3 Steps to 1031 Exchange into a REIT

Carl E. Sera, CMT
Carl E. Sera, CMT
Managing Principal, Sera Capital
Carl Sera is a Chartered Market Technician and the Managing Principal at Sera Capital Management, LLC. He has over 14 years of experience in the financial services industry with a focus on investment management.

apartment building

The answer to “can I 1031 exchange into a REIT?” is yes and no.

Yes, you can, because the IRS says you can. No, you can’t, because most REITs have no interest in acquiring your property since in most cases it is too small for inclusion in their portfolio. But recently, several large REITs have found a way for you to 1031 Exchange into their REITs with as little as $250,000 if you follow certain guidelines.

How does it work? Here are the 3 steps.

Using Delaware Statutory Trusts (DSTs) in a 1031 Exchange to 721 Exchange & 721 UPREIT

  1. The REIT creates a temporary Delaware Statutory Trust (DST) that allows you, the 1031 exchanger, to purchase.
  2. After an appropriate period, the REIT absorbs the DST into their portfolio taking you the temporary DST investor along for the ride.
  3. Once the process is complete, you own the REIT.

This approach initially utilizes Section 1031 of the IRS code and then Section 721 of the IRS code to make it possible. This is all done on a tax deferred basis and confers all the benefits of a REIT to the exchanger. Another name for this technique is 721 Exchange or 721 UPREIT.  It has opened the door to institutional quality real estate for even the smallest of accredited investors. This approach thus makes the 1031 Exchange into a REIT available to most real estate investors.

Elderly woman and daughter

So how has Sera Capital incorporated this as part of our/your exit planning solution?

Let’s see what “Billie” did.  Who is Billie?  She was our first 1031 Exchange client and the reason we developed DST or Delaware Statutory Trust expertise in the first place. You can read about what we did for her long ago by clicking the following link 1031 Exchange to Delaware Statutory Trust (DST) Advisor.  But let’s fast forward to November 2021, the date that Billie’s first DST went full cycle and she had to decide what to do with her proceeds.

When the DST sponsor informed us in July of 2021 that Billie’s DST was going to be sold and that she would be receiving her original investment plus her profits in November of 2021 we had to act. We helped her set up a new 1031 Exchange with her Qualified Intermediary and the proceeds went there instead of directly to Billie just as you would do with any 1031 Exchange.

What next? As is always the case, we/she had 3 choices,

  1. Receive the money, do not reinvest any of the proceeds and pay taxes on the entire amount received, or
  2. Receive the money, reinvest a portion of the proceeds and pay taxes on the portion she doesn’t reinvest or
  3. Reinvest the entire proceeds and defer taxes completely as before.

Apartment REITBillie chose option 2.  She took approximately $100,000 out of the proceeds as “boot”, paid taxes on it at a reduced rate and invested the balance.  Here is where things get interesting.  She now had two choices or alternatives with how to complete the 1031 Exchange.  She could invest in a Traditional DST like she did before, or she could instead invest in the 721 DST.  It was a no-brainer.  The 721 DST was her best option, what we recommended and what she did.

What’s next?  As her other DSTs mature or complete their cycle, we will be rolling over her DSTs into the 721 DSTs and she will eventually have a diversified portfolio of REITS instead of a concentrated portfolio in individual DSTs.  Our only regret is that this solution was not available when we first met Billie.  But it is available today and everyone should take a serious look at why we value this solution so highly.  It’s certainly what we would do with our money and as fiduciaries, we recommend it at every appropriate opportunity.

To find out more schedule your 30 minute call today.

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