Drew Dornbusch, Managing Director at LaSalle Investment Management, joined Keith Black, Managing Director of RIA Channel, to discuss Section 1031 exchanges and Section 721 UPREIT transactions. These transactions provide a tax-efficient transfer of real estate wealth to the next generation with a step-up basis at the time of death.
Section 1031 exchanges allow investors who own appreciated real estate to sell their property, reinvest the proceeds in a like-kind property, and defer the taxes from the sale. It is important to closely follow the technical requirements to ensure that a transaction qualifies for the tax deferral. A qualified intermediary must be identified before closing on the sale of a property. The proceeds from the sale of the property need to be paid to a qualified intermediary, who is a specialized escrow agent that facilitates the transaction. If the property sale proceeds are paid to the seller, the transaction does not qualify for a Section 1031 exchange. The property or security to purchase must be identified within 45 days of the sale of the property with the transaction completed within 180 days.
Investors must carefully evaluate 1031 Securities, as some may invest in only one or two properties with costs up to 25% of the client’s investment. Investments in a small number of properties do not provide liquidity for holders of 1031 Securities. Section 721 UPREIT exchanges may overcome some of the limitations of a Section 1031 exchange. While a Section 1031 exchange may reinvest sale proceeds in a small number of new properties, a Section 721 UPREIT exchange reinvests the proceeds in a large, diversified REIT with potentially hundreds of properties. The UPREIT may have lower costs and potentially greater liquidity than 1031 Securities.