📘 Index
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Introduction
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What Is a 1031 Exchange?
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Why the 1031 → REIT Path?
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How to Move from a 1031 Exchange into a REIT
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Step 1: 1031 → DST
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Step 2: DST → UPREIT (721 Exchange)
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Benefits & Drawbacks
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Practical Tips for Beginners
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Two Real-World Examples
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Statistics on 1031 Exchanges
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Comparison Table
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Conclusion
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FAQs
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Call to Action
1. Introduction
Welcome to Learn with Manika! Investing in real estate can feel overwhelming, especially when tax strategies like 1031 exchanges and REITs enter the picture. But what if you could enjoy the best of both worlds—deferring capital gains taxes through a 1031 exchange, then gaining passive income and diversification via REITs? In this beginner-friendly guide, we’ll break down how this works, step by step, using plain language, helpful visuals, real examples, and easy-to-follow advice.
2. What Is a 1031 Exchange?
A 1031 exchange, named after Section 1031 of the IRS code, lets you sell an investment property and reinvest in a “like-kind” property to defer capital gains taxes Key rules:
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Like-kind property: both the old and new properties must be real estate held for business or investment
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Strict timelines: 45 days to identify replacement, 180 days to close
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Use a Qualified Intermediary: you cannot touch the sale proceeds
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Complex but powerful: defer taxes repeatedly—no limit to how many exchanges you can make
3. Why the 1031 → REIT Path?
Although you can't directly roll your 1031 proceeds into a REIT (it's a security, not real estate) there's a smart workaround:
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Step 1: Use a 1031 exchange to acquire shares in a Delaware Statutory Trust (DST)—a type of real-estate-owning entity that qualifies as like-kind property
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Step 2: Later, convert your DST interest into operating partnership (OP) units via a 721 / UPREIT exchange, which may then convert to REIT shares
This structure lets you defer taxes, diversify, and earn passive income—all while transitioning into a REIT.
4. How to Move from 1031 Exchange into a REIT
🔹 Step 1: 1031 Exchange → DST
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Sell your investment property using a Qualified Intermediary.
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Identify and invest in DST shares within 45/180 days
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You’re now holding real estate interests—no tax due yet.
🔹 Step 2: DST → UPREIT (721 Exchange)
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After holding the DST for typically 12–24 months, you can contribute those interests into a REIT’s operating partnership.
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You receive OP units, which are tax-deferred under Section 721
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These OP units can often be converted to REIT shares, though doing so triggers taxes .
5. Benefits & Drawbacks
| Benefit | Explanation |
|---|---|
| Tax Deferral | You defer capital gains and depreciation recapture taxes twice—using both 1031 and 721 |
| Passive Income | REITs offer stable dividends and professional management . |
| Diversification | One investment can spread across multiple commercial assets . |
| Access to Institutional Property | DSTs and REITs often own large-scale, high-quality assets. |
| Liquidity | REIT shares are easier to buy/sell compared to direct property . |
Drawbacks to consider:
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Once into REIT, you can’t re-enter another 1031: selling shares triggers full taxation
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REIT share sale triggers taxes on gains, depreciation recapture, state tax, and Medicare surtax
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DSTs and REITs may have limited liquidity and lock-up periods.
6. Practical Tips for Beginners
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Engage Experts Early: Include a CPA, tax advisor, and qualified intermediary from day one.
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Plan Near Deadlines: Track your 45/180-day timelines vigilantly.
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Read DST Docs Thoroughly: Not all DSTs allow a 721/UPREIT exit.
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Understand REIT Terms: Lock-up durations, fees, and conversion schedules matter.
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Evaluate Costs & Yield: Compare cap rates, fees, expected REIT dividends, and liquidity vs. direct property ownership.
7. Two Real-World Examples
🔸 Example 1: Small Portfolio Owner
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Sells ₹10 crore rental property.
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Does a 1031 into ₹10 crore DST.
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After 18 months, team allows 721 → OP units in REIT.
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Defers taxes until converting to REIT shares years later.
🔸 Example 2: Commercial Developer
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Swaps ₹50 crore office building into diversified DST portfolio through 1031.
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After 2 years, relocates into OP units, then converts to REIT shares mid-term.
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Gains passive income and broader exposure while maintaining tax deferral.
8. Statistics on 1031 Exchanges
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Over 500,000 exchanges between 2008–2017, totaling $1.6 trillion
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In 2019, about $100 billion in property assets were exchanged
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Average replacement property value: approx $1.32 million
9. Quick Comparison Table
| Process | What You Hold | Tax Status | Liquidity | Pro Control |
|---|---|---|---|---|
| Direct 1031 | Rental property | Deferred | Low–Medium | High |
| DST | Beneficial interest | Deferred | Low | Low |
| OP Units | REIT ops interest | Deferred | Medium | Low |
| REIT Shares | Public shares | Taxed | High | Very Low |
10. Conclusion
The path from a 1031 exchange into direct real estate to PASSIVE REIT ownership can offer the best balance: tax deferral, diversification, and steady income—if done right. By smartly combining DSTs and UPREITs, you can trade active management stress for passive returns while keeping Uncle Sam at bay. But it requires careful planning, expert advice, and diligent execution.
11. Frequently Asked Questions (FAQs)
Q1. Can I directly 1031 into REIT shares?
No—IRS disallows it. But you can go via DST → UPREIT route .
Q2. How long must I hold DST?
Typically 12–24 months, depending on DST agreements .
Q3. What is depreciation recapture?
Taxes owed on previously taken depreciation; it’ll apply when you sell REIT shares .
Q4. Are REITs liquid?
Generally yes, but some private or UPREIT conversions may have lock-ups.
Q5. Once I convert to REIT, can I do another 1031?
No—selling REIT shares is a taxable event.
12. 🛎️ Call to Action
Thinking about using a 1031 exchange to fund your future REIT investments? Need expert-level filing support? Contact Manika FinTax Solutions for personalized, fee-based assistance—guiding you every step from property to REIT.
Feel free to reach out to Learn with Manika anytime—happy investing!
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