--- title: "721 vs. 1031: Two Paths Out of Investment Real Estate" description: Explore the differences between 721 and 1031 exchanges for real estate investments, focusing on liquidity, diversification, and investor objectives. image: https://blog.wealthstonegroup.com/hubfs/WS-InsightsFI3.jpg --- - Client Portal [![Gold-Logo-1](https://blog.wealthstonegroup.com/hs-fs/hubfs/Gold-Logo-1.png?width=2000&height=380&name=Gold-Logo-1.png "Gold-Logo-1")](https://www.wealthstonegroup.com/) [![Wealthstone-logo-gold](https://blog.wealthstonegroup.com/hs-fs/hubfs/Gold-Logo-1.png?width=2000&height=380&name=Gold-Logo-1.png "Wealthstone-logo-gold")](https://blog.wealthstonegroup.com/) - [About](https://www.wealthstonegroup.com/about) - [Real Estate](https://www.wealthstonegroup.com/real-estate) - [1031 Exchanges](https://www.wealthstonegroup.com/real-estate/1031-exchanges) - [1033 Exchanges](https://www.wealthstonegroup.com/real-estate/1033-exchanges) - [721 Exchanges](https://www.wealthstonegroup.com/real-estate/721-exchanges) - 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That framing is incomplete. The [721 exchange](https://www.wealthstonegroup.com/real-estate/721-exchanges) offers a structurally different outcome — and for some investors, a more appropriate one. Understanding the distinction between these two strategies is not a technical exercise. It shapes what the investor owns next, how liquid they are, and what options remain available over the following decade. > The right structure is not the one that defers the most tax. It is the one that serves the investor's actual objectives. How the 1031 Exchange Works A 1031 exchange allows an investor to sell investment or business-use real estate and defer all capital gains taxes by reinvesting proceeds into like-kind replacement property. The timeline is statutory: 45 calendar days from closing to formally identify replacement property, and 180 calendar days to complete the acquisition. A Qualified Intermediary must hold the proceeds throughout. The investor cannot take constructive receipt at any point. These are not procedural preferences — they are IRS requirements for the deferral to stay compliant. **Key considerations** - The deferred gain carries forward as reduced basis in the replacement property — deferral, not elimination - At death, heirs receive a stepped-up basis that permanently eliminates the accumulated deferred gain - Delaware Statutory Trusts qualify as like-kind replacement property under IRS Revenue Ruling 2004-86 How the 721 Exchange Works The 721 exchange allows a property owner to contribute real estate directly to a REIT's operating partnership in exchange for Operating Partnership units. Like the 1031, this is a tax-deferred transaction at the time of contribution. After a defined holding period — typically 12 months — OP units can be converted to REIT shares. At that point, the investor holds a marketable security with potential liquidity in a professionally managed, diversified real estate portfolio. **Key considerations** - The deferred gain is preserved — it is recognized when REIT shares are eventually sold - Investors give up control over individual property decisions permanently - Requires a specific REIT willing to accept the property as a contribution — not universally available The Sequential Path: 1031 Into a DST With a 721 Conversion Option Some [Delaware Statutory Trust](https://www.wealthstonegroup.com/real-estate/delaware-statutory-trusts) offerings are structured with an optional 721 UPREIT conversion feature. An investor completes a 1031 exchange into the DST, receives passive income distributions during the hold period. After an undefined period of time, the sponsor executes a 721 exchange by exchanging DST interests for REIT OP units in a second tax-deferred event. OP units eventually convert to REIT shares upon the investor’s request. The investor has traveled from concentrated, actively managed property to a diversified, liquid real estate portfolio through a series of tax-deferred steps. **Key considerations** - This path requires selecting a DST sponsor that offers a UPREIT conversion feature — not all do - DST performance during the hold period depends on the specific property and sponsor - The conversion is not guaranteed and depends on the sponsor's decision and timeline > Both strategies defer. Only one eventually delivers liquidity. **Conclusion** The 1031 exchange is the appropriate choice for investors who want to maintain real estate exposure, have replacement property identified, and are executing within the defined windows. The 721 exchange is worth evaluating when the investor's priority is liquidity and diversification rather than continued direct real estate investment. The sequential DST-to-UPREIT path combines both in stages, but it requires the right sponsor, a compatible hold period, and realistic expectations about timing. A structured planning discussion can help clarify which path aligns with the investor's actual objectives before a sale is in motion. --- *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.* Topics: [Delaware Statutory Trusts (DSTs)](https://blog.wealthstonegroup.com/insights/tag/delaware-statutory-trusts-dsts) [1031 Exchange](https://blog.wealthstonegroup.com/insights/tag/1031-exchange) [721 Exchange / UPREIT](https://blog.wealthstonegroup.com/insights/tag/721-exchange-upreit) #### Share this [Share on X](https://x.com/intent/post?url=https://blog.wealthstonegroup.com/insights/721-vs.-1031-two-paths-out-of-investment-real-estate&text=721+vs.+1031%3A+Two+Paths+Out+of+Investment+Real+Estate) [Share on Facebook](https://www.facebook.com/sharer/sharer.php?u=https://blog.wealthstonegroup.com/insights/721-vs.-1031-two-paths-out-of-investment-real-estate&t=721+vs.+1031%3A+Two+Paths+Out+of+Investment+Real+Estate) [Share on LinkedIn](https://www.linkedin.com/shareArticle?mini=true&url=https://blog.wealthstonegroup.com/insights/721-vs.-1031-two-paths-out-of-investment-real-estate&t=721+vs.+1031%3A+Two+Paths+Out+of+Investment+Real+Estate) - Recent - Topics - Archive Recent Topics - [1031 Exchange (70)](https://blog.wealthstonegroup.com/insights/tag/1031-exchange) - [Delaware Statutory Trusts (DSTs) (43)](https://blog.wealthstonegroup.com/insights/tag/delaware-statutory-trusts-dsts) - [Tax Mitigation (37)](https://blog.wealthstonegroup.com/insights/tag/tax-mitigation) - [Wealth & Estate Planning (21)](https://blog.wealthstonegroup.com/insights/tag/wealth-estate-planning) - [721 Exchange / UPREIT (17)](https://blog.wealthstonegroup.com/insights/tag/721-exchange-upreit) - [Business Exit Planning (17)](https://blog.wealthstonegroup.com/insights/tag/business-exit-planning) - [REIT (10)](https://blog.wealthstonegroup.com/insights/tag/reit) - [Passive Real Estate Investing (7)](https://blog.wealthstonegroup.com/insights/tag/passive-real-estate-investing) - [Qualified Opportunity Zones (QOZs) (5)](https://blog.wealthstonegroup.com/insights/tag/qualified-opportunity-zones-qozs) See all Archive - [October 2026 (3)](https://blog.wealthstonegroup.com/insights/archive/2026/10) - [September 2026 (13)](https://blog.wealthstonegroup.com/insights/archive/2026/09) - [August 2026 (13)](https://blog.wealthstonegroup.com/insights/archive/2026/08) - [July 2026 (12)](https://blog.wealthstonegroup.com/insights/archive/2026/07) - [June 2026 (13)](https://blog.wealthstonegroup.com/insights/archive/2026/06) - [May 2026 (13)](https://blog.wealthstonegroup.com/insights/archive/2026/05) - [April 2026 (13)](https://blog.wealthstonegroup.com/insights/archive/2026/04) - [March 2026 (11)](https://blog.wealthstonegroup.com/insights/archive/2026/03) - [February 2026 (15)](https://blog.wealthstonegroup.com/insights/archive/2026/02) - [January 2026 (4)](https://blog.wealthstonegroup.com/insights/archive/2026/01) - [December 2025 (4)](https://blog.wealthstonegroup.com/insights/archive/2025/12) - [November 2025 (2)](https://blog.wealthstonegroup.com/insights/archive/2025/11) - [October 2025 (4)](https://blog.wealthstonegroup.com/insights/archive/2025/10) - [September 2025 (1)](https://blog.wealthstonegroup.com/insights/archive/2025/09) - [August 2025 (5)](https://blog.wealthstonegroup.com/insights/archive/2025/08) - [July 2025 (4)](https://blog.wealthstonegroup.com/insights/archive/2025/07) - [June 2025 (2)](https://blog.wealthstonegroup.com/insights/archive/2025/06) - [May 2025 (5)](https://blog.wealthstonegroup.com/insights/archive/2025/05) - [April 2025 (3)](https://blog.wealthstonegroup.com/insights/archive/2025/04) - [March 2025 (6)](https://blog.wealthstonegroup.com/insights/archive/2025/03) - [February 2025 (5)](https://blog.wealthstonegroup.com/insights/archive/2025/02) - [January 2025 (3)](https://blog.wealthstonegroup.com/insights/archive/2025/01) - [October 2024 (1)](https://blog.wealthstonegroup.com/insights/archive/2024/10) - [September 2024 (3)](https://blog.wealthstonegroup.com/insights/archive/2024/09) - [August 2024 (4)](https://blog.wealthstonegroup.com/insights/archive/2024/08) - [July 2024 (5)](https://blog.wealthstonegroup.com/insights/archive/2024/07) - [June 2024 (4)](https://blog.wealthstonegroup.com/insights/archive/2024/06) - [May 2024 (5)](https://blog.wealthstonegroup.com/insights/archive/2024/05) - [April 2024 (5)](https://blog.wealthstonegroup.com/insights/archive/2024/04) See all ### Subscribe by email ![Wealthstone-Logo-GoldWhite-2-1](https://blog.wealthstonegroup.com/hs-fs/hubfs/Wealthstone-Logo-GoldWhite-2-1.png?width=50&height=50&name=Wealthstone-Logo-GoldWhite-2-1.png) Wealthstone Group is a wealth management firm focused on providing investment and financial guidance for successful business owners, real estate investors and affluent individuals. 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