REITs
REITs, or real estate investment trusts, are companies that combine the capital of many investors to acquire or invest in income-producing commercial real estate and related assets.
Key Benefits Of Investing in REITs
There are approximately 150 million Americans invested in REITs through 401(k)s, IRAS, pension plans, and other investment funds. By combining assets that exhibit low correlation (such as REITs), investors can work to reduce portfolio risk without sacrificing return potential. Low or negative correlation means that investments behave differently from each other through changing market environments.
REITs are attractive to many investors today because they can offer more frequent repurchase or redemption options based the current per share NAV.
No Management Responsibilities
Limited Personal Liability
Liquidity
Diversification
Institutional-Quality Property
Tax Benefits
Frequently Asked Questions (FAQ)
What is a Private REIT (Non-Traded REIT)?
A Private REIT (or Non-Traded REIT) is a real estate investment trust whose shares are not listed on a public exchange. They typically raise capital through private placements primarily from accredited investors and hold a portfolio of income-producing real estate.
What is the main risk of investing in a Private REIT?
The main risk is liquidity risk. Because Private REITs do not trade on public stock exchanges, they are illiquid investments. Investors may face limitations, fees, or long holding periods (often 5-10 years) when attempting to sell their shares back to the sponsor through a limited redemption program.
How are Private REIT dividends taxed?
Distributions from Private REITs are generally taxed as ordinary income (subject to the investor's marginal tax rate), since they are primarily funded by net income distributions (due to the 90% payout requirement). However, portions may be classified as Return of Capital (ROC) or Qualified Business Income (QBI), which may offer tax deductions.
What are the 1031 Exchange rules for replacement property?
The 1031 Exchange rules require a property owner to identify potential replacement properties within 45 calendar days and complete the purchase within 180 calendar days from the sale of the relinquished property. Additionally, a Qualified Intermediary (QI) must hold the funds.
Can I use a 1031 Exchange to invest directly into a Private REIT?
No, you generally cannot use a 1031 Exchange to invest directly into a traditional Private REIT. REIT shares are considered securities (personal property), not like-kind real estate. However, some investors use a Delaware Statutory Trust (DST) 1031 to access institutional real estate before potentially utilizing a 721 Exchange later.
What is the 45-day rule in a 1031 Exchange?
The 45-day rule is the non-negotiable deadline for a taxpayer to formally identify their potential replacement properties after closing the sale of their relinquished property. Identification must be in writing and signed by the taxpayer.
What is 'Boot' in a 1031 Exchange?
Boot in a 1031 Exchange refers to any non-like-kind property or cash received by the taxpayer. Receiving boot is a taxable event and may include cash proceeds or a reduction in the taxpayer's mortgage liability (mortgage boot) that is not offset by new debt.
How does a 721 Exchange (UPREIT) facilitate tax deferral?
A 721 Exchange (or UPREIT transaction) allows an investor to contribute real estate directly to a REIT's Operating Partnership (OP) in exchange for OP Units. This contribution is generally tax-deferred under IRC Section 721 until the OP Units are sold or redeemed for cash or REIT shares.
What are Operating Partnership (OP) Units in an UPREIT?
Operating Partnership (OP) Units are the partnership interests an investor receives in the UPREIT structure. They are typically valued on parity with the REIT's common stock and represent an equity stake in the REIT's entire portfolio, but they retain the investor's original, low tax basis.
What is the main advantage of a 721 Exchange for real estate owners?
The main advantage is the ability to convert a single, actively managed property into a diversified, professionally managed, passive investment (OP Units) while continuing to defer capital gains tax. This provides an exit strategy without immediate tax consequences.
What is the difference between a 1031 Exchange and a 721 Exchange?
The 1031 Exchange is a swap of like-kind real estate for like-kind real estate with strict timelines (45/180 days). The 721 Exchange is the swap of real estate for Operating Partnership (OP) Units in an UPREIT, which has no strict timeline but converts property ownership to a passive equity stake.
Why choose a 721 UPREIT over a traditional 1031 Exchange?
Investors choose a 721 UPREIT over a 1031 Exchange when they want greater portfolio diversification, seek a passive management role, and desire a clear liquidity pathway (converting OP Units to REIT shares) without the recurring burden of finding replacement properties every 180 days.