CAPITALIZING ON SECTIONS 1031 AND 721 FOR REIT INVESTMENTS - WITH A LOOK AT THE POTENTIAL PITFALLS

Navigating the complex terrain of real estate investment can involve sorting through rules for complex tax deferral strategies such as the 1031 exchange. While 1031 exchanges are an established tax deferral tool, there are other potential strategies that may be available to investors to defer capital gains taxation, such as the “721 Exchange.” Certain investors can use this strategy to invest in a REIT (“Real Estate Investment Trust”) after completing a 1031 exchange, an action that cannot be achieved directly through a 1031 exchange. This is typically accomplished via the investor’s acquisition of beneficial interests in a Delaware Statutory Trust (“DST”), which are later converted into REIT shares through a series of steps. For investors whose financial advisors have instructed them that REIT investment after an exchange will provide the best flexibility and tax advantages for their circumstances, understanding these mechanisms is essential to a successful transaction. However, there may be some downsides to REIT investment, which taxpayers should be aware of. 

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