Can You 1031 Exchange Into a REIT? (Usually No)

The short answer

You cannot 1031 exchange directly into REIT shares. REIT shares are securities. The 1031 exchange requires real property exchanged for real property. Securities and real property are not like-kind.

This applies to publicly traded REITs, non-traded REITs, and private REITs. The listing status does not change the classification. Shares are securities regardless of whether they trade on an exchange.

Why REIT shares do not qualify

Section 1031 permits tax-deferred exchanges of real property for like-kind real property. The IRS defines real property as land, buildings, improvements, and similar interests directly tied to tangible assets. REIT shares are ownership interests in a business entity that happens to own real estate, not ownership interests in real estate itself.

The distinction exists to prevent investors from using 1031 exchanges to convert real property holdings into financial securities while deferring tax. If REIT shares qualified, investors could sell a building and move into a liquid, diversified security with no tax consequence. That would effectively collapse the boundary between real property and securities for tax purposes.

The rule is bright-line and has been consistently upheld: real property to real property, securities to securities. No crossover.

The DST-to-721 path: the legitimate workaround

If your goal is REIT exposure with tax deferral, a multi-step strategy exists:

Step 1: 1031 exchange into a DST. You sell investment property and exchange into DST beneficial interests. This is a standard 1031 exchange (real property to real property). The DST must be structured with a 721 pathway.

Step 2: Hold the DST for 5-7 years. You receive distributions and hold beneficial interests as a passive investor.

Step 3: 721 exchange into REIT OP units. When the DST reaches its transition point, you contribute your beneficial interests to a REIT operating partnership under Section 721. This is tax-deferred. You receive operating partnership (OP) units.

Result: You hold OP units in a REIT with tax deferred through both exchanges. You have achieved REIT-level diversification and institutional management.

The constraint: Once you hold OP units, you cannot 1031 exchange further. OP units are securities. This is a one-way transition out of the 1031 chain.

This path is not a shortcut. It requires 5-7 years in the DST plus additional time in OP units. But it is the only legitimate route from direct property ownership to REIT exposure without triggering tax.

For a detailed explanation of how this works, including OP unit liquidity, lock-up periods, and who this strategy fits, see the DST-to-721 path.

Direct 721 exchange: theoretically possible, practically rare

Section 721 allows you to contribute property directly to a partnership (including a REIT operating partnership) in exchange for partnership interests without recognizing gain. In theory, you could contribute your investment property directly to a REIT's operating partnership and receive OP units.

In practice, this almost never happens because:

• Most REITs have specific investment criteria and will not accept ad hoc property contributions from individual investors
• The property must meet the REIT's underwriting standards, portfolio strategy, and geographic focus
• Direct 721 exchanges require complex negotiation and legal structuring that most REITs are not set up to accommodate for one-off transactions

The DST-to-721 path is the established, repeatable version of this concept. Direct 721 contributions remain available in theory but are not a practical strategy for most investors.

If you want REIT exposure now

If you want REIT exposure immediately and are willing to pay tax:

1. Sell your property
2. Pay capital gains tax on the gain
3. Invest the after-tax proceeds in REIT shares

This is straightforward but expensive. You pay full tax on the gain, reducing your investable capital by 20-40% depending on your federal and state rates.

The tradeoff: immediate REIT access and full liquidity versus a tax bill that permanently reduces your invested capital. For most investors with significant gains, the DST-to-721 path is more capital-efficient despite its longer timeline.