For real estate investors nearing retirement or seeking to simplify their holdings, the 721 exchange offers a powerful way to transition into passive income without triggering capital gains taxes.
Also known as an UPREIT transaction, a 721 exchange allows investors to contribute real estate assets into a REIT (Real Estate Investment Trust) in exchange for Operating Partnership (OP) units. This defers taxes and unlocks exposure to professionally managed real estate.
But there are two distinct routes to get there and understanding the difference is essential for choosing the right strategy.
Traditional 721 Exchange vs. 721 via DST (Two-Step Strategy)
1. Traditional 721 Exchange
In this structure, investors contribute property directly into a REIT’s operating partnership and receive OP units. This method is usually reserved for large, institutional-quality assets (typically $10M-50M+), and it requires that the property meets the REIT’s acquisition criteria.
For most individuals, this route is simply out of reach.
2. 721 via DST (Delaware Statutory Trust)
This two-step process opens the door to more investors:
- Step 1: Sell your property and complete a 1031 exchange into a DST that owns institutional real estate.
- Step 2: After a hold period, the REIT absorbs the DST's property, and you receive OP units—completing the 721 exchange.
This approach allows investors to access the same benefits with a lower investment threshold and a fully passive structure
What to Keep in Mind
- No 1031 After OP Units: Once you convert into OP units, you can’t do another 1031 exchange. It’s a one-way exit.
- Estate Planning Advantages: OP units receive a step-up in basis upon death, potentially eliminating deferred gains for your heirs.
- Long-Term Fit: This strategy is best for those seeking income, diversification, and simplicity, not short-term liquidity or control.
Bottom Line
The 721 exchange, especially when accessed through a DST, is a powerful tool for real estate investors looking to exit active ownership while maintaining tax deferral and income generation.
If you’re considering your options, make sure to work with an advisor who understands both the technical and strategic sides of this structure. The right path depends on your goals, timeline, and total portfolio—not just the tax rules.
General Disclosure
This material is provided for informational and educational purposes only and is based on information from sources we believe to be reliable. However, its accuracy is not guaranteed, and it is not intended to be the sole basis for investment decisions or to meet specific investment needs.
Wealthstone Group does not offer tax or legal advice. This content should not replace professional advice tailored to your individual situation.
Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Wealthstone Group and Arkadios are not affiliated through any ownership.
