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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
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