Medalist University
What is a 1031 Exchange?
A 1031 exchange enables investors to sell a property and reinvest the proceeds into a “like-kind” real estate or DST, deferring the recognition of taxable gains and the payment of taxes from the original sale.
1. Investment Purpose: The property must be “held for investment” or “used in a trade or business.”
Relinquished Property: The property sold to initiate the 1031 exchange.
Replacement Property: The property or DST acquired to complete the 1031 exchange.
2. To defer all gains, the replacement property or DST must be of equal or greater value than the relinquished property. Importantly, investors cannot directly handle the sale proceeds; they must be transferred through a Qualified Intermediary (QI) to maintain tax deferral benefits.
What is a 721 Exchange?
A 721 exchange allows investors to contribute property or DST to a partnership in exchange for ownership interests (OP Units), deferring taxes on the transaction.
1. Tax Deferral: Contributions are tax-deferred under Section 721 of the Internal Revenue Code.
2. Value Exchange: The value of the contributed property or DST is equivalent to the partnership interests (OP Units) received.
3. Partnership Exposure: Investors gain exposure to all assets owned by the partnership through their ownership interests (OP Units).
What is an UPREIT?
An UPREIT structures a REIT to acquire properties through tax-deferred 721 exchanges, offering a streamlined and tax-efficient approach to property transactions.
OP Units
Equity interests in the Operating Partnership are called OP Units.
REIT as General Partner
The REIT serves as the general partner of the Operating Partnership.
Share Conversion
When the REIT issues common shares, it takes the proceeds and acquires OP Units on a one-for-one basis. Each OP Unit is economically equivalent to, has the same NAV as, and can be converted into a share of the corresponding class of the REIT’s common stock.
Property Acquisition
The Operating Partnership can acquire real estate in exchange for OP Units, deferring taxes for the seller.
Simplicity
UPREIT transactions are simpler than 1031 exchanges, but the REIT must be interested in acquiring the property.
Redemption
Investors can redeem OP Units for cash or REIT shares1, which is generally a taxable event.
What is a Delaware Statutory Trust?
A Delaware Statutory Trust (DST) is a vehicle commonly used in 1031 exchange programs to hold investment real estate.
Precise Investment
Allows investors to acquire the exact dollar amount of replacement property needed for their 1031 exchange by purchasing a percentage interest in the DST.
IRS Recognition
Interests in DSTs holding real estate are recognized by the IRS as qualified replacement property for 1031 exchanges, provided they meet the requirements of Revenue Ruling 2004-86.
Activity Limitations
DST activities are highly restricted to preserve their status for 1031 exchange purposes, adhering to the limitations known as the “7 Deadly Sins.”
Title Holding
The DST holds the title to the property for the benefit of the 1031 exchange investors.
