721 Exchange
A 721 exchange lets an investor contribute real estate to a REIT's operating partnership in exchange for OP units, deferring capital gains tax under Section 721.
Definition
A 721 exchange, sometimes called an UPREIT transaction, uses Section 721 of the tax code to let a property owner contribute real estate to a REIT's operating partnership in return for operating partnership (OP) units, without triggering an immediate taxable sale.
It is often the second step after a 1031 exchange into a DST: once the DST is contributed to the REIT, the investor holds OP units instead of direct property. OP units generally track the REIT's share value and pay distributions, and they can typically be converted to REIT shares later, though that conversion is usually a taxable event.
The appeal is diversification and truly passive ownership across a large portfolio, plus continued tax deferral and a potential step-up in basis at death. The trade-off is that once you convert to REIT shares or the REIT sells, you generally cannot 1031 back out, so it is often a one-way exit.
Key points
- Contributes property to a REIT operating partnership for OP units
- Defers capital gains tax under IRC Section 721
- Commonly follows a 1031 exchange into a DST (the UPREIT path)
- Converting OP units to REIT shares is usually taxable
- Generally a one-way exit; you cannot 1031 out afterward
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.