1031 Real Estate Investment Trust (REIT)

1031 Real Estate Investment Trust (REIT)

A real estate investment trust, or “REIT” for short, is a commonly used corporate structure for holding large portfolios of investment properties. REITs receive special tax treatment due to the fact they are required to pay 90% of their taxable income as dividends to shareholders and 75% of the gross income must come from the REIT’s property holdings.

1031 Real Estate Investment Trust (REIT) in Detail

REITs vary in size significantly and can own portfolios of institutional quality properties worth hundreds of millions to many billions of dollars. Some of the advantages of investing in REITs can include diversification, professional management, transparent financial records (in many cases REITs publish audited financials annually), and potential liquidity. Frequently, REITs are listed and traded on stock exchanges, but there are other REITs which are private or non-traded.

Due to the large amount of properties which a typical REIT owns, investors can benefit from stable income generated by rents coming in each month from the underlying assets. Diversification can come from the properties being located in multiple parts of the country (or world in the case of Global REITs), having multiple tenants, and from owning various types of investment properties (i.e. offices, warehouses, apartments, etc.).

Although a REIT is not considered “like-kind” by the IRS for 1031 exchange purposes, an investor who owns an asset which a REIT wants to acquire can execute a 721 exchange (also known as an “UpREIT” transaction). Section 721 of the Internal Revenue Code allows an investor to defer capital gains taxes and depreciation recapture when trading their property to a REIT in exchange for operating partnership units, which are then directly exchanged for shares of the REIT. However, it is not common for large REITs to make small, single-asset acquisitions, so your potential to perform a Section 721 Exchange may be very limited depending on what size and quality of real estate you own.

A more likely scenario for an investor is to sell an investment property, 1031 exchange into a larger, more institutional asset or portfolio of assets structured as a Tenants-In-Common (TIC) or Delaware Statutory Trust (DST). Then upon disposition of its assets, the TIC or DST can sell to a REIT and offer the original investors an ability to exchange their interests for operating shares of the REIT at that time via a 721 Exchange.

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Disclaimer

1031Sponsors.com is a web portal owned by Investment.Net, LLC. The company is functioning in the 1031 exchange market for more than 15 years. Neither Investment.Net nor 1031Property intend to act as a broker or sell any goods or services. 1031Sponsors does not offer legal or tax advice. Tax topics discussed are for educational purposes only and should not be considered professional tax advice. It's recommended that you discuss your situation with your tax or legal advisor. Distributing an investment in different assets or choosing alternative investments involves higher risks than traditional investments and shouldn't be taken for granted. All alternative investment strategies are sold along with a prospectus that discloses all risks, fees, and expenses. These investments are not tax-efficient, and an investor should consult with his/her tax advisor before investing. The investor should be prepared to bear loss knowing that financial risks are attached to such investments.

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