# 721 Exchange Estate Planning: Tax Rules, Heirs and Timing

> 721 exchange estate planning: how OP units defer tax, what triggers the gain, step-transaction risk, reporting forms, heirs' basis and estate liquidity.

Source: https://baker1031.com/learn/721-exchange-tax-and-estate-planning


By Jerry Baker, Founder, Baker 1031 Investments. Updated October 28, 2026. Topic: 721 Exchanges & UPREITs. Draft for review; not yet approved by Aurora Securities.

## The short answer

721 exchange estate planning means trading property for REIT partnership units without current tax, then holding them so heirs inherit easy-to-split units with a basis reset at death under current law. For 2026, the basic federal estate tax exclusion is $15 million per person, so the income tax reset often matters more.

## Key takeaways

- A 721 exchange defers tax. It doesn't erase it. Your old basis and your deferred gain move into your operating partnership (OP) units and stay there.
- The gain comes due when you redeem units or swap them for REIT shares. It can also come due when the partnership sells your property or cuts your share of its debt.
- Any waiting period built into a DST-to-721 program ties to two tax concerns. One is the step-transaction doctrine on the 1031 side. The other is the disguised sale rules on the partnership side.
- Under current law, units held until death get a new basis equal to their value, plus the heir's share of partnership debt. Heirs who redeem soon after may owe little or no tax on the deferred gain.
- The estate tax is a separate tax, due nine months after death. Units can be hard to turn into cash quickly, so estates that may owe it need a liquidity plan.
- In my offering records as of October 2026, 13 offerings (17%) make the 721 exit mandatory. Your estate plan may need to account for units even if you never chose them.

## How is a 721 exchange taxed at each stage?

A few terms first, because the tax rules lean on all of them.

- **1031 exchange:** a swap of one investment property for another under Section 1031, with the capital gains tax put off until later.
- **721 exchange:** a contribution of property to a partnership for a share of it. [Section 721](https://www.law.cornell.edu/uscode/text/26/721) says "No gain or loss shall be recognized" on that kind of contribution.
- **REIT:** a real estate investment trust, which is a company formed to own rental real estate, usually a large portfolio of it.
- **Operating partnership (OP):** the partnership a REIT uses to hold its buildings. A REIT organized this way is called an UPREIT.
- **OP units:** the partnership shares you receive when you contribute property to the OP.
- **DST:** a Delaware Statutory Trust, a trust that holds real estate for many investors. A DST interest can qualify as 1031 replacement property, as my [DST guide](/learn/dst-guide) explains. In a "721 DST," the REIT's OP has an option to take over the trust's property later in exchange for units. My [721 exchange guide](/learn/721-exchange-guide) walks through that route.
- **Basis:** your tax cost. Depreciation reduces it over time, and your taxable gain is about the sale price minus it.
- **Built-in gain:** the amount by which a property's value exceeds its basis on the day you contribute it to a partnership.

Here is how tax works across the whole life of a 721 investment.

| Stage | What happens | Tax result, generally |
|---|---|---|
| Sale of your property | Qualified intermediary holds proceeds | Gain deferred if the 1031 is completed |
| Purchase of a 721 DST | You own a DST interest | Deferral continues; Form 8824 filed |
| DST hold | Distributions possible, not guaranteed | You report your share of the trust's rental income |
| Option exercise and contribution | DST interest becomes OP units | No gain under Section 721, except debt or disguised sale issues |
| Holding units | K-1 each year | Your share of OP income; distributions lower basis |
| Redemption or swap for shares | Units become cash or REIT shares | Deferred gain taxed, including debt relief |
| OP sells your contributed property | You keep your units | Built-in gain assigned to you |
| Death | Units pass to heirs | No income tax at death; heirs' basis resets under current law |

Two more terms from the table. A **qualified intermediary**, or QI, is the outside firm that holds your sale proceeds during a 1031 so the money never passes through your hands. A **Schedule K-1** is the annual statement in which a partnership reports each partner's portion of its income and deductions.

The pattern to notice: tax is deferred at every step until you, or the partnership, turn units into something else during your life. Death is the one exit that, under current law, doesn't trigger the income tax.

## What carries over into your OP units?

Three things travel with you when your DST interest or property becomes units.

### Your basis

Under [Section 722](https://www.law.cornell.edu/uscode/text/26/722), your basis in the units equals "the adjusted basis of such property" you contributed, plus any cash. If you've done several 1031 exchanges over decades, that basis may be very low compared with the value.

### Your holding period

Under [Section 1223](https://www.law.cornell.edu/uscode/text/26/1223), when the new property keeps the old property's basis, "there shall be included the period for which he held the property exchanged." In practice, units can count as long-term from the start. That matters because long-term gains get lower rates.

### Your built-in gain

[Section 704(c)](https://www.law.cornell.edu/uscode/text/26/704) covers contributed property. Income and gain on that property must be split among the partners in a way that reflects the difference between its value and its basis. In plain words, the OP tracks your built-in gain and assigns it back to you, not to the other partners.

[Treasury Regulation §1.704-3](https://www.law.cornell.edu/cfr/text/26/1.704-3) describes three methods for doing that: the traditional method, the traditional method with curative allocations, and the remedial method. It also says other reasonable methods may be used, and the OP chooses. Under the curative or remedial methods, you'll often see more taxable income on your K-1 each year while you hold. My guide to [OP units](/learn/op-units-explained) explains the three methods in more depth.

## Why do sponsors wait before converting a DST to units?

Some 721 DST programs set a minimum period before the OP can use its option. The offering documents state any such timing. The tax code itself sets no specific waiting period for this. A wait addresses two separate concerns, and it helps to understand both.

### Concern 1: The 1031 side and the step-transaction doctrine

[Section 1031](https://www.law.cornell.edu/uscode/text/26/1031) covers only real property "held for productive use in a trade or business or for investment." Your DST interest has to meet that test.

The **step-transaction doctrine** is a court-made rule. It lets the IRS and the courts treat a series of planned steps as one transaction. The Supreme Court, in [Commissioner v. Clark](https://www.law.cornell.edu/supremecourt/text/489/726), described it this way: "interrelated yet formally distinct steps in an integrated transaction may not be considered independently."

Here's how that could apply. Say you buy a DST interest with your 1031 money, and a few weeks later it becomes OP units under a plan set in advance. The IRS could argue the steps were really one deal: you traded real estate for partnership units. Partnership units aren't real property, so the 1031 could fail and your gain could become taxable.

A meaningful hold of the DST interest, with real economic risk and income, supports the view that you held it for investment. That's one reason programs may space out the two steps. Tax counsel for each program sets the timing, and the documents should explain it.

### Concern 2: The partnership side and disguised sales

The second concern is about what happens after you get units. [Section 707(a)(2)(B)](https://www.law.cornell.edu/uscode/text/26/707) covers a partner who transfers property to a partnership and gets a "related" transfer back. Viewed together, the two may be "properly characterized as a sale or exchange of property." That's called a **disguised sale**.

[Treasury Regulation §1.707-3](https://www.law.cornell.edu/cfr/text/26/1.707-3) puts a clock on it. If you contribute property and the partnership pays you money or other consideration within two years, "the transfers are presumed to be a sale of the property to the partnership." That holds unless the facts "clearly establish" otherwise. Transfers more than two years apart are presumed not to be a sale.

Regular distributions usually aren't the issue. Under [Treasury Regulation §1.707-4](https://www.law.cornell.edu/cfr/text/26/1.707-4), an "operating cash flow distribution" is generally "presumed not to be part of a sale." The bigger risk is redeeming units for cash soon after you receive them.

If certain transfers happen within two years and you treat them as not a sale, [Treasury Regulation §1.707-8](https://www.law.cornell.edu/cfr/text/26/1.707-8) generally requires disclosure on Form 8275 or an attached statement. Your CPA should know your contribution date and track it.

### What this means for your plan

Treat both steps as long-term holds. Don't buy a 721 DST counting on fast units. Don't receive units counting on fast cash. Both shortcuts invite the IRS to look through the steps.

## When does the depreciation you took get taxed?

**Depreciation** is the annual deduction the tax code allows as a building ages. Each year's deduction reduces your basis. When you sell, the part of your gain that came from depreciation on real estate is taxed at up to 25%. The usual top capital gains rate is 20%. The [IRS](https://www.irs.gov/taxtopics/tc409) says this "unrecaptured section 1250 gain" is "taxed at a maximum 25% rate." My guide to [depreciation recapture](/learn/depreciation-recapture) covers those rules.

### Not at the contribution

The 721 contribution is a nonrecognition event, meaning the gain exists but isn't taxed at that time. The depreciation you took through your old property and your DST isn't taxed when you receive units. It stays inside your built-in gain.

### Usually when you dispose of units

When you later sell or exchange units, part of your gain can be taxed at the 25% rate. [Treasury Regulation §1.1(h)-1](https://www.law.cornell.edu/cfr/text/26/1.1(h)-1) applies a look-through test to sales of partnership interests held more than a year. It asks what gain you'd be allocated if the partnership "transferred all of its section 1250 property in a fully taxable transaction for cash."

There's a technical wrinkle. That regulation says its section 1250 look-through rule "does not apply to a transaction that is treated, for Federal income tax purposes, as a redemption of a partnership interest." Whether your redemption is treated as a sale of units or a redemption by the partnership depends on how it's structured. The tax result can differ, so ask your CPA before you redeem.

If the partnership holds assets that would produce ordinary income in a sale, another rule may apply. The [Form 8308 instructions](https://www.irs.gov/instructions/i8308) say the transferor must "attach a statement to the transferor's income tax return" in those cases. The partnership supplies the numbers.

### At death, possibly never

If you hold units until death, the depreciation portion of your gain is part of what can be reset under current law. Your heirs' new basis starts from the units' value, not from your depreciated basis.

## What events can trigger the deferred gain?

Some of these you choose. Others happen to you. A good estate plan accounts for both.

| Event | Who decides | Tax result, generally |
|---|---|---|
| You redeem units for cash | You ask; the REIT chooses cash or shares | Taxable sale; gain includes debt relief |
| You swap units for REIT shares | You | Taxable exchange, even with no cash |
| The OP sells the property you contributed | The REIT | Your built-in gain is assigned to you |
| Your share of OP debt drops | The REIT | Deemed cash; taxable if more than your basis |
| The OP distributes your property to another partner within 7 years | The REIT | You may be treated as selling it |
| The REIT is bought for cash | The REIT's board | Often taxable to unitholders |
| You give units to your children | You | Usually no income tax, but your low basis carries over |
| You die holding units | Not a choice | No income tax; heirs' basis resets under current law |

### Redemptions and swaps

Under [Section 1001](https://www.law.cornell.edu/uscode/text/26/1001), your gain is "the excess of the amount realized therefrom over the adjusted basis." For units, that amount counts both what you receive, in cash or shares, and the OP debt that stops being yours. A swap for REIT shares is a taxable exchange too. Your shares then start with a basis equal to their value, so you aren't taxed twice.

### Debt changes

Under [Section 752](https://www.law.cornell.edu/uscode/text/26/752), "Any decrease in a partner's share of the liabilities" of a partnership counts as a distribution of money to that partner. Under [Section 731](https://www.law.cornell.edu/uscode/text/26/731), a distribution is taxable only to the extent "any money distributed exceeds the adjusted basis" of your interest. So if your debt share falls by more than your basis, the extra is taxable, even though no cash reached you.

### Distributions of your property within seven years

Section 704(c)(1)(B) adds a rule for contributed property that the partnership distributes to another partner "within 7 years of being contributed." If that happens, you can be treated as if you sold it. It belongs on your CPA's checklist.

### The net investment income tax

When gain is triggered, the 3.8% net investment income tax under [Section 1411](https://www.law.cornell.edu/uscode/text/26/1411) can apply on top. It applies to investment income above $250,000 of modified adjusted gross income for joint filers and $200,000 for most single filers.

## Why do people use 721 exchanges for estate planning?

Estate planning is a central reason to consider a 721. Three features drive it.

### The basis reset at death

[Section 1014](https://www.law.cornell.edu/uscode/text/26/1014) covers property passing from a person who has died. It generally takes a basis equal to "the fair market value of the property at the date of the decedent's death." Under current law, OP units fall within that rule.

For a partnership interest, there's one more piece. [Treasury Regulation §1.742-1](https://www.law.cornell.edu/cfr/text/26/1.742-1) covers a partnership interest acquired from a decedent. Its basis is "the fair market value of the interest at the date of his death." That amount is increased by the successor's "share of partnership liabilities." So your heir's basis includes their share of OP debt. That matters, because the debt relief on a later redemption is offset by that higher basis.

My [step-up in basis guide](/learn/step-up-in-basis) covers the general rule for all inherited property. Here, the point is narrower. Units let you hold a diversified real estate investment until death without ever having to sell a building.

### Divisibility

Units divide neatly. A block of 90,000 units can pass as 30,000 to each of three heirs. From then on, each heir acts alone: one might cash out, another might take REIT shares, and a third might keep the units.

Compare that with a single building or one large DST interest. Heirs who inherit one property together must agree on every decision, or wait for the property to sell.

### No more deadlines or landlord work for heirs

Heirs who inherit a building may face management, repairs and a forced sale. Heirs who inherit units face paperwork and a redemption process. That's usually simpler, though it isn't instant.

### The trade-off you accept to get there

Units can't go into another 1031 exchange, because [Section 1031](https://www.law.cornell.edu/uscode/text/26/1031) covers only real property. Any redemption during your life is taxable. The estate plan works most cleanly when you're confident this money stays put until death. My guide to the [721 exchange pros and cons](/learn/721-exchange-pros-and-cons) covers that trade-off in full.

## What do heirs receive, and what should they do next?

### What arrives

Your heirs, or your trust, receive the units. They don't receive cash. Each heir's basis is the units' fair market value at your death plus their share of OP debt. For a non-traded REIT, that value usually comes from an appraisal or the REIT's published **net asset value**, or NAV. NAV is the REIT's own estimate of its holdings' worth after subtracting debt.

### Inside basis and the Section 754 election

The reset applies to the heirs' basis in the units, sometimes called "outside basis." The partnership's basis in its own buildings, called "inside basis," doesn't change on its own.

[Section 743](https://www.law.cornell.edu/uscode/text/26/743) fixes that gap only when the partnership has a Section 754 election in place. With the election, the OP raises its basis in its property for the heir, an adjustment that applies "with respect to the transferee partner only." Without it, an heir who keeps the units can still be allocated income that traces back to your old built-in gain. An heir who redeems quickly largely sidesteps the problem. Find out in advance whether the OP makes the election.

### Choices for each heir

- **Redeem soon after.** With a new basis near the units' value, a prompt redemption may produce little or no gain. Redemption is still subject to the partnership's terms and the REIT's limits.
- **Swap for shares.** If the REIT is listed, shares can be sold on any market day. The swap itself may produce little gain right after a reset.
- **Keep holding.** The heir receives distributions, which are not guaranteed, and a K-1 each year. Future gain above the new basis would be taxed when the heir disposes of the units.

## How do heirs pay estate tax if units are hard to sell?

Keep two taxes apart here. The basis reset at death belongs to the income tax. The estate tax is a separate levy on the value of everything you leave behind.

### The 2026 numbers

For deaths in 2026, the [IRS](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill) lists a basic exclusion amount of $15,000,000. Above that, the top rate under [Section 2001](https://www.law.cornell.edu/uscode/text/26/2001) is 40%. Estates below the exclusion, after counting any taxable gifts made during life, owe no federal estate tax. For them, the basis reset matters far more than the estate tax.

### Nine months, not nine years

The [IRS estate tax FAQ](https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes) says "The due date of the estate tax return is nine months after the decedent's date of death." An executor, the person who settles the estate, can get up to six more months to file. But the IRS notes that "the correct amount of tax is still due by the due date," and interest runs on late payment.

That's the liquidity problem. Units may have redemption limits. A non-traded REIT's redemption program can be limited or stopped. In its [investor bulletin on non-traded REITs](https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-non-traded-reits), the SEC cautions that these programs "are typically subject to significant limitations." The bulletin also notes they "may be discontinued at the discretion of the REIT without notice."

### A hypothetical estate tax example

The figures in this example are invented for illustration. They don't describe any real estate, offering or client, and they aren't tax advice.

Say a widow dies in 2026 with a $22,000,000 estate. It includes $6,000,000 of OP units, and she made no taxable gifts during life. None of a late spouse's unused exclusion carried over to her. The estate is $7,000,000 over the exclusion. At 40%, the federal estate tax is roughly $2,800,000, due in nine months.

If the rest of her estate is cash and listed stocks, paying is simple. Now say most of it is units and DST interests. Her executor may have to redeem units under a limited program, borrow, or sell other assets at a bad time.

### Ways families plan for it

- **Keep liquid assets outside the units.** Cash, listed securities or other assets that can be sold quickly give an executor room.
- **Size the 721 position to the plan.** Not every dollar of exchange equity has to go into units. Some can stay in DSTs without a 721 exit, or in other assets.
- **Understand the redemption terms in advance.** Know the REIT's limits, minimums and timing before they matter.
- **Ask your estate attorney about other tools.** Lifetime gifts, trusts and other liquidity sources each have trade-offs. Your attorney can weigh them for your estate.

### Valuation choices at death

Your executor needs a value for the units. For estate tax, that means fair market value: under [Treasury Regulation §20.2031-1](https://www.law.cornell.edu/cfr/text/26/20.2031-1), "the price at which the property would change hands between a willing buyer and a willing seller." An appraiser may conclude that a hard-to-sell interest is worth less than its share of the REIT's net asset value. Whether any such discount applies depends on the units' terms and the appraisal, and the IRS can challenge it. In an estate that owes tax, a lower accepted value means a lower tax. But the same lower value becomes the heirs' new basis, which raises their tax if they later redeem at full value. For an estate under the exclusion, a lower value can cost basis without saving any estate tax.

There's also an alternate date. Under [Section 2032](https://www.law.cornell.edu/uscode/text/26/2032), an executor can elect to value property "as of the date 6 months after the decedent's death." The election is allowed only if it lowers both the gross estate and the tax. It mainly helps taxable estates whose assets fell after death.

## Should you give units away now or hold them until death?

### Lifetime gifts keep your old basis

Under [Section 1015](https://www.law.cornell.edu/uscode/text/26/1015), a person who receives a gift generally takes "the same" basis "as it would be in the hands of the donor." So your children would receive units with your low basis. When they redeem, they owe tax on the gain you deferred.

### Debt can complicate a gift

A gift of units also hands your share of OP debt to the recipient. If that debt is more than your basis in the units, the gift can create taxable gain for you. Have your CPA run the numbers before any gift.

### Transfer limits

Partnership agreements usually require the general partner's consent to transfer units. The **general partner** is the partner that runs the partnership, usually the REIT itself. Some agreements specifically permit transfers for estate planning, such as to a revocable trust. Check the terms and get consent where required.

### Gift tax reporting

Gifts above the annual exclusion, $19,000 per recipient for 2026 according to the same IRS release, are reported on [Form 709](https://www.irs.gov/forms-pubs/about-form-709). Units in a non-traded REIT have no market price, so the gift usually needs a supportable valuation.

### When a lifetime gift can still make sense

A gift can make sense when your estate is large enough that removing future growth matters more than the basis reset. It can also fit when a family member truly needs the asset now. These are judgment calls for you and your estate attorney.

## A worked example: four ways to exit the same units

Every number below is made up to show the mechanics. None of it reflects a real offering or client, and none of it is typical of any offering. State tax is left out, and this isn't tax advice.

### The setup

Say you're 72 and single. You hold 60,000 OP units worth $25 each, or $1,500,000. Your share of OP debt is $200,000. Your basis in the units is $500,000, and that figure includes the $200,000 debt share.

If you disposed of all the units today, your amount realized would be $1,500,000 plus $200,000 of debt relief, or $1,700,000. Your gain would be $1,700,000 − $500,000 = **$1,200,000**. Assume $350,000 of that is depreciation-related.

### Option 1: Redeem everything this year

- Depreciation portion: $350,000 × 25% = $87,500
- Remaining long-term gain: $850,000 × 20% = $170,000
- Net investment income tax: $1,200,000 × 3.8% = $45,600
- **Federal total: about $303,100**

You'd keep about $1,196,900 of the $1,500,000 in cash. For simplicity, this uses the top rates on the whole gain.

### Option 2: Swap everything for REIT shares this year

The tax is about the same, $303,100. But you receive shares, not cash. You'd need to sell shares or use other money to pay the bill.

### Option 3: Give the units to your children now

Your $200,000 debt share is less than your $500,000 basis, so the gift itself generally doesn't create gain for you in this example. Your children take your $500,000 basis. When they later redeem, they face about the same $1,200,000 of gain, taxed at their own rates. The deferred tax moves to them. It doesn't go away.

### Option 4: Hold until death

You hold until death at 88, taking distributions along the way, which are not guaranteed. Assume the units are still worth $1,500,000 and the debt share is still $200,000.

Your heirs' basis becomes $1,500,000 of value plus $200,000 of debt share, or $1,700,000. If they redeem soon after, their amount realized is also $1,700,000. Their gain is about **$0**. In this example, under current law, the $1,200,000 of deferred gain would not be taxed to you or your heirs.

### Side by side

| Option | Federal income tax in this example | Who pays | What's left |
|---|---|---|---|
| 1: Redeem now | About $303,100 | You, this year | About $1,196,900 in cash |
| 2: Swap for shares now | About $303,100 | You, this year | $1,500,000 in shares, minus the tax you must fund |
| 3: Gift now | About $0 now; gain carries over | Your children, later | Units with your $500,000 basis |
| 4: Hold until death | About $0 under current law | No one, if heirs redeem promptly | Units with a $1,700,000 basis |

Real life is messier. Unit values move, distributions lower your basis each year, and the law can change. But the direction is clear. Under current law, every exit during your life triggers the deferred gain, while holding until death may not.

That's the core of 721 exchange estate planning. It's also why a 721 fits most naturally with money you truly expect to hold for life.

## How to build a 721 estate plan, step by step

### Step 1: Gather your basis history

Collect the paper trail: the Form 8824 for each 1031 exchange, the DST's yearly statements, the option exercise notice, the unit issuance statement and each K-1 after that. Without them, your CPA can't pin down your basis, debt share or built-in gain.

### Step 2: Decide which money is "forever money"

Split your assets into money you may need during life and money you expect to pass on. Units fit the second bucket far better than the first.

### Step 3: Read the partnership agreement's transfer rules

Find out what happens to units at death, whether transfers to a trust need consent, and what paperwork the transfer agent asks for. Ask whether the OP makes Section 754 elections.

### Step 4: Title the units to match your plan

If you use a revocable living trust, find out whether the units can be held in it, and arrange any consent. Make sure the units go where your estate plan says they should.

### Step 5: Build an estate liquidity plan

Estimate whether your estate could owe estate tax. If it could, make sure enough liquid assets sit outside the units to pay it within nine months.

### Step 6: Decide on any lifetime redemptions

If you need income beyond distributions, consider redeeming small slices over several years, not one large block. Each slice can be taxable, so model it with your CPA first.

### Step 7: Leave instructions for your executor and heirs

Write down who to call at the REIT, where your records are, and what your heirs should ask before redeeming. Include the 754 question and the redemption terms.

### Step 8: Review every few years

Tax law, the REIT's terms and your family's needs change. Revisit the plan with your CPA and estate attorney at least every few years, and after any major law change.

## What tax forms come up over the life of a 721?

This table covers the forms across your life and your estate. Your CPA and executor handle the details.

| Event | Form or document | Notes |
|---|---|---|
| Year of each 1031 exchange | [Form 8824](https://www.irs.gov/forms-pubs/about-form-8824) | Reports each like-kind exchange |
| DST years | Sponsor's annual tax statement | Your share of rental income and expenses |
| Year of the 721 | No dedicated form | CPA records unit basis, debt share and built-in gain |
| Certain transfers within two years | Form 8275 or attached statement | Disclosure under Treas. Reg. §1.707-8 |
| Each year you hold units | Schedule K-1 (Form 1065) | Tends to come after 1099s; extensions are common |
| Redemption or swap for shares | [Form 8949](https://www.irs.gov/forms-pubs/about-form-8949) and Schedule D | Gain includes debt relief |
| Sale or exchange of units when the partnership holds ordinary-income (section 751) assets | Statement on your return, plus Form 8308 from the partnership | Separates ordinary income from capital gain |
| Gift of units above the annual exclusion | Form 709 | Valuation needed for non-traded units |
| Death, if an estate tax return is required | [Form 706](https://www.irs.gov/forms-pubs/about-form-706) | Calculates the federal estate tax |
| After Form 706 is filed | [Form 8971 and Schedule A](https://www.irs.gov/forms-pubs/about-form-8971) | Reports estate tax values to the IRS and each heir |

That last row matters for heirs. Under [Section 6035](https://www.law.cornell.edu/uscode/text/26/6035), an executor who must file an estate tax return generally must send a statement of the reported values. It goes to the IRS and to "each person acquiring any interest in property." In short, the estate's valuation of the units becomes the starting point for the heirs' basis.

## Mistakes to avoid in 721 estate planning

1. **Assuming the 721 erases the tax.** It defers it. Only holding until death may avoid it under current law.
2. **Redeeming units for cash soon after conversion.** Cash back within two years of the contribution can be presumed to be part of a disguised sale unless the facts clearly show otherwise.
3. **Expecting fast units after a 1031.** A plan to flip a DST interest into units right away invites a step-transaction challenge to your exchange.
4. **Forgetting the debt.** Debt relief counts in your gain on any disposal, and a falling debt share can create gain on its own.
5. **Gifting units without checking basis and debt.** A lifetime gift passes your low basis to the recipient, and debt above basis can create gain for you.
6. **Ignoring transfer rules.** Moving units generally takes the general partner's sign-off. A trust that isn't allowed to hold them won't do its job.
7. **Having no estate liquidity plan.** Estate tax is due in nine months. Units may not turn into cash that fast.
8. **Assuming a valuation discount helps.** A lower value can cut estate tax in a taxable estate, but it also lowers the heirs' new basis, and the IRS can challenge it.
9. **Leaving heirs without records.** Heirs need the date-of-death value, the K-1s and the REIT's contacts to act well.
10. **Planning on current law forever.** Congress can change the basis reset at death or other rules. Keep some flexibility.

## Where my firm fits in

Baker 1031 Investments is based in San Francisco, with a second office in Los Angeles, and [my background](/about) includes real estate roles at ValueRock Realty Partners, Faris Lee Investments, Westport Capital Partners and Arbor Bay Capital Partners.

Our due diligence on each DST covers broker-dealer review, investment manager audit, investment offering review, real estate assessment and institutional underwriting. It's an ongoing process. We offer DSTs from more than 20 institutional sponsors and follow more than 1,100 full-cycle 1031 DST investments to see how they performed.

Your tax return and your estate documents belong with your CPA and estate attorney. My part is the investment side. As we review [the offerings I currently have available](/invest), I'll say why each one made my list, what I like about it and what gives me pause, including how its 721 feature would sit inside the plan your CPA and attorney have built. Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments is independent of Aurora.

## What my data shows

This section draws on [my offering records](/data/dst-offerings) as of October 2026, which cover 76 DST offerings from 38 sponsors. The figures describe those offerings and nothing more. They aren't a prediction about future offerings.

### 721 exits shape what your heirs inherit

The key figure for estate planning: **13 offerings (17%) in my offering records as of October 2026 make the 721 exit mandatory.** Once the operating partnership exercises its option in one of them, every investor's DST interest turns into units. Your heirs could then inherit units rather than a DST interest, planned or not.

| 721 (UPREIT) exit | Offerings | Share |
|---|---|---|
| Optional | 44 | 58% |
| Mandatory | 13 | 17% |
| None | 17 | 22% |
| Unclear | 2 | — |

That gives you real choice. If your estate plan depends on heirs holding divisible units, an optional or mandatory 721 program may fit. If you'd rather keep your 1031 options open, 17 offerings (22%) have no 721 exit.

### Holds and timing

In my offering records as of October 2026, ten years is the most common projected hold, at 31 offerings. Other offerings project 5 to 10 years or 7 years, and a few are 2-year programs. In a 721 DST, an early option exercise moves up the day the unit tax rules begin to apply to you.

### Minimums make it easier to size the 721 piece

In my offering records as of October 2026, the median minimum is $100,000, within a range of $25,000 to $500,000. Twenty-one offerings (28%) start at $25,000. Smaller minimums let you size the 721 slice of an exchange to fit your estate plan and place the rest in other DSTs.

### Debt and the conversion

Here's how leverage breaks down in my offering records as of October 2026:

| Leverage | Offerings | Share |
|---|---|---|
| All-cash (no debt) | 36 | 47% |
| Loan-to-value above 50% | 16 | 21% |
| Median LTV among leveraged offerings | About 49% | — |

**Loan-to-value**, or LTV, is the loan divided by the property's value. When an all-cash DST converts, no trust-level loan has to be paid off or replaced, so one source of debt-related gain drops away. In a leveraged DST, how the OP assigns its debt to you matters more for your tax at conversion and later.

## Frequently asked questions

### How does a 721 exchange help with estate planning?

It lets you hold a diversified real estate investment as units that split easily among heirs. Under current law, units held until death get a new basis equal to their value. Heirs who redeem promptly may then owe little or no tax on the gain you deferred.

### Is a DST conversion into OP units a taxable event for me?

Usually not, since Section 721 treats the contribution as a nonrecognition event. The main exceptions are a large drop in your share of debt, and money paid back to you within two years that is treated as a disguised sale.

### When is the depreciation I took taxed after a 721?

Not when you receive units. It's usually taxed when you sell, redeem or swap units, with part of the gain possibly taxed at up to 25%. Under current law, it may never be taxed if you hold until death.

### What is the step-transaction doctrine in a 721 exchange?

It's a court-made rule that lets the IRS treat planned, connected steps as one transaction. If a DST interest bought with 1031 money becomes units too quickly under a set plan, the IRS could treat it as a swap of real estate for units. That swap doesn't qualify under Section 1031.

### Is there a required holding period before a 721 conversion?

The tax code doesn't set one for this. Programs set their own timing in the offering documents to support the 1031 investment intent. The disguised sale rules add a separate two-year presumption after you receive units.

### What is my heirs' basis in inherited OP units?

Generally, it's the units' fair market value at your death plus the heir's share of partnership debt. Because debt relief on a later redemption is offset by that higher basis, a prompt redemption may produce little or no gain under current law.

### Does a 721 exchange reduce estate tax?

Not by itself. Units are included in your estate at fair market value, and the estate tax exclusion is $15,000,000 per person for 2026. The main benefit is the income tax basis reset, not a lower estate tax.

### How can my estate pay estate tax if my units can't be redeemed quickly?

Plan ahead by keeping liquid assets outside the units and by learning the REIT's redemption limits now. Estate tax is due nine months after death, and non-traded REIT redemption programs can be limited or suspended.

### Can I hold OP units in my living trust?

Often yes, but it depends on the partnership agreement, which usually requires the general partner's consent to transfer units. Check the terms and get any needed consent while you're alive.

### Is it better to gift OP units now or leave them at death?

For income tax, leaving them at death is usually better under current law, because a gift passes your low basis to the recipient. A gift can still make sense for very large estates or real family needs, so weigh it with your estate attorney.

## Before you act

Estate and partnership tax turn on facts this page can't see, so treat it as education rather than tax, legal or investment advice. Review any plan with your CPA, estate attorney and qualified intermediary before acting. DST interests are sold only through a private placement memorandum, and most are open only to accredited investors. They're illiquid with limited control, distributions are not guaranteed, and you can lose your entire investment.

## Sources

- [26 U.S.C. § 721, Nonrecognition of gain or loss on contribution (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/721)
- [26 U.S.C. § 722, Basis of contributing partner's interest (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/722)
- [26 U.S.C. § 1223, Holding period of property (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1223)
- [26 U.S.C. § 704, Partner's distributive share (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/704)
- [26 CFR § 1.704-3, Contributed property (Cornell LII)](https://www.law.cornell.edu/cfr/text/26/1.704-3)
- [26 U.S.C. § 1031, Exchange of real property held for productive use or investment (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1031)
- [Commissioner v. Clark, 489 U.S. 726 (1989) (Cornell LII)](https://www.law.cornell.edu/supremecourt/text/489/726)
- [26 U.S.C. § 707, Transactions between partner and partnership (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/707)
- [26 CFR § 1.707-3, Disguised sales of property to partnership (Cornell LII)](https://www.law.cornell.edu/cfr/text/26/1.707-3)
- [26 CFR § 1.707-4, Disguised sales: operating cash flow distributions (Cornell LII)](https://www.law.cornell.edu/cfr/text/26/1.707-4)
- [26 CFR § 1.707-8, Disclosure of certain information (Cornell LII)](https://www.law.cornell.edu/cfr/text/26/1.707-8)
- [IRS Topic No. 409, Capital gains and losses](https://www.irs.gov/taxtopics/tc409)
- [26 CFR § 1.1(h)-1, Capital gains look-through rule for sales of partnership interests (Cornell LII)](https://www.law.cornell.edu/cfr/text/26/1.1(h)-1)
- [IRS, Instructions for Form 8308](https://www.irs.gov/instructions/i8308)
- [26 U.S.C. § 1001, Determination of amount of and recognition of gain or loss (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1001)
- [26 U.S.C. § 752, Treatment of certain liabilities (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/752)
- [26 U.S.C. § 731, Extent of recognition of gain or loss on distribution (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/731)
- [26 U.S.C. § 1411, Net investment income tax (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1411)
- [26 U.S.C. § 1014, Basis of property acquired from a decedent (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1014)
- [26 CFR § 1.742-1, Basis of transferee partner's interest (Cornell LII)](https://www.law.cornell.edu/cfr/text/26/1.742-1)
- [26 U.S.C. § 743, Special rules where section 754 election or substantial built-in loss (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/743)
- [IRS, Tax inflation adjustments for tax year 2026](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill)
- [26 U.S.C. § 2001, Imposition and rate of estate tax (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/2001)
- [IRS, Frequently asked questions on estate taxes](https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes)
- [SEC / Investor.gov, Investor Bulletin: Non-traded REITs](https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-non-traded-reits)
- [26 CFR § 20.2031-1, Definition of gross estate; valuation of property (Cornell LII)](https://www.law.cornell.edu/cfr/text/26/20.2031-1)
- [26 U.S.C. § 2032, Alternate valuation (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/2032)
- [26 U.S.C. § 1015, Basis of property acquired by gifts and transfers in trust (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1015)
- [IRS, About Form 709](https://www.irs.gov/forms-pubs/about-form-709)
- [IRS, About Form 8824](https://www.irs.gov/forms-pubs/about-form-8824)
- [IRS, About Form 8949](https://www.irs.gov/forms-pubs/about-form-8949)
- [IRS, About Form 706](https://www.irs.gov/forms-pubs/about-form-706)
- [IRS, About Form 8971](https://www.irs.gov/forms-pubs/about-form-8971)
- [26 U.S.C. § 6035, Basis information to persons acquiring property from decedent (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/6035)

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Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments, LLC is independent of Aurora Securities, Inc. and is not a registered broker-dealer or investment adviser. This content is general education, not investment, tax, or legal advice, and is not an offer to buy or sell securities. Offers are made only through the offering documents to eligible investors, generally accredited investors. DST interests are illiquid, distributions are not guaranteed, and you can lose your entire investment.

Contact: Jerry Baker, Baker 1031 Investments · hello@baker1031.com · (415) 965-0552 · https://baker1031.com/contact