What Is a 721 Exchange?
A 721 exchange, often called an UPREIT, lets a property owner contribute real estate into a REIT's operating partnership and receive partnership units instead of cash. The tax code treats the contribution as a non-taxable event, so the capital gain is deferred. The building joins a larger, diversified portfolio, and the owner becomes a partner in it.
This is usually an exit, not an entry. Many DST and direct owners land here at the end of a hold. Rather than sell and trigger the tax, they roll the asset into a REIT and keep deferring. The units pay income like shares and can convert to REIT stock over time. What you give up is the option to 1031 back out into a single, specific property.
How It Works
- Own qualifying real estate. A direct property, or a DST interest structured for a 721 exit.
- Contribute to the operating partnership. Deed the property into the REIT's OP in exchange for units.
- Defer the gain. The contribution is tax-deferred under Section 721; no capital-gains tax is due.
- Receive operating partnership units. The units pay distributions and track the value of the REIT.
- Convert to shares over time. Exchange units for REIT shares when you choose, a taxable event only when you do.
Trade one building for a piece of the whole portfolio. Defer the tax on the way in.
Why investors choose a 721 exchangeTax Advantages
Section 721 treats the property-for-units swap as non-taxable, so the capital gain rolls forward instead of coming due.
A single concentrated asset becomes a stake in a portfolio spread across sectors and markets.
Hold the units until death and heirs inherit at a stepped-up basis, which can erase the deferred gain.
Who It's For
A good fit
- DST and direct owners nearing the end of a hold.
- Investors ready to trade control for diversification.
- Those who want to defer the gain without managing a building.
- Estate plans aiming for a step-up on appreciated property.
Not a fit
- Owners who want to keep a specific asset or 1031 into another.
- Investors who need immediate cash from the sale.
- Anyone who wants to control the underlying real estate.
- Those uneasy holding units in a single REIT.
Considerations & Risks
Once contributed, the property is gone; you cannot 1031 back out into a chosen asset. Converting units to shares is itself a taxable event, so timing matters. Your outcome now rides on one REIT’s management, portfolio, and repurchase terms. Unit liquidity is limited, and the deferred gain follows you until a sale or a step-up at death.
1031 Exchange vs. 721 UPREIT
| 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 or shares are sold |
| Control | Some (direct) / none (DST) | None |
Illustrative comparison; consult your CPA and attorney.
Frequently Asked Questions
How is a 721 different from a 1031?
Can I 1031 out later?
When do I owe tax?
Do the units pay income?
Glossary
Related Offerings
Baker Diversified Real Estate REIT
Artery Plaza DST
