721 Exchange (UPREIT)
Trade a single property — or a maturing DST — for a diversified slice of an entire REIT portfolio, on a tax-deferred basis, with a path toward liquidity and simpler estate planning.
What is a 721 exchange?
A 721 exchange, often called an UPREIT(Umbrella Partnership REIT): lets you contribute real estate, frequently a DST interest, into a REIT's operating partnership in return for operating partnership (OP) units, deferring capital gains tax while gaining a stake in a large, diversified portfolio.
It's frequently the natural next step after a DST: when the trust sells its property, investors may have the option to "UPREIT" into the sponsor's REIT rather than starting another 1031. The result is broader diversification across many properties, professional management, potential income through distributions, and a streamlined way to pass wealth to heirs.
Because a 1031 exchange cannot be performed out of REIT units, a 721 is generally a longer-term, one-way decision. We make sure you understand the trade-offs before you take it.
Key takeaways
- Contribute property or a DST interest for REIT OP units, tax-deferred
- Gain diversification across an entire portfolio, not one building
- Potential for gradual liquidity by converting units to shares
- Simplifies estate planning and wealth transfer to heirs
- Generally a one-way move. You can't 1031 back out of REIT units
How the two exchanges compare.
| 1031 Exchange | 721 Exchange (UPREIT) | |
|---|---|---|
| You end up holding | Direct or fractional (DST) real estate | REIT operating partnership units |
| Diversification | One property at a time | Entire REIT portfolio |
| Liquidity | Illiquid until next exchange/sale | Potential to convert units to shares over time |
| Can you exchange again? | Yes, repeatable 1031s | No 1031 out of REIT units |
| Best for | Owners who want to stay in real estate | Owners seeking diversification & estate simplicity |
The case for an UPREIT.
Diversify
Spread risk across dozens of properties, markets, and tenants instead of one asset.
Stay deferred
Continue deferring capital gains you've carried forward through prior exchanges.
Plan your estate
OP units are simpler to divide among heirs than a single illiquid building.
Step toward liquidity
Convert units to shares over time to access cash on your schedule.
721 / UPREIT FAQ
How is a 721 different from a 1031 exchange?
A 1031 moves you between like-kind properties. A 721 moves you from a property or DST interest into REIT operating partnership units — trading direct ownership for diversification and potential liquidity. Importantly, you cannot perform a 1031 out of REIT units, so a 721 is typically a one-way, longer-term step.
Where do the OP units come from?
You contribute your property (or DST interest) to the REIT's operating partnership. In exchange, the partnership issues you OP units valued to match your contribution. The contribution itself is structured to defer your capital gains.
How do distributions work?
OP units generally pay distributions comparable to the REIT's common shares, providing potential ongoing income. Distributions are not guaranteed and depend on the REIT's performance.
When does this make sense?
Often when a DST is nearing the end of its hold and the sponsor offers an UPREIT option, or when an owner wants to exit active, single-asset risk in favor of a diversified, more liquid, estate-friendly structure. We'll model whether it fits your goals.
See if a 721 fits your plan.
We'll walk through the trade-offs, the tax picture, and how an UPREIT compares to staying in DSTs or direct property.