Can You Do a 1031 Exchange With a Commercial Property and a REIT?


Quick Answer

Investors who own shares in a real estate investment trust cannot participate in a 1031 exchange for commercial property, according to Exeter. REIT shares are treated as personal property under U.S. tax laws, and 1031 property exchanges require a direct interest in properties, as of 2015.

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Full Answer

Investors opt for the alternative 1031/721 umbrella partnership real estate investment trust, or upREIT, which offers similar tax benefits as the regular 1031 exchange, suggests Exeter. Two steps are required to set up an upREIT, and the first step involves selling relinquished property, which allows investors to create a 1031 exchange. Investors use fractional interest real estate instead of real property as part of the exchange. Investors hold the fractional interest real estate for one or two years before setting up the 721 in the second step, creating an operating partnership.

Under 1031 tax rules, personal real estate, such as a primary home, is not eligible for exchanges, but tax rules allow for some exceptions regarding vacation homes, according to Forbes. Investors need to check current U.S. tax codes for more information. When conducting commercial property swaps using 1031 exchanges, both properties must be like-kind, but this wording is interpreted broadly. For example, it's okay to swap a plot of untouched land for a commercial building, but investors must use caution to avoid unfair deals.

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