An exchanger cannot use a Section 1031 exchange to acquire publicly traded REIT shares directly, because shares of a REIT are stock, a security, not real property, and Section 1031 only defers gain on the exchange of real property held for investment or business use for other like-kind real property. This surprises a fair number of exchangers who assume that because REITs own real estate, buying shares should qualify the same way buying a building would.
What is actually available is an indirect two-step route: exchange into a Delaware statutory trust interest first, which does qualify as like-kind real property under Revenue Ruling 2004-86, and then, if and when the DST sponsor offers it, contribute that DST interest to an affiliated REIT's operating partnership under Section 721 in exchange for operating partnership units, which can later convert to REIT shares under that program's terms.
The like-kind requirement in Section 1031 is specific to real property; personal property exchanges were eliminated for tax years after 2017, and securities, including REIT shares, have always been excluded from like-kind treatment. A REIT share represents an ownership interest in a corporation that in turn owns real estate, which is a different legal relationship to the underlying property than direct or DST ownership provides, and that distinction is what keeps REIT stock outside the exchange rules regardless of what the corporation itself owns.
No structuring choice changes this; an exchanger cannot route funds through an intermediary and come out the other side holding publicly traded REIT stock as a completed 1031 exchange.
A DST interest works because the trust holds title to specific real property and, under the ruling that governs these structures, the beneficial interests are treated as direct fractional ownership of that real estate rather than as a security interest in an operating entity. This is the step where an exchanger can genuinely defer gain: proceeds go into a DST that owns an identifiable property or portfolio, identified and closed inside the standard 45-day and 180-day windows like any other replacement property.
The DST itself is not a REIT and does not trade publicly; it is a separate structure that happens to sometimes be affiliated with a REIT sponsor's broader platform.
Some DST sponsors operate an affiliated REIT and, at a time the sponsor determines rather than on the investor's schedule, offer DST holders the option to contribute their interest into the REIT's operating partnership in exchange for operating partnership units under Section 721. This step is not a 1031 exchange and has no 45-day or 180-day deadline; it is a separate non-recognition transaction governed by the operating partnership agreement. Units received this way may later convert to REIT shares under the program's redemption terms, at which point the investor holds a security that can be sold like any other, generally as a taxable event.
Not every DST program offers this conversion path, and an exchanger should not assume it will be available when choosing a DST offering unless the sponsor's materials specifically describe an UPREIT option.
The appeal of eventually reaching REIT ownership through this path is diversification across the REIT's broader portfolio instead of concentration in a single DST property, along with a defined, if program-specific, path toward liquidity that a standalone DST interest generally lacks. The cost is giving up the ability to 1031 exchange that investment further once it becomes operating partnership units, and accepting whatever fee structure and redemption terms the specific REIT program applies.
None of this happens automatically or quickly; it typically spans a completed exchange, a holding period in the DST, and then a separate election into the operating partnership when and if the sponsor makes that option available.
An exchanger drawn to the idea of eventually owning REIT-style diversified real estate exposure should evaluate DST offerings specifically from sponsors with an affiliated operating partnership and a track record of offering the conversion option, rather than assuming any DST will eventually lead there. This is a multi-step decision best made with a tax adviser who can walk through the timing, the loss of future exchange eligibility once converted, and the specific REIT program's terms before the initial DST subscription is finalized.