Exit Strategy
721 Exchange & UPREIT Exits
How a 721 exchange can roll a DST into REIT operating-partnership units: the potential benefits, and the important trade-off.
What is a 721 exchange?
A 721 exchange (named for IRC Section 721) lets an investor contribute real property, including in some structures a DST interest, to a REIT’s operating partnership in return for operating partnership (OP) units, without triggering immediate tax. This is often called an UPREIT (Umbrella Partnership REIT) transaction.
Why investors use it
- Diversification: moving from a single DST property into a REIT that owns many properties.
- Potential liquidity: OP units can typically be converted to REIT shares over time, which may then be sold (a taxable event).
- Estate planning: some investors value the income and the ability to pass holdings to heirs.
The important catch
Once you complete a 721 exchange into a REIT, that capital generally cannot be used for future 1031 exchanges. You are converting like-kind real estate into a partnership/REIT interest. It can be a one-way door: a sensible final step for some investors, but the end of 1031 deferral for that money. Many DSTs that offer a 721 option do so on the sponsor’s timeline, not yours.
The Mechanics
How the two-step transaction works
In practice, most 721 exits don’t start as 721s at all. They start as ordinary 1031 exchanges:
Sell & exchange
You sell your investment property and complete a standard 1031 exchange into fractional DST interests.
Hold the DST
The DST interests are typically held for at least two years to respect the exchange’s investment-intent requirements.
Contribute for OP units
Where offered, and subject to sponsor and REIT approval, your DST interests are contributed to the REIT’s operating partnership for OP units under Section 721.
DST vs. 721 at a glance
| DST | 721 / REIT OP Units | |
|---|---|---|
| Tax deferral | 1031 exchange into the DST | 1031 into DST, then 721 contribution into OP units |
| Diversification | Typically a single property or small portfolio | Diversified REIT portfolio |
| Liquidity | None until the property sells (often 5 to 7 years) | Potential partial or staged liquidity via unit conversion, subject to REIT policies and lockups* |
| Future 1031s | Yes, you can exchange again when the property sells | Generally no, exchange flexibility ends at contribution |
| Estate planning | Deferral can continue; heirs may receive a step-up in basis | Staged liquidity plus estate planning flexibility |
*Converting OP units to REIT shares is typically a taxable event, and REIT qualification rules are complex, with no guarantee a REIT continues to qualify. Confirm the specifics of any program with your tax advisor.
FAQ
Common questions
Is the 721 exchange tax-free?
It defers tax at the time of contribution, similar to a 1031. Tax is generally triggered later when OP units or REIT shares are sold. Consult your tax advisor.
Do all DSTs offer a 721 exit?
No. Only certain DSTs are structured with an UPREIT option, and the timing is controlled by the sponsor/REIT. Confirm before investing if this exit matters to you.
Questions about your situation?
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Continue learning
Start with the complete DST & 1031 Exchange Guide, or explore a related topic:
Educational purposes only. 1031InvestorGuide is not an offer to sell or a solicitation to buy any security, and is not tax, legal, or investment advice. Delaware Statutory Trusts are available only to accredited investors through licensed broker-dealers. Past performance is not indicative of future results. Consult your own advisors.
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