Investors facing a large capital gain quickly discover they have options — and that the options are easy to confuse. The 1031 exchange, the Delaware Statutory Trust, the Opportunity Zone fund, and the 721 exchange all defer tax, but they work on different gains, deliver different benefits, and suit different investors. This memo is the decision hub that ties them together: a side-by-side comparison and a simple way to find your fit. Each tool has its own in-depth guide; this is the map that points you to the right one.
- Only some work for any gain: the 1031, DST, and 721 are for real estate; the Opportunity Zone fund accepts any capital gain.
- Most defer tax; the Opportunity Zone fund can also eliminate tax on the fund's future appreciation after ten years.
- Control, liquidity, deadlines, and repeatability differ sharply across the four.
- The right choice follows from your goal — keep investing, go passive, diversify, or maximize after-tax growth — not from the tax alone.
The quick answer
If you want a one-line orientation: use a 1031 exchange to stay in directly owned real estate; a DST to do that passively; an Opportunity Zone fund for a non-real-estate gain or to chase tax-free growth over a decade; and a 721 exchange to exit into a diversified REIT for good. They aren't rivals so much as different instruments for different jobs, and most confusion comes from reaching for one while needing what another does. The sections below give each its due and then compare them head to head.
The 1031 exchange
The 1031 exchange is the workhorse: sell investment real estate, reinvest the full proceeds in like-kind property, and defer the entire tax — capital gains, depreciation recapture, and the 3.8% surtax. You keep direct ownership and control, you can repeat it indefinitely, and a step-up at death can ultimately eliminate the gain for heirs. The price is the strict 45- and 180-day deadlines and the work of owning property. It's the default for investors who want to stay hands-on in real estate.
The Delaware Statutory Trust
A Delaware Statutory Trust is a way to complete a 1031 exchange passively. The IRS recognizes a DST interest as eligible replacement property, so you defer the same taxes while owning a fractional, professionally managed stake in institutional real estate — no landlording, and the ability to absorb an exact dollar amount of leftover equity. You trade away control and liquidity to get it. The DST is the choice for an investor who wants 1031 deferral but is done managing property.
The Opportunity Zone fund
The Opportunity Zone fund is the outlier in the best way: it accepts any capital gain — real estate, stock, a business sale — not just real estate, and you invest only the gain, within 180 days. It defers that gain and, uniquely, can eliminate tax on the fund's own appreciation if you hold ten years. The trade-offs are a long lock-up, development-style risk, and an eventual tax on the original deferred gain. It's the tool for a large gain of any type and a decade-long horizon.
The 721 exchange (UPREIT)
A 721 exchange contributes property into a REIT's operating partnership for OP units, deferring tax while moving you into a diversified, semi-liquid REIT — usually reached via the two-step DST-then-721 path. It suits an investor ready to leave active real estate behind for good, who values diversification and an estate-friendly, divisible asset. The catch is that it's a one-way door: once in OP units, you generally can't 1031 again.
The four, side by side
| Factor | 1031 | DST | OZ Fund | 721 |
|---|---|---|---|---|
| Qualifying gain | Real estate | Real estate | Any capital gain | Real estate |
| Benefit | Defer | Defer (passive) | Defer + eliminate growth | Defer |
| Reinvest | Full proceeds | Full proceeds | The gain only | Contribute property |
| Deadlines | 45 / 180 days | 45 / 180 days | 180 days from gain | None (contribution) |
| Control | You | Sponsor | Fund / sponsor | REIT |
| Liquidity | Low | Low | Low (10-yr hold) | Higher (taxable) |
| Repeatable | Yes | Yes | n/a | One-way |
A simplified orientation; each tool has nuances covered in its own guide.
Four questions to find your fit
Work through these in order:
- Is your gain from real estate? If not, the Opportunity Zone fund is your route — the others require real estate.
- Do you want to keep control and stay hands-on? If yes, a 1031 into direct property. If no, a DST.
- Are you ready to leave real estate for a diversified REIT permanently? If yes, the 721 path.
- Can you lock up capital for a decade to pursue tax-free growth? If yes, an Opportunity Zone fund is worth weighing even for a real-estate gain.
Often the answers point clearly to one tool — and sometimes to a sequence, like 1031 into a DST now and a 721 later. Our memo on ways to avoid capital gains tax places these alongside other options like installment sales and charitable trusts.
Three illustrative scenarios
To make it concrete (hypothetical): A tired landlord selling a rental and wanting passive income → 1031 into a DST. A founder with a large gain from selling her company → an Opportunity Zone fund, since no 1031 is available for a business-sale gain. An investor nearing retirement who wants to consolidate a property into a diversified, divisible, estate-friendly holding → the two-step 1031-into-a-DST then 721-into-a-REIT. Same broad goal of deferring tax, three different right answers — determined by the gain type, the desire for control, and the time horizon.
Frequently Asked Questions
Which defers the most tax — 1031, DST, OZ, or 721?
They defer differently. The 1031, DST, and 721 defer real-estate gain; an Opportunity Zone fund defers any capital gain and can also eliminate tax on the fund's appreciation after ten years. The 'most' depends on your gain and horizon.
Which works for a non-real-estate gain?
Only the Opportunity Zone fund. The 1031, DST, and 721 are for real estate (or interests in it); an OZ fund accepts any capital gain — stock, a business sale, and more.
What's the difference between a 1031 and a DST?
A DST is a way to do a 1031 passively — it's IRS-recognized replacement property, so you defer the same taxes while owning a managed fractional interest instead of buying and running a property yourself.
Can I combine these strategies?
Yes, often in sequence: 1031 into a DST to defer and stay flexible, then a 721 into a REIT to consolidate. The order runs one way, so you commit to the permanent move only when ready.
How do I choose among them?
By goal: 1031 to stay hands-on in real estate, DST to go passive, Opportunity Zone fund for any gain or tax-free growth over a decade, and 721 to exit into a diversified REIT permanently.
Glossary
- 1031 Exchange
- A like-kind exchange of investment real estate that defers tax and can be repeated.
- Delaware Statutory Trust (DST)
- A passive, 1031-eligible fractional interest in institutional real estate.
- Opportunity Zone Fund
- A fund accepting any capital gain that defers tax and can eliminate tax on appreciation after ten years.
- 721 Exchange (UPREIT)
- A contribution of property to a REIT's operating partnership for units, deferring tax one way.
Disclosures
This comparison is published by Baker 1031 for general informational and educational purposes only. It is not investment, legal, or tax advice, and is not an offer to sell or a solicitation to buy any security. The right strategy depends on your individual facts; consult your own CPA and attorney before acting.
Every figure and example here is general and illustrative, not a projection or a representation about any specific transaction. DSTs, Opportunity Zone funds, and other private placements are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk including loss of principal. Securities offered through Aurora Securities, Inc., member FINRA / SIPC; Baker 1031 Investments is independent of Aurora Securities, Inc.
