REIT 1031 Exchange: How The Strategy Works

A common question from investors completing a 1031 exchange: "Can I exchange into a REIT?" The short answer is: typically no — but there are alternatives that provide similar passive income benefits.

Why Most REIT Shares Don't Qualify

Under IRC Section 1031, the replacement property must be real property — not personal property or securities. REIT shares (stocks) are securities, not direct real estate, so they don't qualify as like-kind replacement property in a traditional 1031 exchange.

The Exception: UPREIT Transactions (721 Exchange)

Some REITs allow investors to contribute property in exchange for Operating Partnership (OP) units through what's called a 721 Exchange. While not a traditional 1031, this can defer capital gains. The catch: once you hold OP units, you generally can't do another 1031 exchange without triggering the deferred gain.

The Best Alternative: Delaware Statutory Trusts (DSTs)

DSTs are fractional ownership interests in commercial real estate that DO qualify as like-kind property in a 1031 exchange. They provide passive income with no management responsibilities — similar to REIT investing, but with the tax benefits of direct real estate ownership.

Common DST property types include institutional-quality apartment communities, net-lease retail (Walgreens, Amazon), and industrial warehouses.

Is a DST Right for You?

DSTs are best for investors who want to exit management responsibilities, diversify across multiple properties, or complete an exchange on a smaller relinquished property. They're not ideal for investors who want leverage or active management control.

Contact Samimi CRE Advisors to discuss 1031 exchange strategies tailored to your situation.