Can You 1031 Exchange Into a REIT? What Actually Has to Happen

This is one of the most common questions investors ask after selling appreciated real estate: can a 1031 exchange be used to reinvest directly into a REIT?

The answer is no. A 1031 exchange cannot be completed directly into a REIT. What is often misunderstood is that some investors eventually end up with REIT exposure, but only after a separate and sequential process.

A 1031 exchange into a REIT is not a single transaction. It is a two-step process that unfolds over time.

Understanding that sequence is essential before assuming a REIT is an available replacement option.

Why a 1031 Exchange Cannot Go Directly Into a REIT

A 1031 exchange requires reinvestment into qualifying real property or a qualifying interest in real property. REIT shares are securities, not real estate interests.

Because of that distinction, REITs are not eligible replacement properties under Section 1031. This rule is structural and does not depend on the type of REIT or the investor’s intent.

There is no workaround that allows a direct 1031 exchange into a REIT.

The First Step: Exchanging Into a Delaware Statutory Trust

While REITs themselves do not qualify for 1031 treatment, certain structures do.

A Delaware Statutory Trust (DST) is treated as a direct interest in real estate for 1031 purposes. This allows investors to complete a 1031 exchange while stepping away from active management and owning a beneficial interest in institutional-quality real estate.

At this stage:

• The investor completes a standard 1031 exchange
• Proceeds are reinvested into one or more DSTs
• The investor owns a beneficial interest in real estate, not a security

This is the only tax-deferred step available at the time of sale.

The Second Step: A Potential 721 Contribution

After a period of ownership, some DSTs may offer an additional option.

If the DST sponsor has a relationship with a REIT and the underlying asset fits the REIT’s acquisition criteria, the investor may later be offered the opportunity to contribute their DST interest into the REIT’s operating partnership.

This contribution occurs under Section 721 of the tax code and results in the investor receiving operating partnership units rather than selling the interest for cash.

It is important to note that this is not a second exchange. It is a contribution of an existing real estate interest.

Why Not All DSTs Are Eligible

A key point often overlooked is that not every DST will ever be eligible for a 721 contribution.

Eligibility depends on:

• Whether the sponsor has an affiliated REIT
• Whether the REIT wants to acquire that specific asset
• Whether the DST structure allows for a contribution

Many DSTs are designed solely for income and eventual sale, not for REIT acquisition. Investors must understand this at the time of the initial 1031 exchange.

The Required Holding Period

Another common misunderstanding is timing.

Investors must generally hold their DST interest through multiple tax cycles before a 721 contribution is even possible. This seasoning period is necessary to support the tax treatment and avoid recharacterization risk.

A 721 contribution cannot be executed immediately after a 1031 exchange.

What Investors Often Get Wrong

The confusion usually stems from shorthand language.

Investors hear “721 exchange” and assume it is an alternative to a 1031 exchange. It is not.

A 1031 exchange defers tax at the time of sale. A 721 contribution may occur later, if conditions allow, and only after the investor already owns qualifying real estate.

The 721 transaction does not replace the 1031 exchange. It only becomes available after it.

Conclusion

You cannot 1031 exchange directly into a REIT.

What is possible is a two-step process: first completing a 1031 exchange into a qualifying real estate structure, such as a DST, and later contributing that interest into a REIT operating partnership under Section 721, if the sponsor and structure allow it.

Those steps are separate, sequential, and conditional.

A structured planning discussion can help clarify whether this pathway is realistic before assumptions are made at the time of sale.

General Disclosure