Can You Do a 1031 Exchange with Stocks?

In Short, No.

If you are looking for the answer in 2022, the answer is certainly ‘no’. The Tax Cuts and Jobs Act of 2017 signed into law by President Donald Trump on December 22, 2017 clarified the requirements for an exchange to qualify for tax deferral under section 1031 of the Internal Revenue Code. 

As you might guess, that clarification provides that only real property (as defined in final IRS regulations issued in late 2020) that is held for investment purposes qualifies for a 1031 exchange. Unfortunately, stocks, bonds, or other evidence of indebtedness are all excluded from the definition of real property and thus do not qualify.

Are there Alternatives?

This is where tax planning gets interesting. While you cannot enter into a tax-deferred section 1031 exchange directly with stocks, bonds, etc. you may be able to achieve similar results with code section 721. Code section 721 states that if you contribute property for an interest in a partnership, it is tax-free to the extent the only property received in exchange is an interest in a partnership. Now, with that background, let’s discuss the concept of a REIT (Real Estate Investment Trust).

Putting it All Together

We’ve already identified that stocks and bonds cannot be directly exchanged for real estate and qualify for tax-deferral under section 1031. But, if you want to be a real estate investor, there are other ways if your investment portfolio in the form of stocks and bonds is all you have at the moment to get started. What some investors like to do is acquire an interest in a portion of real estate that will eventually be contributed to a REIT.

Essentially, you’ll be able to hold your real estate investment for a year or two and then contribute it in a section 721 tax-deferred transaction to a partnership so that the original real estate investment ends up rolling up into a REIT and turns into an ownership interest in the REIT itself.

Read More: What is Section 721? – BloomberTax.com

Other Options

While the above may seem like a daunting task for non-tax-minded investors, there is a more simple solution. You could invest directly into a Real Estate Investment Trust. The downside to this strategy is that if you just purchase shares of the REIT, it would not be tax-deferred.

Also, generally, when you own ownership interest in the piece of real estate that is ultimately contributed to a REIT and results in shares in that REIT, you usually acquire a greater amount of shares in that REIT than if you were to just purchase the shares through a broker. This is because you are contributing income-producing property rather than just cash for stock.

Check Out Our 1031 Exchange Guide for 2024

Learn more about the benefits of a 1031 exchange.

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