Can You 1031 Then 721? The DST Bridge Strategy

Investors who want to reach REIT ownership tax-deferred often ask: can I do a 1031 exchange directly into a REIT? The short answer is no — you can't 1031 into a REIT, because the things a REIT offers (OP units or REIT shares) aren't like-kind real property that a 1031 requires. But there's a workaround that achieves the goal: you do a 1031 exchange into a Delaware Statutory Trust (DST) — which is like-kind real property — and later, the DST is acquired by a REIT through a 721 exchange, converting your interest into OP units. The DST 'bridges' your property to the REIT, letting you effectively '1031 then 721' your way into REIT ownership, all tax-deferred. This guide explains why you can't 1031 directly into a REIT, how the DST bridges the gap, the sequence, and how to confirm the 721 exit before investing.

Yes — but not directly

Can you 1031 then 721 to reach REIT ownership? Yes — but not by 1031-ing directly into the REIT. The direct route (a 1031 exchange straight into a REIT) doesn't work, because a REIT offers OP units or REIT shares, neither of which is the like-kind real property a 1031 exchange requires. So you can't simply exchange your property for REIT ownership in a 1031.

The workaround is to use a DST as an intermediate step. You do a 1031 exchange into a DST — which holds real property and qualifies as like-kind for the 1031 — and then, later, the DST's property is acquired by a REIT through a 721 exchange, converting your DST interest into OP units. So you reach REIT ownership in two steps (1031 into the DST, then 721 into the REIT), with the DST bridging the gap. The combination achieves what the direct route can't.

So the answer to 'can you 1031 then 721?' is yes, via the DST bridge — you 1031 into a DST (step one), then the DST is 721'd into the REIT (step two). This is the established way to reach REIT ownership tax-deferred from direct property, since the direct 1031-into-REIT doesn't work. Yes — but not directly — captures the answer: you can effectively 1031 then 721 into REIT ownership, but through a DST bridge, not a direct 1031 into the REIT. Understanding that the direct route doesn't work (but the DST bridge does) is the key insight. The DST bridge is how the 1031-then-721 combination is achieved, reaching REIT ownership tax-deferred from direct property. The two-step DST bridge is the workable path.

Why you can't 1031 directly into a REIT

Understanding why you can't 1031 directly into a REIT clarifies the need for the DST bridge. A 1031 exchange requires exchanging like-kind real property for other like-kind real property. What a REIT offers an investor is ownership of the REIT — either REIT shares (the corporate stock) or, in an UPREIT, OP units (a partnership interest). Neither REIT shares nor OP units is real property — shares are corporate stock, and OP units are a partnership interest. So neither qualifies as the like-kind real property a 1031 needs.

This means you can't exchange your property for REIT shares or OP units in a 1031 — they're not like-kind real property, so the exchange wouldn't qualify (it would be a taxable transaction). The 1031 requires real property on both sides, and REIT ownership (shares or units) isn't real property. So the direct 1031-into-REIT route is foreclosed by the like-kind requirement.

There's a further wrinkle: even the 721 contribution of your individual property directly into the REIT (bypassing a 1031) usually isn't practical, because the REIT must specifically want your particular property — uncommon for a typical individual property. So neither a direct 1031 nor a direct 721 of your individual property easily reaches the REIT. Why you can't 1031 directly into a REIT — because REIT shares and OP units aren't like-kind real property (a 1031 requires real property on both sides) — explains the foreclosure of the direct route. The like-kind requirement blocks a direct 1031 into REIT ownership. Understanding why clarifies the need for an intermediary (the DST) that is real property (1031-eligible) and can later be 721'd into the REIT. The DST solves the problem the direct route can't, which is why it's the bridge.

The DST as the bridge

The DST serves as the bridge that connects your property to the REIT, because it's real property (1031-eligible) and can be 721'd into the REIT. A Delaware Statutory Trust holds real estate, and a DST interest is treated as a direct interest in real property for 1031 purposes (under longstanding IRS guidance). So you can do a 1031 exchange into a DST — your property for a DST interest — satisfying the 1031's like-kind requirement (real property for real property).

Then, because the DST holds real property that a REIT can acquire, the DST can be 721'd into the REIT — the REIT acquires the DST's property, and the DST investors' interests are converted into OP units under Section 721. So the DST, being real property, bridges the two steps: it's 1031-eligible (so you can 1031 into it) and it can be 721'd into the REIT (so you can reach REIT ownership from it). The DST is the intermediary that makes both steps work.

This bridging role is why DSTs are central to reaching REIT ownership tax-deferred. The DST is the only practical intermediary that is both 1031-eligible (real property you can exchange into) and structured to be 721'd into a REIT (reaching REIT ownership). So the DST bridges the gap that the direct route can't cross. The DST as the bridge — being real property (1031-eligible, so you can 1031 into it) and able to be 721'd into the REIT (reaching REIT ownership) — is the key to the 1031-then-721 strategy. The DST connects your property to the REIT across the two steps. Understanding the DST's bridging role shows why it's central to reaching REIT ownership tax-deferred. The DST is the intermediary that makes the 1031-then-721 path possible, bridging your direct property to REIT ownership.

How the sequence works

The sequence works in two steps, each tax-deferred. Step one: you sell your property and do a 1031 exchange into a DST (within the 1031 deadlines — 45-day identification, 180-day completion), deferring the gain under Section 1031 and gaining a passive DST interest. The DST should be one structured with a potential 721/UPREIT exit (so step two can happen). After step one, you hold a DST interest, with the gain deferred.

Step two: at some point later (the timing depends on the DST/REIT structure), the REIT acquires the DST's property, and your DST interest is converted into OP units in the REIT's operating partnership under Section 721, deferring the gain again. After step two, you hold OP units in the REIT — diversified, with convertible units (liquidity path) and the REIT's benefits. So the sequence takes you from property (step one's start) to DST interest (after step one) to OP units (after step two).

Throughout, the deferral is preserved — Section 1031 in step one, Section 721 in step two — so the gain carries from your property, through the DST, into the OP units, deferred all the way (until you eventually convert the OP units, or never if held until death). So the two-step sequence reaches REIT ownership entirely tax-deferred. How the sequence works — step one (1031 into a DST, deferring under Section 1031) and step two (the DST's 721 exit into the REIT, deferring under Section 721) — shows the mechanics of the 1031-then-721 strategy via the DST bridge. The two tax-deferred steps reach REIT ownership from direct property. Understanding the sequence clarifies how the DST bridge is traversed in practice. The two-step sequence, each step tax-deferred, is how you 1031 then 721 into REIT ownership through the DST bridge.

Confirming the DST's 721 exit

Because the strategy depends on the DST being 721'd into the REIT, confirming the DST's 721 exit before investing is essential. Not every DST is structured for a 721/UPREIT exit — some are standalone DSTs without a planned REIT acquisition. For the 1031-then-721 strategy, you need a DST structured with a potential 721 exit, where the affiliated REIT intends or has the option to acquire the DST's property and convert investors' interests into OP units.

So before investing in the DST (step one), confirm that it's structured for the 721 exit — that the REIT acquisition and OP-unit conversion are part of the DST's structure or plan. Without this, the DST won't lead to the REIT, and you'd be left with a standalone DST (which has its own merits, but doesn't reach REIT ownership). Verifying the 721-exit structure is the critical due-diligence point for this strategy.

Also understand the expected timing and certainty of the exit (a planned timeline, or just an option?), since the timing may not be guaranteed. And evaluate the REIT you'd end up owning (its portfolio, quality, traded or non-traded), since that's your ultimate destination. Confirming the DST's 721 exit — verifying the DST is structured for a REIT acquisition and OP-unit conversion, understanding the exit's expected timing and certainty, and evaluating the destination REIT — is essential due diligence before investing in the DST for this strategy. Because the strategy depends on the 721 exit materializing, confirming it protects you. Understanding the need to confirm the exit ensures you choose a DST that will actually bridge to the REIT. Confirming the 721 exit is the key due-diligence step for the 1031-then-721 strategy.

Timing and certainty

The timing and certainty of the 721 exit are important considerations, since they're not always fixed. The 721 exit (step two) happens when the REIT acquires the DST's property, which depends on the DST/REIT structure and the sponsor's plans. Some DSTs have a planned exit timeline (e.g., a target number of years); others have the option to exit when the sponsor decides, without a fixed date. So the timing of reaching REIT ownership may be defined or open-ended.

The certainty of the exit also varies — some structures make the 721 exit highly likely (or contractual), while others make it an option that may or may not be exercised. So you should understand how certain the exit is, not just when it's expected. Because the strategy's goal (reaching the REIT) depends on the exit happening, the certainty matters — you're relying on the exit to complete the strategy.

Understanding the timing and certainty helps you set realistic expectations and assess the strategy's reliability for your goals. If reaching the REIT by a certain time is important, understand whether the DST's exit timing supports that. If certainty matters, understand how assured the exit is. Timing and certainty — the 721 exit's expected timing (planned or open-ended) and how certain it is (likely or just an option) — are important to understand before pursuing the 1031-then-721 strategy. Because you're relying on the exit to reach the REIT, its timing and certainty affect the strategy's reliability for your goals. Understanding these factors lets you assess the strategy realistically and choose a DST whose exit timing and certainty fit your needs. The exit's timing and certainty are key to the strategy's dependability.

How Baker 1031 helps with the bridge strategy

Baker 1031 Investments helps investors execute the 1031-then-721 DST bridge strategy — guiding the 1031 exchange into a DST structured for a 721/UPREIT exit, confirming the exit structure, timing, and certainty, evaluating the destination REIT, and coordinating the later 721 exit. We help you reach REIT ownership tax-deferred from direct property, using the DST as the bridge, with the due diligence the strategy requires.

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 steps involve securities, available to suitable, typically accredited investors after a review. We coordinate with your CPA on the tax treatment across both steps (the continuous deferral). Our role is to help you use the DST bridge strategy to reach REIT ownership tax-deferred — confirming the DST's 721 exit, evaluating the REIT, and navigating both steps — since you can't 1031 directly into a REIT. For investors wanting to reach REIT ownership tax-deferred from direct property, we help you traverse the DST bridge soundly, with clear expectations about the exit's timing and certainty.

Frequently Asked Questions

Glossary

1031-then-721

Reaching REIT ownership via a 1031 into a DST then a 721 into the REIT.

DST Bridge

Using a DST as the intermediary between your property and the REIT.

Delaware Statutory Trust (DST)

The 1031-eligible real property that bridges to the REIT.

Direct 1031 into REIT

The route that doesn't work (REIT ownership isn't real property).

Like-Kind Real Property

What a 1031 requires; the DST qualifies, REIT ownership doesn't.

721/UPREIT Exit

The REIT acquiring the DST and converting interests to OP units.

Step One

The 1031 into the DST, deferring under Section 1031.

Step Two

The DST's 721 exit into the REIT, deferring under Section 721.

OP Units

The REIT operating partnership units received in step two.

Continuous Deferral

The gain deferred across both steps, property to OP units.

Standalone DST

A DST without a 721 exit, which doesn't bridge to a REIT.

Exit Timing

When the 721 exit occurs, not always fixed.

Exit Certainty

How assured the 721 exit is (likely vs. optional).

Destination REIT

The REIT you ultimately own, to be evaluated before investing.

Revenue Ruling 2004-86

The guidance treating DST interests as 1031-eligible real property.

Accredited Investor

The investor status typically required for these securities.

Sources & References

Disclosures