments, such as stocks, bonds, mutual funds, and the like? The answer is a resounding NO, and in fact, securities are expressly forbidden under Section 1031 of the Code. Well, what about a mutual fund that invests solely in real estate, such as a REIT (Real Estate Investment Trust)? Again, the answer is NO.

Having said that, there is an exception of sorts -- a special type of REIT, called an UPREIT or Umbrella Partnership REIT. But it's not as simple as selling your Old Property and using the proceeds to buy REIT shares off of one of the major stock exchanges.

UPREITs allow investors to purchase Partnership Units in the REIT, which are similar to, but not the same as, Equity Shares (such as you'd buy off of a stock exchange). This strategy is done by combining two different, complex sections of the Internal Revenue Code: 1031 and 721. The REIT must be an UPREIT, you are still just deferring the capital gains, the Partnership Units liquidity is limited, and this exit strategy a one-way ticket! With traditional real estate investments you can always sell or do another 1031 exchange with your property -- but with UPREITs, once your 'in', you cannot then sell or exchange your Units and go 'back out' and buy actual real estate.

Make sure that you use a Qualified Intermediary that is very knowledgeable about this unusual real estate strategy.

--The Experts


I like Tee-Shots because they're short and to the point -- and they make a lot of sense!

Agnes Tabor, Realtor, e-PRO
South Bay Realty
Naples, Florida


TEE-Shots are Tips from the Exchange Experts that are designed to make you think about, and ask questions about, the 1031 exchange process.