I have been to several TIC seminars looking for something to invest in once I sell some of my residential property. In one of the seminar's the speaker mentioned being able to do a 1031 into a REIT, but my accountant says that isnt possible?

You can not exchange directly into a REIT, but you can get there through a intermediate step.  The tax code allows you to exchange in the Operating Partnership Units (OPU's) of a REIT as a tax-deferred transaction.  However, in order to liquidate the investment, the OPU's must be converted into stock in the REIT, which is a taxable event.  So, you can effectively exchange into a REIT through the OPU's, but you can not generally exchange back out.

 This may be a good choice for an investor who does not anticipate doing another exchange, wants to diversify their investment among multiple properties and who wants to be able to liquidate their investment over time by converting the OPU's to stock and then selling the stock (you don't have to convert all of the OPU's at once, you can generally choose the amount that you convert at any given time.

Jim

As Jim has explained, one of the newer permutations in the field of syndicated property interests are tax deferred contribution packages, otherwise known as an “UPREIT” investments. Essentially, these packages are a means of converting a real property interest, such as a piece of investment real estate, into a personal property interest in a completely tax deferred manner - in essence, sort of a tax deferred conduit. These investments accomplish this by in essence breaking the conversion into two steps: in the first step, the investor defers tax liability on the sale of their investment property by utilizing a tax deferred exchange under Section 1031 to reinvest their equity in a fractional piece of real estate with other co-owners, and then in the second step, contribute their real property fractional ownership interests in a tax deferred contribution under Section 721 into a pre-established Operating Partnership in return for a personal property interest in the form of operating units in the Partnership (above mentioned OPUs). Jim is absolutely right to point out the conversion and subsequent liquidation of the REIT stock is a taxable event, one in which the taxpayer will recognize all their deferred gains (the increased liquidity does however give the investor the ability to time the taxable event more efficiently to coincide with any losses they may be carrying forward)

On its face, the UPREIT concept is very marketable with investors, many of whom are well acquainted with the profitability of REIT’s and to whom complete tax deferral is a key objective in their overall investment strategy, but there are a number of risks built into the overall structure and its very important for anyone considering in investing in one of these offerings to sit down ahead of time with an advisor and have those risks expained before making their ultimate decision.

Ok, so that makes sense.... how safe are these? Does anyone know, or is it too new to tell really?

“how safe are these?”  If you are talking about a publicly traded REIT, they are probably quite safe, in that the REIT’s financials are generally transparent.  The same is probably true for a publicly registered, but non-traded REIT, as they will use the same accounting standards as a publicly traded REIT.  The primary difference between the two is that the shares of a non-traded REIT are not as liquid (or maybe not at all liquid) and the redemption price may not be the same as a true ‘market’ price.  In the case of a publicly traded REIT, the shares are (typically) fully liquid and the market sets the price.  Watch out for non-registered, non-traded REITs, which may offer you neither financial transparency, nor liquidity.

The bigger risk is probably related to the performance of the individual property that you would exchange into.  If it doesn’t perform well, it is unlikely that the REIT would exercise their call option.  If it is out-performing the pro-forma, the investors may want to keep it (which they can’t do if the REIT exercises their call option).  There is a fairly simple metric that will give you a reasonable idea if the property is likely to be called by the REIT; if the return for the property, based on the ‘call’ price is greater than the dividend yield for the REIT as a whole, the property is accretive to the REIT and they would probably exercise their call option.  If the return is lower, the property would dilute the REIT’s dividend yield, and they may not exercise their call option.  In both cases, of course, their may be other compelling reasons that would cause the REIT to exercise or not exercise their call option.

Jim