Short answer: Not directly. REIT shares are securities, not real property, so a 1031 exchange cannot go straight into a REIT. The usual path is a 1031 exchange into a Delaware statutory trust (DST) that may later be contributed to a REIT's operating partnership under Section 721. Otherwise, you sell, pay the tax and buy shares.
Reviewed by Jon Hilley. Last updated September 29, 2026.
A 1031 exchange only works real property for real property, and shares of a real estate investment trust are stock. That rules out a direct 1031 exchange into a REIT. Investors who want to end up in a REIT without paying tax now usually combine two tools, which makes this one of the more involved 1031 exchange alternatives: a 1031 exchange into a DST, followed later by a Section 721 contribution into the REIT's operating partnership.
That route defers the tax, but it has a cost. Once you hold operating partnership units, you are out of the 1031 world for good, and the deferred gain is taxed when you convert or sell the units.
Key rules
- Only real property qualifies: Since 2018, a 1031 exchange is limited to real property, and stock, including REIT shares, is not real property (IRC §1031(a)(1); Treas. Reg. §1.1031(a)-3)
- DST interests can be replacement property: A beneficial interest in a properly structured Delaware statutory trust is treated as a direct interest in real estate (Rev. Rul. 2004-86)
- Contributions to a partnership are tax-free: Contributing property to a partnership, such as a REIT's operating partnership, in exchange for a partnership interest generally triggers no gain (IRC §721(a))
- Operating partnership units are not real property: After a 721 contribution you cannot do another 1031 exchange with those units (Treas. Reg. §1.1031(a)-3)
- Cash and debt can trigger tax: Cash paid to you around the contribution can be a disguised sale, and a shift in your share of debt can create gain (IRC §707(a)(2)(B); IRC §752)
Why you cannot 1031 straight into REIT shares
When you own REIT shares, you own stock in a company that owns real estate. The tax code treats that like any other stock. Before 2018, the statute expressly excluded stocks and securities; since then, only real property qualifies at all. Either way, selling a rental and buying REIT shares is a taxable sale followed by a purchase. The rule works in reverse too: you cannot 1031 out of a REIT by selling shares or operating partnership units and buying a rental property.
The DST 1031 exchange to UPREIT path
Many public and non-traded REITs are organized as UPREITs, which means the REIT holds its real estate through an operating partnership (OP). Because the OP is a partnership, property can be contributed to it tax-free under Section 721. The common sequence looks like this:
- You sell your investment property through a qualified intermediary.
- Within your 45-day and 180-day deadlines, you buy DST interests as your replacement property. This step is a 1031 exchange.
- After a holding period, often one to three years or more, the DST sponsor may contribute the DST's property to an affiliated REIT's operating partnership. DST investors receive OP units. This step is a 721 exchange.
- Later, you can hold the OP units, redeem them for cash, or convert them to REIT shares. Redemption or conversion is taxable.
The 721 step generally happens at the sponsor's option, not yours. Read the offering documents carefully to see whether a 721 exit is contemplated and on what terms.
What you give up on the REIT path
- Future exchanges: OP units cannot be exchanged into real estate under Section 1031.
- Control over timing: The sponsor decides when the DST sells or contributes its property, and redemptions follow the REIT's rules.
- Liquidity in the DST stage: DST interests are typically illiquid for 5 to 10 years, and they are sold as securities, usually to accredited investors with minimums commonly between $25,000 and $100,000.
- Fees: DST offerings carry sponsor fees and loads that reduce your return.
Some REITs will also accept a direct 721 contribution of an individual property in exchange for OP units, but typically only when the property fits the REIT's portfolio and size requirements.
Example: selling and buying REIT shares vs. the DST path
Assume you bought a rental for $800,000, took $200,000 of depreciation, and sell it for $1,500,000 net of selling costs, with no mortgage. For simplicity, assume the non-depreciation gain is taxed at 20%, the depreciation portion at the 25% maximum, and the 3.8% net investment income tax applies. State tax is not included.
Option 1: sell, pay tax, buy REIT shares
- Adjusted basis: $600,000
- Gain: $900,000
- Tax on $200,000 of depreciation at 25%: $50,000
- Tax on the remaining $700,000 at 20%: $140,000
- Net investment income tax at 3.8% on $900,000: $34,200
- Total federal tax: $224,200
- Left to invest in REIT shares: $1,275,800
Option 2: 1031 into a DST, later a 721 contribution
- Invested in DST interests: $1,500,000
- Tax due at the exchange: $0
- Gain deferred into the DST and later the OP units: $900,000
Option 2 keeps $224,200 more working for you, but the $900,000 of deferred gain, plus any growth, becomes taxable when you redeem or convert the OP units. Depreciation during the holding period would lower your basis further. If you still hold the units at death, your heirs generally receive a stepped-up basis (IRC §1014). To see how paying now compares with deferring, use our capital gains vs 1031 comparison.
Other questions investors ask
How can a REIT avoid being taxed?
A REIT generally avoids corporate income tax on the income it pays out by distributing at least 90% of its taxable income to shareholders each year and meeting the other REIT tests (IRC §857). Shareholders then pay tax on the dividends, and much of a typical REIT dividend is taxed as ordinary income rather than at capital gains rates.
What is the downside of a REIT?
For an investor coming out of rental property, you give up control over the real estate and the depreciation deductions you took directly, and after a 721 step you give up future 1031 exchanges. Traded REIT shares move with the stock market, and non-traded REITs can be hard to sell.
Common mistakes
- Assuming the 721 step is guaranteed. We see investors buy a DST expecting a REIT exit on a set date. Whether and when that happens is up to the sponsor.
- Forgetting the one-way door. Investors who like the idea of exchanging again in ten years are sometimes surprised that OP units end their 1031 chain.
- Choosing a DST under deadline pressure. DSTs can close in days, which makes them a useful backup identification, but they are securities with fees and long hold periods. Review the offering with your financial and tax advisers before day 45.
1031 Specialists is a qualified intermediary, not a DST sponsor or broker-dealer, so we do not recommend specific offerings.
