Can You Use a 1031 Exchange to Buy Into a REIT

A 1031 exchange does not work the way most people think it does with REITs

You cannot use a 1031 exchange to defer taxes when you sell real estate and buy shares in a REIT. The IRS treats a REIT investment as a security purchase, not a real property purchase. A 1031 exchange only defers capital gains tax when you sell one piece of real property and reinvest the proceeds into another piece of real property — land, buildings, rental homes, commercial space. REIT shares do not may have access to, even though the REIT itself owns real estate.

The distinction matters because it is absolute. You can exchange a rental house for an apartment building. You can exchange raw land for a commercial property. But you cannot exchange a rental property for REIT shares and claim the tax deferral. The moment you sell the property and buy the REIT, the IRS treats it as a taxable sale, and you owe capital gains tax on the profit.

Key Takeaways

A 1031 exchange requires you to buy real property directly; REIT shares are securities and do not may have access to for the deferral.
If you sell real estate and buy a REIT within the 1031 timeline, you still owe capital gains tax on the sale.
You can use a 1031 exchange to buy into a real estate syndication or partnership that owns property directly, but not into a REIT.
If you want to move money from a rental property into a REIT without triggering immediate tax, you need a different strategy — such as a charitable remainder trust or a direct sale with tax planning.

Why the IRS does not treat REIT shares as real property

The IRS defines like-kind property for 1031 exchanges as real property held for investment or business use. A rental house, an office building, a strip mall, and raw land all count. A REIT share is a stock certificate — it represents a fractional ownership stake in a company that owns real estate, but it is not real property itself.

This rule has been in place for decades. Even though a REIT is required by law to own real estate and distribute most of its income to shareholders, the IRS still classifies the share as a security. The Tax Cuts and Jobs Act of 2017 tightened this further by limiting 1031 exchanges to real property only, eliminating the ability to exchange personal property or equipment.

The practical result: if you sell a rental property and want to buy REIT shares within the 1031 timeline (45 days to identify, 180 days to close), you can do so, but it does not defer your tax. You owe capital gains tax on the sale in the year you sell, regardless of what you buy with the money.

What you can exchange into instead of a REIT

If you want to use a 1031 exchange and move away from direct property management, you have a few options that do may have access to. You can buy into a real estate syndication or limited partnership that owns property directly — as long as your ownership stake represents an interest in real property, not a security. The line between the two is not always clear, and it depends on how the syndication is structured and registered.

You can also exchange into a Delaware Statutory Trust (DST), which is a legal structure designed specifically to hold real property for 1031 exchanges. A DST owns real estate directly, and when you buy a fractional interest in the trust, you are buying an interest in that real property. DSTs are passive — you do not manage the property or make decisions — but they do may have access to for 1031 deferral.

Another option is a tenant-in-common (TIC) arrangement, where you own a direct fractional interest in a specific piece of real property alongside other investors. Like a DST, a TIC qualifies for 1031 exchange treatment because you own real property, not a security.

All three of these structures carry costs and restrictions. DSTs and TICs typically charge annual fees, have long holding periods, and offer limited liquidity. Syndications vary widely in structure and regulation. Before pursuing any of them, you should consult a tax professional or real estate attorney who understands 1031 rules in your state.

The tax cost of selling real estate and buying a REIT directly

If you sell a rental property with a $500,000 gain and buy REIT shares instead, you owe capital gains tax on that $500,000 in the year of the sale. The tax rate depends on how long you held the property and your income level. Long-term capital gains (property held over one year) are taxed at 0%, 15%, or 20% at the federal level, depending on your tax bracket. Most states also tax capital gains, adding another 5% to 13% depending on where you live.

A 1031 exchange defers that tax indefinitely — you pay it only when you eventually sell the replacement property without doing another exchange. The difference between paying tax now and deferring it can be tens of thousands of dollars, which is why people pursue 1031 exchanges in the first place.

Strategies if you want to move into a REIT without immediate tax

If you own real estate with significant gains and want to diversify into a REIT without triggering capital gains tax immediately, you have a few alternatives to a 1031 exchange. None of them are as straightforward, and all require professional guidance.

A charitable remainder trust (CRT) allows you to donate appreciated property to a trust, receive an income stream for life or a set term, and avoid capital gains tax on the sale. The trust sells the property and reinvests the proceeds tax-free. When the trust ends, the remainder goes to a charity. This works if you are comfortable with a charitable component and want ongoing income.

A direct sale with installment payments spreads the gain over multiple years, which can lower your tax bracket in each year and reduce the total tax owed. This does not eliminate the tax, but it can make it more manageable.

You can also simply sell the property, pay the tax, and buy the REIT. This is the most straightforward route if the tax hit is acceptable or if you have losses elsewhere to offset the gain.

How to know if a real estate investment qualifies for 1031 treatment

Before you commit money to any real estate investment vehicle, ask the sponsor or manager directly: "Does this investment may have access to as real property for 1031 exchange purposes?" Get the answer in writing. Do not assume based on the name or description.

If it is a DST or TIC, the sponsor should be able to provide documentation showing how the structure qualifies. If it is a syndication, ask whether it is registered as a security with the SEC or your state, and whether it has received a tax opinion letter confirming 1031 treatment. Many syndications do may have access to, but not all, and the difference is critical.

A tax professional or real estate attorney can review the offering documents and give you a definitive answer. This costs money upfront, but it is far cheaper than discovering after the exchange that the investment did not may have access to and owing back taxes plus penalties.

Frequently Asked Questions

Can I do a 1031 exchange and then buy a REIT later with the proceeds?

Yes, but it does not help you defer tax on the REIT purchase. If you exchange into another real property and later sell that property to buy a REIT, you owe capital gains tax on the second sale. The 1031 deferral only applies to the first exchange — from the original property into the replacement property.

What if I buy REIT shares within the 1031 timeline but claim I did not intend to do a 1031 exchange?

The IRS does not care about intent. If you sell real property and buy REIT shares, it is a taxable sale. The timeline does not matter. You cannot accidentally may have access to for 1031 treatment or opt out of it after the fact.

Do I owe tax on REIT dividends if I bought the shares with 1031 proceeds?

Yes. REIT dividends are taxed as ordinary income in the year you receive them, regardless of how you funded the purchase. The 1031 exchange does not shield you from dividend tax — it only defers tax on the gain from selling the original property.

Can I use a 1031 exchange to buy into a REIT mutual fund or ETF?

No. A mutual fund or ETF that holds REIT shares is a security, not real property. The same rule applies: you owe capital gains tax on the sale of your original property.

What happens if I accidentally do a 1031 exchange into something that does not may have access to?

You owe capital gains tax on the original sale, plus interest and penalties if the IRS audits you. The penalties can be substantial. This is why professional review of any replacement property is worth the cost.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.