A 721 exchange — also called an UPREIT — lets an investor contribute real property or DST interests into a REIT's operating partnership in exchange for operating-partnership (OP) units, deferring gain under Internal Revenue Code Section 721.
Where a 1031 exchange swaps one property for another, a 721 exchange moves an investor up into a REIT. The investor contributes property — increasingly, a DST interest after its full cycle — to the REIT's operating partnership and receives OP units roughly equal in value. Section 721 generally makes that contribution non-taxable, so gains continue to be deferred.
The trade is control for scale. OP units represent a stake in the REIT's entire diversified portfolio rather than a single asset, and they can typically be converted (after a holding period) into REIT shares that may offer liquidity. The cost is that the move is usually a one-way door: once you hold OP units or shares, you generally cannot 1031 back out into direct property.
Hold a contributable asset
You own investment property — or DST interests that the sponsor's REIT is willing to accept, often near the DST's full cycle.
Contribute for OP units
Under Section 721, you contribute the asset to the REIT's operating partnership and receive OP units of equivalent value, generally tax-deferred.
Receive partnership distributions
OP units pay distributions comparable to REIT shares while your original gain stays deferred.
Convert toward liquidity
After a holding period, OP units can typically be converted to REIT shares — a taxable event when sold, but a route to liquidity and estate flexibility.
DST/1031 vs. 721 UPREIT — relative profile
Illustrative · 1 = lower, 5 = higher · not investment adviceInstant diversification
Exposure to the REIT's whole portfolio across many properties and markets, rather than one building.
Continued tax deferral
Section 721 contribution defers gain; heirs may still receive a step-up in basis.
Liquidity path
Unlike a single property or DST, OP units offer a route to partial, staged liquidity through conversion to shares.
Estate planning
Units can be divided among heirs more easily than a single illiquid asset.
Usually one-way
Once in OP units or REIT shares, you generally cannot 1031 exchange back into direct real estate.
Loss of control
You become a passive holder in a REIT; asset-level decisions are out of your hands.
Conversion is taxable
Converting units to shares and selling triggers the deferred gain; deferral ends when you exit.
REIT-specific risk
Your outcome now tracks the entire REIT's performance, leverage, and management.
1031 exchange vs. 721 UPREIT exchange
| Feature | 1031 exchange | 721 UPREIT |
|---|---|---|
| You receive | Direct/like-kind real estate (incl. DST) | REIT operating-partnership units |
| Diversification | Per property exchanged | Whole REIT portfolio |
| Future 1031 out | Yes | Generally no |
| Liquidity | Illiquid | Path via conversion to shares |
| Tax deferral | Yes, ongoing | Yes, until units/shares are sold |
| Control | Some (direct) / none (DST) | None |
Illustrative comparison; consult your CPA and attorney.
