Case Study

3 Steps to 1031 Exchange into a REIT

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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 it is usually 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 specific guidelines.

How does it work? Here are the three steps.

apartment building

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 its portfolio, taking you, the temporary DST investor, along for the ride.
  3. Once the process is complete, you own the REIT.

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 1031 Exchange to Delaware Statutory Trust (DST) Advisor link. But let’s fast forward to November 2021, when 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 would be sold and that she would receive 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 three 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 REIT

Billie chose option 2. She took approximately $100,000 out of the proceeds as “boot,” paid taxes at a reduced rate, and invested the balance. Here is where things get interesting. She now had two choices or alternatives for completing the 1031 Exchange. She could invest in a Traditional DST as before or 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 roll over her DSTs into the 721 DSTs. 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 unavailable when we first met Billie. But it is available today, and everyone should seriously consider 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.

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