Beyond 1031 Exchanges: REITs vs. REIT ETFs — Which Fits Your Long-Term Strategy?
For investors who have successfully used 1031 Exchanges to grow and reposition their real estate portfolios, there often comes a point where active ownership feels less appealing. Managing tenants, maintenance, and tax deadlines can become a lot to juggle — especially when your goal shifts toward passive income and diversification.
That’s where Real Estate Investment Trusts (REITs) and REIT ETFs come into play. Both allow investors to stay in real estate without owning property directly, but they work differently and serve different purposes in a long-term strategy.
What Is a REIT?
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends, which makes them a popular vehicle for generating regular income.
REITs can specialize in different sectors — such as multifamily housing, industrial properties, healthcare facilities, or retail centers — and may be publicly traded, non-traded, or private.
What Is a REIT ETF?
A REIT Exchange-Traded Fund (ETF) is a fund that holds a portfolio of publicly traded REITs. It offers investors broad exposure to the real estate market through a single investment.
REIT ETFs trade like stocks on major exchanges, offering liquidity and diversification that individual REITs may not provide. For example, an ETF might include dozens or even hundreds of REITs across various property types and regions, spreading risk across the broader market.
Key Differences Between REITs and REIT ETFs
| Feature | REIT | REIT ETF |
|---|---|---|
| Ownership Type | Direct shares in a real estate company | Shares in a fund that owns multiple REITs |
| Liquidity | Varies — publicly traded REITs are liquid; private ones are not | Highly liquid — trades like a stock |
| Diversification | Limited to specific property types or markets | Broad exposure to multiple sectors and REITs |
| Dividends | Directly from rental or financing income | Aggregate of multiple REITs’ dividends |
| Management | Active — each REIT manages its portfolio | Passive — tracks a REIT index |
| Volatility | Sector-specific | Market-wide exposure reduces concentration risk |
Where 1031 Investors Fit In
If you’ve used 1031 Exchanges for years, transitioning to REITs or REIT ETFs can serve as a natural next step in your investment journey — especially when seeking a hands-off approach.
While direct property ownership allows for tax deferral through 1031 Exchanges, selling a property and moving into REITs or REIT ETFs generally triggers capital gains because shares in these entities are considered securities, not like-kind real estate.
However, investors who wish to maintain deferral benefits may consider a 721 Exchange (UPREIT structure), which allows property owners to contribute their real estate into a REIT partnership in exchange for operating partnership (OP) units. This can later be converted into REIT shares — providing diversification and liquidity while initially preserving tax deferral.
Choosing the Right Fit
REITs may be better suited for investors who:
Want consistent income from real estate-backed assets
Don’t mind exposure to a specific property sector
Are comfortable with some management and research involvement
REIT ETFs may fit those who:
Prefer a “set-it-and-forget-it” investment
Want instant diversification across the entire real estate market
Value liquidity and simplicity over property-level control
Both can play valuable roles in a diversified, long-term investment plan — especially for investors transitioning from direct ownership to more passive forms of real estate exposure.
Building a Long-Term Strategy
While 1031 Exchanges help investors grow wealth through tax-deferred property reinvestment, exploring REITs or REIT ETFs can be a strategic way to preserve that wealth and simplify portfolio management in later stages.
The right choice depends on your goals, risk tolerance, and need for liquidity. For many, the journey doesn’t end with a 1031 Exchange — it evolves into a broader real estate investment strategy that balances income, diversification, and tax efficiency.
