![]() The investor receives an interest in the operating partnership in exchange for his or her contribution of the real estate and is now effectively part of the REIT. The second step is to contribute the fractional interest into the operating partnership after a holding period of 12 to 24 months as part of a 721 Exchange (tax deferred contribution into a partnership). This completes the 1031 Exchange portion of the transaction. However, instead of searching for suitable replacement property the investor would identify and acquire a fractional interest (tenant-in-common interest) in real estate that the REIT has already designated. The first step is selling the relinquished property and structuring a 1031 Exchange. UPREITs are generally structured as a two step process using a combination of a tax-deferred exchange pursuant to Section 1031 of the Internal Revenue Code ("1031 Exchange") and subsequently a tax-deferred contribution of real estate into a partnership pursuant to Section 721 of the Internal Revenue Code ("721 Exchange"). This rarely happens because the REIT is generally not interested in the real estate offered by the investor. Investors can effectively dispose of real estate and acquire an interest in a REIT on a tax deferred basis by taking advantage of the upREIT strategy.Ī pure 721 Exchange transaction would involve a direct contribution of the investor's real property into the operating partnership in exchange for an interest in the operating partnership. Investors can sell rental or investment real property and then 1031 Exchange into an interest in an upREIT, which is also referred to as a 1031/721 Exchange or a 1031 Exchange followed by a 721 Contribution.Īn Umbrella Partnership Real Estate Investment Trust, usually referred to as an upREIT or a 1031/721 Exchange, can provide virtually the same tax-deferred benefits to real estate investors that a 1031 Exchange provides when they contribute their investment real property into a new ownership structure that includes an operating partnership with a REIT. ![]() ![]() There is, however, one exception to this question. The investor would need to acquire a direct interest in real estate in order to qualify for tax-deferred exchange treatment under Section 1031. a security interest) and not an interest in real estate and is therefore not like-kind to the real property that was sold. The answer is no because buying shares in a REIT is considered to be personal property (i.e. Investors often ask if they can 1031 Exchange out of investment real estate and acquire an interest in a Real Estate Investment Trust as their replacement property. REITs are also well known for providing handsome cash flows in the form of dividends paid to investors.Ĭan an Investor 1031 Exchange into a REIT? Real Estate Investment Trusts generally acquire and own numerous investment real properties that provide investors with a well diversified investment real estate portfolio. REITs are therefore considered securities and can be publicly traded (bought and sold) like any other publicly traded stock, bond or mutual fund, or it can be privately traded and bought or sold through registered representatives that specialize in non-publicly traded REITs. Investors buy shares or units in the REIT and the REIT in turn buys the real estate. ![]() Real Estate Investment Trusts, usually referred to as REITs, are very similar in concept to a mutual fund that invests in real estate and real estate related assets. Register Now UPREITs as 1031 Exchange Replacement Property Solutions Get the edge you deserve when it comes to understanding the power of wealth building tax-deferral and tax-exclusion strategies.
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