--- title: What Is a 721 UPREIT and How Does It Work? description: Explore how a 721 UPREIT allows real estate investors to defer taxes while transitioning from direct ownership to a diversified REIT portfolio for long-term wealth planning. image: https://blog.wealthstonegroup.com/hubfs/matt-pritchard-iw4yGVYMImg-unsplash-min-1.jpeg --- - 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) - [Delaware Statutory Trusts](https://www.wealthstonegroup.com/real-estate/delaware-statutory-trusts) - [Qualified Opportunity Zones](https://www.wealthstonegroup.com/real-estate/qualified-opportunity-zones) - [Private Real Estate Investments](https://www.wealthstonegroup.com/real-estate/private-real-estate-investments) - [Wealth Management](https://www.wealthstonegroup.com/services) - [Investment Management](https://www.wealthstonegroup.com/services/investment-management) - [Alternative Investments](https://www.wealthstonegroup.com/services/alternative-investments) - [Retirement Income](https://www.wealthstonegroup.com/services/retirement-income) - [Tax Mitigation](https://www.wealthstonegroup.com/services/tax-mitigation) - [Wealth Preservation](https://www.wealthstonegroup.com/services/wealth-preservation) - [Business Exit Planning & ESOPs](https://www.wealthstonegroup.com/services/business-exit-planning-esops) - Resources - [Insights](https://blog.wealthstonegroup.com/insights) - [Commentary](https://blog.wealthstonegroup.com/commentary) - [Library](https://www.wealthstonegroup.com/library) - [Events](https://blog.wealthstonegroup.com/events) - [Videos](https://www.wealthstonegroup.com/videos) - [Contact](https://www.wealthstonegroup.com/contact) [![View Properties](https://no-cache.hubspot.com/cta/default/44709168/47dd736a-2645-40ed-92a8-f366b8bf509e.png)](https://cta-redirect.hubspot.com/cta/redirect/44709168/47dd736a-2645-40ed-92a8-f366b8bf509e) [Schedule a Call](https://www.wealthstonegroup.com/schedule-a-call) [![View Properties](https://no-cache.hubspot.com/cta/default/44709168/47dd736a-2645-40ed-92a8-f366b8bf509e.png)](https://cta-redirect.hubspot.com/cta/redirect/44709168/47dd736a-2645-40ed-92a8-f366b8bf509e) [Schedule a Call](https://www.wealthstonegroup.com/schedule-a-call) - [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) - [Delaware Statutory Trusts](https://www.wealthstonegroup.com/real-estate/delaware-statutory-trusts) - [Qualified Opportunity Zones](https://www.wealthstonegroup.com/real-estate/qualified-opportunity-zones) - [Private Real Estate Investments](https://www.wealthstonegroup.com/real-estate/private-real-estate-investments) - [Wealth Management](https://www.wealthstonegroup.com/services) - [Investment Management](https://www.wealthstonegroup.com/services/investment-management) - [Alternative Investments](https://www.wealthstonegroup.com/services/alternative-investments) - [Retirement Income](https://www.wealthstonegroup.com/services/retirement-income) - [Tax Mitigation](https://www.wealthstonegroup.com/services/tax-mitigation) - [Wealth Preservation](https://www.wealthstonegroup.com/services/wealth-preservation) - [Business Exit Planning & ESOPs](https://www.wealthstonegroup.com/services/business-exit-planning-esops) - Resources - [Insights](https://blog.wealthstonegroup.com/insights) - [Commentary](https://blog.wealthstonegroup.com/commentary) - [Library](https://www.wealthstonegroup.com/library) - [Events](https://blog.wealthstonegroup.com/events) - [Videos](https://www.wealthstonegroup.com/videos) - [Contact](https://www.wealthstonegroup.com/contact) [![View Properties](https://no-cache.hubspot.com/cta/default/44709168/47dd736a-2645-40ed-92a8-f366b8bf509e.png)](https://cta-redirect.hubspot.com/cta/redirect/44709168/47dd736a-2645-40ed-92a8-f366b8bf509e)[Schedule a Call](https://www.wealthstonegroup.com/schedule-a-call) Insights #### Share this [Share on X](https://x.com/intent/post?url=https://blog.wealthstonegroup.com/insights/what-is-a-721-upreit-and-how-does-it-work&text=What+Is+a+721+UPREIT+and+How+Does+It+Work%3F) [Share on Facebook](https://www.facebook.com/sharer/sharer.php?u=https://blog.wealthstonegroup.com/insights/what-is-a-721-upreit-and-how-does-it-work&t=What+Is+a+721+UPREIT+and+How+Does+It+Work%3F) [Share on LinkedIn](https://www.linkedin.com/shareArticle?mini=true&url=https://blog.wealthstonegroup.com/insights/what-is-a-721-upreit-and-how-does-it-work&t=What+Is+a+721+UPREIT+and+How+Does+It+Work%3F) # What Is a 721 UPREIT and How Does It Work? by [**Paulo Aguilar, CFA, CAIA**](https://blog.wealthstonegroup.com/insights/author/paulo-aguilar) on Nov 04, 2026 For real estate investors who have owned appreciated properties for decades, selling can create a difficult decision. They may be ready to move away from direct ownership, but recognizing a substantial taxable gain could significantly reduce the wealth they have accumulated. A 721 UPREIT allows real estate investors to transition their ownership interests into a REIT in exchange for operating partnership units (OP units), while continuing to defer capital gains taxes. For individual investors, this often begins with a 1031 exchange into a Delaware Statutory Trust (DST) structured for a potential future 721 UPREIT. While the strategy can provide a pathway toward more diversified real estate ownership, investors should understand what changes when their DST investment ultimately transitions into a REIT. > A 721 UPREIT is more than a tax-deferral strategy. It represents a long-term decision about how an investor wants to own real estate and ultimately transfer wealth. ## How Does a 721 UPREIT Work? Section 721 of the Internal Revenue Code generally allows qualifying real estate interests to be contributed to a partnership in exchange for partnership interests without immediately recognizing taxable gain. In a 721 UPREIT transaction, the REIT's operating partnership acquires the real estate interest, and the investor receives OP units. Those units represent an ownership interest in the operating partnership, which typically holds a diversified portfolio of real estate investments. The investor's tax basis generally carries over into the OP units, allowing the embedded gain to remain deferred, subject to applicable tax requirements. Although larger property owners may contribute real estate directly, individual investors frequently access this strategy through DST investments. ## How DSTs Fit Into a 721 UPREIT Strategy An investor may first complete a 1031 exchange into a DST that contemplates a future 721 transaction. The initial exchange allows the investor to defer capital gains from the sale of their original property while transitioning into passive real estate ownership. After a period of DST ownership, the underlying property may be acquired by a REIT's operating partnership through a 721 transaction. The investor then receives OP units, allowing the original tax deferral to continue while transitioning into the REIT's broader portfolio. Not every DST is structured to transition into a REIT. With a [traditional DST](https://blog.wealthstonegroup.com/insights/what-is-a-delaware-statutory-trust-dst), the property is generally sold at the end of its investment period, allowing investors to pursue another 1031 exchange or receive the proceeds and recognize any applicable taxes. By comparison, a DST structured for a 721 UPREIT provides a potential pathway into a REIT rather than another property exchange. Depending on the offering, that transition may be planned as part of the investment strategy or offered as an option when the DST exits. The distinction matters because the type of DST an investor selects today can determine the choices available to them years later. ## What Changes When a DST Transitions Into a REIT? When a DST transitions into a REIT, the investor's ownership changes from an interest in a specific property to OP units representing an interest in the REIT's operating partnership. Rather than relying on the performance of a single property, the investor now has exposure to the REIT's broader portfolio of real estate investments. This can provide greater diversification, but it also means the investor's returns depend on the financial performance, leverage, and management of the REIT as a whole. Liquidity is another important consideration. Depending on the operating partnership agreement, OP units may eventually be redeemed or exchanged for REIT shares or cash. However, these rights are subject to specific terms and restrictions. For nontraded REITs, receiving shares does not necessarily provide immediate liquidity. Redemption programs may impose holding periods, limitations, or other conditions that affect access to capital. These provisions should be evaluated before entering a DST that anticipates a future 721 transaction, particularly when the investor expects to access a portion of their investment during retirement. > When evaluating a DST with a future 721 UPREIT, investors should look beyond the original property. The REIT they may eventually own can have a greater impact on their long-term investment outcome. ## Why a 721 UPREIT Changes Future 1031 Exchange Flexibility One of the most important distinctions between a traditional DST and a 721 UPREIT is what happens to the investor's ability to complete future exchanges. With a traditional DST, the eventual sale of the underlying property may provide an opportunity to complete another 1031 exchange. After a 721 transaction, however, the investor generally holds partnership interests rather than qualifying real estate. Because partnership interests are not eligible for Section 1031 treatment, OP units generally cannot be exchanged into another investment property through a subsequent 1031 exchange. The deferred gain remains embedded in the OP units, and redeeming or converting those units can create a taxable event. Other transactions involving the operating partnership may also have tax consequences. For investors who expect to acquire directly owned real estate again, this loss of exchange flexibility may be a meaningful disadvantage. But what about investors who have no intention of purchasing another property and instead expect to hold their investment for the remainder of their lives? That is where estate planning becomes particularly relevant. ## How Does a 721 UPREIT Fit Into Estate Planning? For investors with substantial unrealized gains, a 721 UPREIT may complement a longer-term estate-planning strategy. Under current federal tax law, qualifying inherited assets may receive an adjustment in tax basis at death. Depending on the circumstances, inherited OP units may qualify for this treatment, potentially reducing or eliminating the deferred gain for income-tax purposes. For an investor who intends to hold OP units for life, this can be an important consideration, particularly when the objective is to simplify ownership while transferring wealth to the next generation. However, the outcome depends on the investor's ownership structure, estate circumstances, and applicable tax law. Liquidity for heirs, potential estate taxes, and how beneficiaries may ultimately access their inherited investment should also be evaluated. ## How to Choose the Right Approach for Your Situation The decision to pursue a 721 UPREIT should begin with the investor's long-term objectives rather than tax deferral alone. An investor seeking to simplify ownership, diversify real estate exposure, and potentially hold an investment for life may find the strategy worth considering. Someone who values the ability to continue exchanging into different properties may prefer a traditional DST or another replacement strategy. The REIT itself also deserves careful evaluation. Its portfolio composition, leverage, management team, fees, distribution coverage, and liquidity provisions can have a greater impact on the investor's experience than the tax structure used to enter it. Ultimately, the question is not simply whether a 721 UPREIT can defer taxes, but whether the investment an investor will own afterward supports their income, liquidity, and estate-planning objectives. ## **Conclusion** A 721 UPREIT can provide a pathway from individual real estate ownership into a professionally managed REIT portfolio while continuing to defer taxable gain. For investors entering through a DST, the decision carries important long-term implications. Once the investment transitions into OP units, the investor's exposure, liquidity options, and ability to complete future 1031 exchanges change. Understanding those trade-offs before entering the original DST investment is essential. A coordinated review with financial, tax, and legal advisors can help determine whether a traditional DST, a planned or optional 721 UPREIT, or another real estate exit strategy is better aligned with the investor's broader financial plan. *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: [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/what-is-a-721-upreit-and-how-does-it-work&text=What+Is+a+721+UPREIT+and+How+Does+It+Work%3F) [Share on Facebook](https://www.facebook.com/sharer/sharer.php?u=https://blog.wealthstonegroup.com/insights/what-is-a-721-upreit-and-how-does-it-work&t=What+Is+a+721+UPREIT+and+How+Does+It+Work%3F) [Share on LinkedIn](https://www.linkedin.com/shareArticle?mini=true&url=https://blog.wealthstonegroup.com/insights/what-is-a-721-upreit-and-how-does-it-work&t=What+Is+a+721+UPREIT+and+How+Does+It+Work%3F) - Recent - Topics - Archive Recent Topics - [1031 Exchange (73)](https://blog.wealthstonegroup.com/insights/tag/1031-exchange) - [Delaware Statutory Trusts (DSTs) (44)](https://blog.wealthstonegroup.com/insights/tag/delaware-statutory-trusts-dsts) - [Tax Mitigation (39)](https://blog.wealthstonegroup.com/insights/tag/tax-mitigation) - [Wealth & Estate Planning (24)](https://blog.wealthstonegroup.com/insights/tag/wealth-estate-planning) - [Business Exit Planning (20)](https://blog.wealthstonegroup.com/insights/tag/business-exit-planning) - [721 Exchange / UPREIT (18)](https://blog.wealthstonegroup.com/insights/tag/721-exchange-upreit) - [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 - [November 2026 (1)](https://blog.wealthstonegroup.com/insights/archive/2026/11) - [October 2026 (13)](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. [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) - [Delaware Statutory Trusts](https://www.wealthstonegroup.com/real-estate/delaware-statutory-trusts) - [Qualified Opportunity Zones](https://www.wealthstonegroup.com/real-estate/qualified-opportunity-zones) - [Private Real Estate](https://www.wealthstonegroup.com/real-estate/private-real-estate-investments) [Wealth Management](https://www.wealthstonegroup.com/services) - [Investment Management](https://www.wealthstonegroup.com/services/investment-management) - [Alternative Investments](https://www.wealthstonegroup.com/services/alternative-investments) - [Retirement Income](https://www.wealthstonegroup.com/services/retirement-income) - [Tax Mitigation](https://www.wealthstonegroup.com/services/tax-mitigation) - [Wealth Preservation](https://www.wealthstonegroup.com/services/wealth-preservation) - [Business Exit Planning & ESOPs](https://www.wealthstonegroup.com/services/business-exit-planning-esops) Resources - [Insights](https://blog.wealthstonegroup.com/insights) - [Commentary](https://blog.wealthstonegroup.com/commentary) - [Library](https://www.wealthstonegroup.com/library) - [Events](https://blog.wealthstonegroup.com/events) - [Videos](https://www.wealthstonegroup.com/videos) Company - [About](https://blog.wealthstonegroup.com/about) - [Contact](https://www.wealthstonegroup.com/contact) - [Schedule a Call](https://www.wealthstonegroup.com/schedule-a-call) 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. Check the background of this firm/advisor on [FINRA’s BrokerCheck](https://d5fymz04.na1.hs-sales-engage.com/Ctc/5H+23284/d5fYmz04/JkM2-6qcW6N1vHY6lZ3mYN4pK6WlBkpFCW7v0sYg2_wv5_W7ZC5_p9lMpV9N2mLYb3b1Kt3W19_SZt6-rMHvW8_x-wq4sYh1TW4XJbzr2-1sSdVL3HsH3txppfW1K-Z1Q56Lnk2W3s3crW4kSJHHW6241wl4TBfLgW4z17F_4Rzl4pVgZ43M7sNPmVN4mVB-08Rc3zW828Gqx6r8n-YW21lDn24045sWW3wDlGS3pQbHvW1p_B9Z2DSvXwW5mgq3g7XcLCGW6KxHb21y0S0CW39tHnF3KF-sqW72ntxK15y1kXf3wyRhz04). Copyright © 2026 Wealthstone Group. [Privacy Policy](https://www.wealthstonegroup.com/privacy-policy) | [Terms of Service](https://www.wealthstonegroup.com/terms-of-service) Please click on the buttons below to view your client portal. [Right Capital – Financial Planning](https://app.rightcapital.com/account/login)[Black Diamond – Portfolio Management Reporting](https://login.bdreporting.com/Auth/SignIn) ```json { "@context" : "https://schema.org", "@type" : "BlogPosting", "author" : { "@type" : "Person", "name" : "Paulo Aguilar, CFA, CAIA", "url" : "https://blog.wealthstonegroup.com/insights/author/paulo-aguilar" }, "dateModified" : "2026-11-04T14:00:02.771Z", "datePublished" : "2026-11-04T14:00:02.000Z", "headline" : "What Is a 721 UPREIT and How Does It Work?", "image" : [ "https://blog.wealthstonegroup.com/hubfs/matt-pritchard-iw4yGVYMImg-unsplash-min-1.jpeg" ], "mainEntityOfPage" : { "@id" : "https://blog.wealthstonegroup.com/insights/what-is-a-721-upreit-and-how-does-it-work", "@type" : "WebPage" }, "publisher" : { "@type" : "Organization", "logo" : { "@type" : "ImageObject", "url" : "https://blog.wealthstonegroup.com/hubfs/Gold-Logo-1.png" }, "name" : "Wealthstone Group" } } ``` ```json { "@context" : "https://schema.org", "@type" : "FAQPage", "mainEntity" : [ { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "A 721 UPREIT exchange allows a real estate owner to contribute property to a REIT's operating partnership in exchange for operating partnership units, deferring capital gains recognition at the time of contribution under Section 721 of the Internal Revenue Code." }, "name" : "What is a 721 UPREIT exchange?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "Operating partnership units are equity interests in the REIT's operating partnership, not publicly traded shares. They may be converted to REIT shares after a lock-up period, and that conversion is a taxable event." }, "name" : "How are operating partnership units different from REIT shares?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "No. A 721 UPREIT exchange defers capital gains recognition. The gain remains embedded in the OP units until a triggering event such as conversion to REIT shares or a taxable disposition." }, "name" : "Does a 721 UPREIT exchange eliminate capital gains?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "Phantom income risk occurs when the REIT sells the contributed property and allocates the resulting gain back to the contributing investor without a matching cash distribution, creating taxable income without a cash receipt." }, "name" : "What is phantom income risk in a 721 UPREIT exchange?" }, { "@type" : "Question", "acceptedAnswer" : { "@type" : "Answer", "text" : "Yes. Heirs who inherit OP units receive a stepped-up basis equal to the fair market value at the date of death, which can eliminate the accumulated deferred gain. This benefit is subject to applicable estate and tax laws at the time of inheritance." }, "name" : "Can heirs benefit from a 721 UPREIT exchange?" } ] } ```