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Real Estate

721 Exchanges & UPREIT

Discover how to maximize wealth, reduce your tax burdens, and gain access to institutional-grade real estate through a 721 Exchange.

What Is a 721 Exchange?

A 721 Exchange, governed by IRC Section 721, allows real estate owners to contribute their investment property to a Real Estate Investment Trust (REIT) in exchange for Operating Partnership Units (OP Units), all while deferring capital gains taxes.

Unlike a traditional 1031 Exchange, which requires exchanging one property for another, a 721 Exchange provides:

Diversification

Access to a professionally managed, diversified portfolio of institutional real estate assets.

Liquidity

OP Units can be converted into REIT shares after a holding period, offering greater financial flexibility.

Estate Planning Benefits

Heirs may receive a step-up in basis, reducing tax burdens upon inheritance.

This strategy is ideal for investors looking to transition away from direct property ownership while continuing to generate passive income through REIT distributions.

How the 721 Exchange Works

1

Contribute Property to a REIT

Instead of selling, an investor transfers their real estate to a REIT’s operating partnership.

In return, they receive Operating Partnership Units (OP Units), which mirror the value and cash flow of REIT shares.

2

Deferred Taxation on Capital Gains

Since the transaction is structured under IRC Section 721, the investor does not immediately trigger capital gains taxes as they would in a direct sale.

3

Optional Conversion into REIT Shares

After a holding period, investors can convert their OP Units into REIT shares for enhanced liquidity.

Once converted, this transaction is taxable, but if passed down through an estate, heirs benefit from a step-up in cost basis.

The DST + 721 Exchange:
A Two-Step Approach

Many investors don't own real estate that a REIT would directly acquire, but they can still access REIT ownership through a Delaware Statutory Trust (DST) + 721 UPREIT Transaction.

This strategy allows investors to access REITs via DSTs, avoiding the hassles of direct property management while continuing to defer capital gains taxes.

1

1031 Exchange into a DST

Sell your investment property and use the proceeds to purchase fractional interests in a DST.

1031 Exchange into a DST
2

Holding Period

Hold the DST for at least two years to ensure compliance with IRS guidelines.

Holding Period
3

721 Exchange into a REIT

After the holding period, the REIT acquires the DST’s assets, converting the investor’s DST interests into Operating Partnership Units (OP Units) of the REIT. Investors now own part of a diversified REIT portfolio.

721 Exchange into a REIT

Relinquished Property Sale

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Investor sells investment property in anticipation of executing a 1031 Exchange

Property Exchanged for Fractional DST Interests

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Exchange funds are used to purchase fractional interests in a DST and held for at least two years

REIT Operating Partnership Units Issued in Exchange for DST Interests

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Interest in the DST are contributed to a REIT's operating partnership in exchange for operating partnership units in a 721 Transaction

Benefits of a 721 Exchange

Tax Deferral

Investors can defer capital gains taxes upon transferring real estate into a REIT.

Tax Deferral

Diversification

Gain access to a broad portfolio of professionally managed real estate assets, reducing single-property risk.

Diversification

Liquidity & Flexibility

OP Units can be converted into REIT shares, allowing partial or full liquidity after a holding period.

Liquidity & Flexibility

Passive Income

Receive REIT distributions without the responsibilities of active property management.

Passive Income

Estate Planning Advantages

Heirs can receive a step-up in basis, minimizing potential tax liabilities.

Estate Planning Advantages

Avoid Future 1031 Exchange Restrictions

With increasing discussions around limiting 1031 Exchanges, a 721 Exchange may offer a more stable, tax-efficient alternative.

Avoid Future 1031 Exchange Restrictions

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