Can You Use a 1031 Exchange to Buy a REIT?

No, you cannot use a 1031 exchange to buy a REIT

A 1031 exchange lets you sell real property — land, buildings, rental houses — and reinvest the proceeds in other real property without paying capital gains tax on the sale. A REIT is not real property. It is a security, like a stock or mutual fund, that owns real property. The IRS does not permit 1031 exchanges into securities of any kind, including REITs.

This rule applies even if the REIT owns the exact type of property you sold. You could sell an apartment building, want to reinvest in apartments, and find a REIT that owns nothing but apartment buildings — and you still cannot use a 1031 exchange to buy it. The tax code looks at what you are buying (a security), not what that security owns (real property).

The distinction matters because it affects your tax bill and your timeline. If you sell real property at a gain and do not use a 1031 exchange, you owe capital gains tax on the profit in the year of the sale. A REIT purchase does not defer that tax.

Key Takeaways

• The IRS treats REITs as securities, not real property, so they do not may have access to as replacement property in a 1031 exchange.
• Selling real property and buying a REIT triggers capital gains tax on your profit in the year you sell, with no deferral available.
• If you want to use a 1031 exchange, you must reinvest in actual real property — land, buildings, or certain mineral interests — within strict timelines.
• A REIT can be a useful alternative to real property ownership for investors who want real estate exposure without the 1031 restriction, but it does not offer the same tax deferral benefit.

Why the IRS treats REITs differently from real property

The 1031 exchange rule exists to encourage real estate investment and allow investors to consolidate or diversify their holdings without a tax hit. Congress wrote the rule to apply to real property — the land and structures themselves — because that is what the tax code calls "like-kind" property.

A REIT is a financial instrument. You own shares in a company that owns real property, but you do not own the property directly. The IRS has consistently ruled that shares in any corporation, partnership, or trust — even one that owns only real estate — do not may have access to as real property for 1031 purposes. The form of ownership matters as much as what is owned.

This is not a gray area or a loophole. The IRS published guidance on this in 1990 and has not wavered. If you are considering a 1031 exchange, your replacement property must be real property you own directly or hold through a may have access to intermediary, not through a REIT or other investment vehicle.

What does may have access to as replacement property in a 1031 exchange

Real property that qualifies includes residential rental homes, apartment buildings, office buildings, warehouses, raw land, and commercial property. You can also exchange into mineral interests in certain cases. The property does not have to be the same type as what you sold — you can sell an office building and buy raw land, or sell a rental house and buy a strip mall.

The property must be held for investment or business use. Your primary residence does not may have access to. A vacation home you rent out part of the year may may have access to, depending on how much you use it personally and how the IRS views your intent.

You must identify replacement property within 45 days of selling and close on it within 180 days. These timelines are strict. If you miss either one, the entire exchange fails and you owe tax on the gain. A may have access to intermediary — a third party who holds the sale proceeds — helps you meet these deadlines and stay compliant with IRS rules.

How capital gains tax works if you buy a REIT instead

When you sell real property at a profit, the gain is the difference between what you paid and what you sold it for, minus depreciation recapture and other adjustments. If you do not use a 1031 exchange, you owe federal capital gains tax on that gain in the year of the sale.

The tax rate depends on how long you held the property and your income. Long-term capital gains (property held more than one year) are taxed at 0%, 15%, or 20% depending on your tax bracket. Short-term gains are taxed as ordinary income, which can be much higher.

You also may owe state income tax on the gain and a 3.8% net investment income tax if your modified adjusted gross income exceeds certain thresholds. The exact amount varies by state and your personal situation. A tax professional can calculate your specific liability before you sell.

When a REIT might make sense despite the 1031 limitation

Some investors choose to buy a REIT instead of doing a 1031 exchange because they want to exit real property ownership without the complications of finding replacement property and meeting strict timelines. You pay the capital gains tax upfront, but you avoid the work and risk of identifying and closing on new real property within 180 days.

A REIT also offers liquidity. You can sell REIT shares in a day or two. Selling real property takes weeks or months. If you need access to your money quickly, a REIT is more flexible than holding direct real estate.

REITs also let you own real estate in markets or property types you might not otherwise reach — a small investor can own a piece of a major office tower or a nationwide apartment portfolio through a REIT. Direct real property ownership requires capital, time, and expertise to manage.

The trade-off: tax deferral versus simplicity

A 1031 exchange defers your capital gains tax indefinitely, as long as you keep reinvesting in real property. Over decades, that deferral can save you a substantial amount. But it locks you into real property ownership and requires you to move quickly to find and close on replacement property.

Buying a REIT means paying tax now, but you gain flexibility. You can move your money into different asset classes, take a break from real estate, or diversify into stocks and bonds without the pressure of a 180-day clock.

Neither choice is right for everyone. The decision depends on your tax situation, your timeline, how much you want to stay in real estate, and whether you can identify suitable replacement property within the 1031 deadlines. A tax advisor or financial planner can help you weigh the trade-offs for your specific circumstances.

Frequently Asked Questions

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

Yes. A 1031 exchange only requires that your replacement property be real property. Once you have completed the exchange and held the replacement property, you can sell it later and buy a REIT. You will owe capital gains tax on any gain from that second sale, but the 1031 exchange itself is complete and valid.

What if I use a 1031 exchange to buy a property and then convert it to a REIT?

You cannot convert your property into a REIT on your own. REITs are publicly traded companies or private funds with their own structure and rules. You can sell your property to a REIT or to a REIT sponsor, but that sale is a taxable event and does not extend your 1031 exchange.

Are there any other tax-deferred ways to buy a REIT?

No. REITs are securities and do not may have access to for 1031 exchanges. However, you can hold REIT shares in tax-advantaged accounts like IRAs or 401(k)s, where gains are not taxed until you withdraw the money. That is a different tax benefit, not a deferral of a sale.

If I sell a REIT at a loss, can I use that loss to offset gains from selling real property?

Yes. Capital losses from any investment, including REITs, can offset capital gains from any source, including real property sales. If you sell real property at a gain and REIT shares at a loss in the same year, you can net them together for tax purposes. A tax professional can help you coordinate the timing.