A common point of confusion is framing the DST and the 721 exchange as competing choices — 'should I do a DST or a 721 exchange?' In reality, they're usually not either/or; they're often sequential steps in a single strategy. A DST is a 1031-eligible vehicle you exchange into (deferring gain, gaining passive real estate), while a 721 exchange contributes property to a REIT for OP units (transitioning into REIT ownership). The DST and the 721 serve different roles, and they frequently combine: you use the DST first (1031 into it) and the 721 second (when the DST is acquired by a REIT). So 'which first' usually means the DST, with the 721 following. Understanding their roles and sequence clarifies how they work together. This guide explains each one's role, the typical sequence, when to use a DST alone, and when the 721 is the goal.
They're not either/or
The first thing to understand is that a DST and a 721 exchange usually aren't competing alternatives — they serve different roles and often work together. A DST is a passive, 1031-eligible real estate investment you exchange into; a 721 exchange is a contribution of property to a REIT for OP units. They're different tools for different parts of a strategy, not two options for the same goal.
In fact, they frequently combine sequentially in the 1031-then-721 (DST bridge) strategy: you do a 1031 exchange into a DST (the first step), and later the DST is acquired by a REIT through a 721 exchange (the second step), transitioning your DST interest into REIT OP units. So the DST and the 721 are sequential steps, not an either/or choice — the DST first, the 721 second.
So the question 'DST or 721, which first?' usually has the answer: the DST first (you exchange into it), then the 721 (when the DST is UPREIT'd into the REIT). They're not competing; they're sequential. (There are cases for using a DST alone, or pursuing a direct 721, discussed below.) They're not either/or — the DST and the 721 exchange usually being sequential steps (DST first, 721 second) in a combined strategy, not competing alternatives — is the key insight. The DST and 721 serve different roles and often work together. Understanding that they're not either/or clarifies how they relate. The DST and 721 are typically sequential, with the DST used first and the 721 following, rather than a choice between them.
The DST's role
The DST's role in the strategy is as the 1031-eligible entry point — the vehicle you exchange into first. A Delaware Statutory Trust holds real estate, and a DST interest is treated as a direct interest in real property for 1031 purposes (under IRS guidance). So you can do a 1031 exchange into a DST — your property for a DST interest — deferring the gain under Section 1031 and gaining a passive, fractional interest in institutional-quality real estate.
The DST provides immediate benefits: tax deferral (Section 1031), passive ownership (the sponsor manages the property), and access to institutional real estate. For many owners, the DST step alone is a satisfying outcome — passive, tax-deferred real estate. So the DST serves as both a standalone passive investment and the entry point for the two-step strategy.
Crucially, the DST is 1031-eligible (you can exchange into it), which the REIT directly isn't (you can't 1031 into a REIT). So the DST is the necessary first step to reach REIT ownership tax-deferred — it's the 1031-eligible vehicle that can later be 721'd into the REIT. The DST's role — the 1031-eligible entry point you exchange into first (deferring gain, gaining passive real estate), serving as both a standalone investment and the bridge to the REIT — is the first part of the combined strategy. The DST is what you use first, because it's 1031-eligible (the REIT isn't). Understanding the DST's role clarifies why it comes first. The DST is the entry point — the 1031-eligible step you take first, which can stand alone or bridge to the 721/REIT step.
The DST is the 1031-eligible entry point — you exchange into it first because you can't 1031 directly into a REIT. It can stand alone, or bridge to the 721/REIT step.
The 721's role
The 721 exchange's role is as the transition into REIT ownership — the second step that moves you from the DST (or directly from property) into the REIT. The 721 exchange contributes property to a REIT's operating partnership for OP units, tax-deferred under Section 721. In the two-step strategy, the 721 step occurs when the REIT acquires the DST's property, converting your DST interest into REIT OP units.
The 721's role is to deliver the REIT-ownership benefits the DST alone doesn't fully provide — the broad diversification of the REIT's portfolio, the liquidity of convertible REIT units, and the path to the REIT's scale. So while the DST provides passive, tax-deferred real estate, the 721 transitions you into the diversified, more liquid REIT, completing the journey into REIT ownership.
So the 721's role is the destination step — reaching REIT ownership from the DST (or from property directly, if feasible). The 721 is what transitions you into the REIT, after the DST entry point. The 721's role — the transition into REIT ownership (the second step), delivering the REIT's diversification and liquidity that the DST alone doesn't fully provide — is the destination part of the combined strategy. The 721 moves you into the REIT, after the DST step. Understanding the 721's role clarifies why it comes second (the destination). The 721 is the transition into REIT ownership, following the DST entry point in the typical sequence.
The typical sequence
The typical sequence combines the two: DST first, 721 second. Step one: you sell your property and do a 1031 exchange into a DST (within the 1031 deadlines), deferring the gain and gaining passive real estate. The DST should be one structured for a 721/UPREIT exit (so step two can happen). Step two: later, the REIT acquires the DST's property, and your DST interest is converted into REIT OP units via the 721 exchange, deferring the gain again.
This sequence reaches REIT ownership tax-deferred from direct property, using the DST as the 1031-eligible bridge. The DST comes first because it's 1031-eligible (you can exchange into it), and the 721 comes second because it transitions the DST into the REIT (which you can't reach directly via 1031). So the sequence is dictated by the tax rules — DST first (1031-eligible), 721 second (into the REIT).
Throughout, the deferral is preserved (Section 1031 then Section 721), so the gain carries from property, through the DST, into the OP units, deferred all the way. So the typical sequence is DST first, 721 second, both tax-deferred. The typical sequence — DST first (1031 into a DST structured for a 721 exit), then 721 second (the DST's UPREIT exit into the REIT), both tax-deferred — is how the DST and 721 combine to reach REIT ownership. The sequence is dictated by the tax rules (DST 1031-eligible first, 721 into the REIT second). Understanding the typical sequence clarifies the order and why. The DST-first, 721-second sequence is the standard way to combine them, reaching REIT ownership tax-deferred.
When to use a DST alone
Sometimes a DST is used alone — without the 721 step — when REIT ownership isn't the goal. An owner who wants passive, tax-deferred real estate (the DST's benefits) but doesn't want or need to reach REIT ownership can use a DST as a standalone investment. The DST provides deferral, passivity, and diversification (across the DST's properties), which may satisfy the owner without transitioning to a REIT.
Using a DST alone suits owners who want to stay in the DST structure (or keep their 1031 options open — a DST can later be exchanged into another 1031 property or DST when it resolves, unlike OP units which are a one-way move). So an owner who values keeping 1031 flexibility, or who simply wants passive DST real estate, might use a DST alone, without the 721 exit.
So the DST-alone path is for owners whose goal is passive, tax-deferred real estate (not REIT ownership) — they use the DST without the 721 step. They retain 1031 flexibility (the DST can be 1031'd again at resolution) and avoid the one-way commitment of the 721/REIT. When to use a DST alone — when passive, tax-deferred real estate is the goal (not REIT ownership), and the owner values keeping 1031 flexibility — is the case for the DST without the 721 step. The DST alone suits owners content with passive DST real estate. Understanding when to use a DST alone clarifies that the 721 step isn't always pursued. For owners whose goal is the DST's benefits (not REIT ownership), the DST is used alone, without the 721 exit.
- A DST and a 721 exchange usually aren't either/or — they're often sequential (DST first, 721 second) in the bridge strategy.
- The DST is the 1031-eligible entry point (you can't 1031 directly into a REIT); the 721 is the transition into REIT ownership.
- The typical sequence: 1031 into a DST (structured for a 721 exit), then the 721 exit into the REIT — both tax-deferred.
- Use a DST alone when passive real estate (not REIT ownership) is the goal; pursue the 721 when reaching REIT ownership is the goal.
When the 721 is the goal
When reaching REIT ownership is the goal, the 721 (via the DST bridge) is the strategy — and the DST is the means to it. An owner who wants the REIT's diversification, liquidity, and scale (beyond what a single DST offers) pursues the 721 step, using the DST as the 1031-eligible bridge. So when REIT ownership is the destination, you use the DST first (as the bridge) and the 721 second (to reach the REIT).
This suits owners who want the broad diversification of a REIT's portfolio (vs. a single DST's property or small portfolio), the liquidity of convertible REIT units (vs. a DST's illiquidity), and the path to the REIT's scale and the eventual share liquidity. For these owners, the DST alone isn't the endpoint; the REIT is, reached via the 721.
So when the 721 is the goal, you choose a DST structured for the 721 exit (the bridge) and pursue the two-step strategy to reach the REIT. The DST is the first step toward the REIT goal. When the 721 is the goal — when reaching REIT ownership (for its diversification, liquidity, and scale) is the destination, with the DST used as the bridge — is the case for pursuing the two-step strategy to the REIT. The 721 is the goal when REIT ownership is the destination. Understanding when the 721 is the goal clarifies when to pursue the full two-step strategy. For owners wanting REIT ownership, the 721 (via the DST bridge) is the strategy, with the DST as the means to the REIT destination.
How Baker 1031 helps you sequence them
Baker 1031 Investments helps owners understand and sequence the DST and 721 exchange — clarifying that they're usually sequential (DST first, 721 second), helping you decide whether to use a DST alone (for passive real estate) or pursue the 721 (to reach REIT ownership), and guiding the appropriate path. We help you use the right tool(s) for your goal — the DST, the 721, or both in sequence.
DST interests, REIT units, and related securities are offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), and any recommendation follows a suitability review — both involve securities, available to suitable investors after a review. We help you assess your goal (passive real estate via a DST, or REIT ownership via the 721/DST bridge) and choose the appropriate strategy, coordinating with your CPA. Our role is to help you sequence the DST and 721 correctly for your goals — using a DST alone if passive real estate is your aim, or the DST-then-721 sequence if REIT ownership is your destination. Understanding that they're sequential (not either/or), and choosing based on your goal, is the key, and we help you navigate it. We match the DST and 721 to your objectives.
Frequently Asked Questions
Should I use a DST or a 721 exchange?
Usually it's not either/or — they're often sequential steps. A DST is a 1031-eligible vehicle you exchange into (deferring gain, gaining passive real estate); a 721 exchange contributes property to a REIT for OP units. They frequently combine: you use the DST first (1031 into it) and the 721 second (when the DST is acquired by a REIT). So 'DST or 721' usually means the DST first, with the 721 following. Use a DST alone if passive real estate is your goal; pursue the 721 if reaching REIT ownership is your goal.
Which comes first, the DST or the 721?
The DST comes first. You can't 1031 directly into a REIT (REIT ownership isn't like-kind real property), but you can 1031 into a DST (which is real property). So the DST is the 1031-eligible entry point you use first. Then, the 721 comes second — when the DST is acquired by a REIT, your DST interest is converted into REIT OP units via the 721 exchange. So the sequence is DST first (1031-eligible), 721 second (into the REIT), dictated by the tax rules. The DST is the necessary first step to reach REIT ownership tax-deferred.
Why can't I 721 directly instead of using a DST first?
You can in principle, but it's usually impractical — a direct 721 of your individual property requires a REIT that specifically wants your particular property, which is uncommon. The DST bridge solves this: you 1031 into a DST (which the REIT is structured to acquire), reaching the REIT via the DST rather than contributing your individual property directly. So for most owners, the DST-first path is the practical way to reach REIT ownership, since a direct 721 of their specific property isn't feasible. The DST makes the transition possible.
When should I use a DST alone?
When passive, tax-deferred real estate is your goal — not REIT ownership. If you want the DST's benefits (deferral, passivity, diversification across the DST's properties) without transitioning to a REIT, use a DST alone. This also suits owners who value keeping 1031 flexibility (a DST can be 1031'd again when it resolves, unlike OP units which are a one-way move). So if your goal is passive DST real estate (not REIT ownership), and you want to retain 1031 options, use a DST alone, without the 721 step.
When is the 721 the goal?
When reaching REIT ownership is your destination — for the broad diversification of a REIT's portfolio (beyond a single DST), the liquidity of convertible REIT units, and the REIT's scale. For owners wanting these REIT benefits, the DST alone isn't the endpoint; the REIT is, reached via the 721. So when REIT ownership is the goal, you use a DST structured for the 721 exit (the bridge) and pursue the two-step strategy. The 721 is the goal when you want REIT ownership, with the DST as the means to it.
Is the whole DST-then-721 sequence tax-deferred?
Yes — both steps are tax-deferred. The DST step defers the gain under Section 1031 (carried into the DST interest); the 721 step defers it under Section 721 (carried into the OP units). The gain carries from your property, through the DST, into the OP units, deferred all the way — triggered only when you eventually convert the OP units (or never, if held until death). So the DST-then-721 sequence reaches REIT ownership entirely tax-deferred, preserving the deferral continuously across both steps.
Can I decide later whether to do the 721?
To some degree — if you 1031 into a DST structured for a 721 exit, the 721 typically happens when the REIT acquires the DST (on the DST/REIT's schedule), so you're somewhat committed to that path by choosing that DST. If you 1031 into a standalone DST (without a 721 exit), you stay in the DST (and can 1031 again at resolution), without reaching a REIT. So your choice of DST (with or without a 721 exit) largely determines whether you'll reach the REIT. Decide your goal (DST alone or REIT) when choosing the DST, since the DST's structure sets the path.
Does using a DST alone keep my 1031 options open?
Yes — a key advantage of a DST alone (vs. the 721/REIT) is that it keeps your 1031 options open. When a DST resolves (the sponsor sells its property), you can typically do another 1031 exchange (into another property or DST), continuing the deferral and staying in direct real estate. In contrast, the 721/REIT (OP units) is a one-way move (you can't 1031 out). So if retaining 1031 flexibility matters to you, using a DST alone preserves it, while the 721 forecloses it. The DST-alone path keeps you 1031-able.
What if I'm not sure whether I want REIT ownership?
You might start with a DST (which provides passive, tax-deferred real estate and keeps your options more open) and decide about REIT ownership later — but note that reaching a REIT requires a DST structured for a 721 exit, so if you might want the REIT, choose such a DST. If you're unsure, a DST that has the option (but not obligation) for a 721 exit may offer flexibility. Discuss your uncertainty with your advisor — the choice of DST (with or without a 721 exit path) affects your later options. Don't commit to the one-way REIT until you're sure you want it.
Is a single DST as diversified as a REIT?
Usually not — a single DST often holds one property or a small portfolio, so its diversification is limited, while a REIT typically holds a broad, diversified portfolio (many properties, markets, types). So if broad diversification is a priority, the REIT (reached via the 721) offers more than a single DST. You can diversify across multiple DSTs (spreading a 1031 across several), but a REIT's portfolio is generally broader. So the diversification difference is a reason some owners pursue the 721 (to reach the REIT's broad portfolio) rather than staying in a single DST.
How do I decide between using a DST alone and pursuing the 721?
Based on your goal: if you want passive, tax-deferred real estate and value keeping 1031 flexibility (without committing to REIT ownership), use a DST alone. If you want to reach REIT ownership (for its broad diversification, liquidity, and scale) and are comfortable with the one-way commitment, pursue the 721 via the DST bridge. So the decision turns on whether your destination is the DST (passive real estate, flexible) or the REIT (diversified, liquid, but one-way). Assess your goal with your advisor to choose the right path. We help you decide based on your objectives.
Is a DST more liquid than OP units from a 721?
They have different liquidity profiles, both limited. A DST is illiquid during its hold (you generally can't easily exit until the DST resolves), but at resolution you can do another 1031 (deferring again) or take the proceeds. OP units from a 721 are also illiquid directly but can be converted to REIT shares (after a holding period) for liquidity — which is taxable, and for a traded REIT provides market liquidity. So neither is highly liquid in the short term, but they differ: a DST resolves into a 1031-able event, while OP units convert (taxably) into shares. Consider which liquidity profile fits your needs.
Can I split my exchange between a DST and a direct property?
Potentially — in a 1031 exchange, you can split your proceeds across multiple replacement properties, which could include a DST (passive) and a direct property (active), diversifying your approach. This lets you have some passive DST real estate and some directly-controlled property. Whether this fits depends on your goals and the 1031 mechanics (meeting the value and identification requirements across the replacements). So a split approach is possible within a 1031, letting you balance passive (DST) and active (direct) real estate. Your advisor and QI help structure a split exchange if it suits your goals.
Does using a DST first delay reaching the REIT?
Yes, somewhat — the DST-then-721 path involves first holding the DST (after the 1031), then waiting for the 721 exit (when the REIT acquires the DST), which occurs on the DST/REIT's schedule (potentially years). So reaching the REIT via the DST bridge takes longer than a hypothetical direct 721 (which is often infeasible anyway). During the wait, you're in the DST (passive, tax-deferred), then transition to the REIT. So the DST-first path does delay reaching the REIT, but it's typically the only practical route. Understand the expected timing of the 721 exit when choosing the DST.
Glossary
- DST
- A 1031-eligible passive real estate vehicle, the entry point you use first.
- 721 Exchange
- The contribution to a REIT for OP units, the second step into REIT ownership.
- Sequential Steps
- The DST and 721 as steps (DST first, 721 second), not either/or.
- DST Bridge
- Using the DST to reach the REIT via the 721 exit.
- 1031-Eligible
- The DST's quality (real property) letting you exchange into it.
- 721 Exit
- The REIT acquiring the DST and converting interests to OP units.
- DST Alone
- Using a DST without the 721 step, for passive real estate.
- 1031 Flexibility
- The ability to 1031 again, kept with a DST, lost with the 721.
- OP Units
- The REIT units from the 721 step, a one-way move.
- Standalone DST
- A DST without a 721 exit, kept as passive real estate.
- REIT Ownership
- The destination reached via the 721 step.
- Continuous Deferral
- The gain deferred across both the DST and 721 steps.
- Diversification
- Broader in a REIT than a single DST, a reason to pursue the 721.
- Liquidity
- Convertible REIT units (721) vs. illiquid DST.
- One-Way Move
- The 721/REIT's irreversibility, unlike a DST.
- Destination
- Whether your goal is the DST or the REIT, determining the path.
Sources & References
- IRS. Revenue Ruling 2004-86 (Delaware Statutory Trusts)
- Cornell Legal Information Institute. 26 U.S. Code § 721 — Nonrecognition of gain or loss on contribution
- Cornell Legal Information Institute. 26 U.S. Code § 1031
- U.S. Securities and Exchange Commission. Investor.gov — Real Estate Investment Trusts (REITs)
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
