What is a 1031 Exchange?
Internal Revenue Code Section 1031 can provide an immediate taxation exception and allow an exchanger to postpone paying tax on the gain from the sale of real property held for productive use or as an investment if the proceeds are reinvested in other real property as part of a qualifying “like-kind” exchange.
Securitized 1031 Exchanges (Delaware Statutory Trusts)
Delaware statutory trusts (“DSTs”) are business trusts created under Delaware law that may offer beneficial interest to investors and may own income-producing, professionally managed real estate. IRS Revenue Ruling 2004-86 allows an investor’s beneficial interest to be treated as replacement property for a 1031 exchange providing tax deferral treatment on gains from the sale.
What is a 721 Transaction?
As an alternative, or complementary, solution to a 1031 Exchange (for which partnership interests cannot be received as replacement property), Internal Revenue Code Section 721 allows an investor to contribute property to a partnership in exchange for interests in such partnership. In a typical structure, an investor contributes property to an Operating Partnership (the “OP”) under a REIT (known as an “UPREIT” structure) in exchange for units in the OP (“OP Units”). At a later date (typically after a minimum one year hold period), the investor may sell its units to the REIT, or exchange its units for shares of the REIT, which it can then sell to a third party.
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