Can A 1031 Exchange Be Used To Buy A REIT? | Clear Rules, Real Options

No—REIT shares are securities, so they don’t qualify as 1031 replacement property; only certain real-estate interests can.

You sold an investment property, you’re sitting on exchange proceeds, and a REIT looks tempting. It’s hands-off, spread across many properties, and you can buy in with a click.

Here’s the catch: a Section 1031 exchange is built for swapping one real property interest for another real property interest. A standard REIT purchase is a securities trade. That mismatch is where people get tripped up.

This article explains what counts, what doesn’t, and what investors use when they want REIT-style exposure while staying inside 1031 rules.

Why REIT Shares Don’t Fit Inside Section 1031

After the Tax Cuts and Jobs Act changes took effect, Section 1031 applies to exchanges of real property held for investment or for use in a trade or business. That core limit shows up in IRS explanations of like-kind exchanges and in the statute itself.

A REIT share is stock. Even if the REIT owns buildings, the investor owns a security, not a deeded real property interest. Section 1031 does not treat stock as like-kind to real property, so buying REIT shares with exchange proceeds breaks the exchange.

Real property Versus A security

Think in terms of what you own on closing day. With a typical replacement property, you receive a deeded interest in land or a building. With a REIT, you receive shares issued by an entity. That shift from deed to share is the whole story.

The IRS’s own like-kind exchange guidance ties the rule to real property and outlines reporting on Form 8824. The statute text also frames the exchange as “real property for real property.”

What happens if you try anyway

If exchange funds end up buying REIT shares, the transaction fails as a 1031 exchange. In plain terms, the deferred gain becomes taxable, plus you may face penalties or interest if the return is filed as though the exchange worked.

Also, most qualified intermediaries won’t release exchange proceeds for a plain stock purchase, since it invites a broken exchange and a record trail that is hard to defend.

Can A 1031 Exchange Be Used To Buy A REIT? What People Mean When They Ask

Most searchers aren’t trying to bend rules. They’re usually asking one of these two things:

• “Can I swap into something that feels like a REIT, with property-level income, but still qualify under 1031?”
• “Can I end up in a REIT later, after I finish the exchange, without wrecking the tax treatment?”

The first goal is often possible with the right structure. The second can be possible too, yet timing, holding intent, and documentation matter.

Using A 1031 Exchange To Buy A REIT-Style Property Interest

There are a few commonly used structures that aim for hands-off ownership, pooled real estate, or both, while still being treated as real property for 1031 purposes. The details vary by sponsor and offering, and the documents control the tax character.

Delaware statutory trust Interests

Many investors use Delaware statutory trust (DST) offerings as replacement property. A typical DST holds one or more real estate assets and sells beneficial interests to investors. When structured as a grantor trust for tax purposes, an investor is treated as owning an interest in the underlying real estate rather than a share of an operating business.

DSTs can resemble a REIT from a distance: pooled real estate, professional management, and distributions. The trade-off is liquidity. You can’t click “sell” the way you can with a public REIT.

Tenant-in-common Fractional Interests

A tenant-in-common (TIC) structure can also work. Here, multiple co-owners hold deeded fractional interests in a property. The IRS issued Revenue Procedure 2002-22 describing conditions under which the IRS will review a ruling request that a TIC interest is not an interest in a business entity.

In practical terms, TIC deals tend to involve more moving parts than a DST, since co-ownership needs rules on management, financing, and decision rights.

Common REIT-Adjacent Options And How They Fit 1031 Rules

Option	Qualifies As 1031 Replacement Property?	What The Investor Owns
Publicly traded REIT shares	No	Stock security
Non-traded REIT shares	No	Stock security
REIT mutual fund or ETF	No	Fund shares
DST structured as grantor trust	Often yes (deal documents control)	Beneficial interest treated as real estate ownership
TIC fractional deeded interest	Often yes (must avoid partnership treatment)	Deeded co-ownership interest
Direct purchase of replacement rental property	Yes	Deeded real property
Property contributed for OP units in an UPREIT	Not a typical 1031 replacement step	Partnership interest / units
Private real estate partnership interest	No	Partnership interest

Rules That Control A Valid 1031 Exchange

If you’re trying to land in a DST or TIC, the normal 1031 guardrails still apply. Most problems come from missing a deadline, taking “constructive receipt” of funds, or buying something that isn’t real property for 1031 purposes.

The property must be held for investment or business use

Both the relinquished property and the replacement property need to be held for investment or use in a trade or business. Fix-and-flip inventory and personal residences sit outside the rule set.

Meet the 45-day identification window

You generally must identify potential replacement properties within 45 days of the sale of your relinquished property. Identification is written, signed, and delivered to the right party under your exchange paperwork.

Close within 180 days

From the sale date, you generally have 180 days to receive the replacement property. If your tax return is due earlier, filing timing can tighten that window.

Use a qualified intermediary

A deferred exchange typically uses a qualified intermediary to hold exchange proceeds and complete the exchange steps. Taking control of the cash can collapse the exchange.

How To Vet A DST Or TIC When You Want A REIT-Like Setup

A DST or TIC can feel simple on the surface, yet the risk profile can be much different from a public REIT. Public REITs trade daily, publish periodic reports, and pricing is visible. DSTs and TICs sit in the private placement lane.

Read the ownership form, not the marketing

Start with what you actually own. The offering documents should spell out whether the structure is intended to be treated as real property ownership for 1031 purposes. If it reads like you’re buying shares in an entity, pause.

Match debt and cash flow to your exchange needs

Many exchanges involve debt relief. If you had a mortgage on the old property, you often need to replace that debt level, or add cash, to avoid taxable “boot.” DSTs often use non-recourse debt at the trust level, while TIC deals can involve co-borrower structures.

Check exit terms and timing

DSTs and TICs are not liquid. Plan for a multi-year hold, with an exit tied to an asset sale or refinance plan laid out by the sponsor. Ask what happens if the business plan runs long.

Check Sponsor Track Record And Fees

Since many DST and TIC offerings are sold with placement fees and asset management fees, you want a clean view of all costs. Compare projected distributions with net cash flow after fees.

1031 Exchange Timeline Checklist

Step	Timing	What To Keep In Your File
Choose a qualified intermediary	Before closing the sale	Exchange agreement, wiring instructions, contact log
Close sale of relinquished property	Day 0	Settlement statement, deed record, payoff statements
Identify replacement properties	By day 45	Signed identification notice with dates and sending proof
Complete due diligence	Days 1–180	Offering docs, title review, loan terms, risk notes
Close on replacement property	By day 180	Settlement statement, deed or beneficial interest assignment
Report the exchange	Tax filing for the year of sale	Form 8824 data, basis worksheet, intermediary statement

Can You Buy A REIT After The Exchange Closes?

Once your exchange is complete and you’ve received qualifying replacement property, you can later sell that replacement property and buy REIT shares the normal way. That later sale is its own taxable event unless you do another valid 1031 exchange into other real property.

Some investors ask about converting a completed 1031 position into REIT shares soon after closing. The tax risk here is “intent.” A 1031 exchange is meant for property held for investment or business use. If you buy replacement property with a pre-set plan to flip it into securities right away, the IRS could argue the replacement wasn’t acquired to hold for investment in the first place.

There is no single day count in the law that makes intent safe. The cleanest record is simple: buy real property for investment, operate it as an investment, then sell when your real plans change.

REIT Basics That Matter Before You Choose Any Workaround

The SEC explains that publicly traded REITs are securities registered with the SEC and traded on exchanges. That visibility can help, yet it does not change 1031 treatment: REIT shares stay in the securities bucket.

Common Mistakes That Blow Up A 1031 When REITs Are In The Mix

Trying to identify “a REIT” instead of real property

Your identification list must describe replacement property. A ticker symbol is not real property. If you want a pooled deal, the identification should be the DST or TIC property interest, as described in the offering package.

Letting exchange cash touch your hands

Even a short detour through your bank account can count as constructive receipt. Once that happens, you no longer have a deferred exchange.

Ignoring the difference between “REIT-like” and “REIT”

DST and TIC offerings can feel similar to REIT ownership, yet they do not trade daily and may carry sponsor-level fees and exit limits. Treat them as private real estate positions, not as stock substitutes.

Practical Takeaway For Most Investors

If your goal is a clean 1031 exchange, plan on swapping into real property. REIT shares, REIT funds, and REIT ETFs do not qualify. If you still want hands-off ownership, check structures that can be treated as real property, such as certain DST or TIC offerings, and keep your paperwork and deadlines tight.