721 Exchange vs 1031: Control, Liquidity, Taxes and Estate Plans

Key takeaways

• A 1031 exchange keeps you in real estate. You can repeat it with each sale for as long as you own investment property.
• A 721 exchange moves you into a partnership. In real estate, that usually means operating partnership units in a REIT. Units are not real property, so that money can't go into another 1031 exchange.
• A 1031 has strict deadlines and generally uses a qualified intermediary (QI), a company that holds your sale money. A 721 has neither. The hard parts of a 721 come later, through debt rules, redemption limits and the taxes on cashing out.
• Units can give you partial liquidity and easy division among heirs. A 1031 chain keeps control and future flexibility. Both can receive a step-up in basis at death under current law, which resets the tax cost to the value on the date of death.
• For most individual owners, the choice isn't either-or. The common sequence is a 1031 into a DST (Delaware statutory trust, a trust that owns real estate for many investors) first, with a possible 721 later if the REIT's partnership acts.
• The DST you pick often settles the question. My offering records as of October 2026 show 17 offerings (22%) with no 721 exit, 44 (58%) with an optional one and 13 (17%) with a mandatory one.

How do a 721 and a 1031 exchange differ at the core?

Both rules let you put off paying tax on a gain. That's where most of the similarity ends. They come from different parts of the tax code, they move you into different kinds of assets, and they leave you with very different choices afterward.

The 1031 exchange

A 1031 exchange lets you sell real estate held for investment or business use and buy other real estate without paying tax on the gain right away. Section 1031(a)(1) says no gain or loss is recognized when real property "is exchanged solely for real property of like kind" that you'll hold for business or investment.

Like-kind is broad for real estate. Land, a rental house, an apartment building and a warehouse are generally like-kind to each other, as long as all of it is in the United States and held for investment or business use.

The tax isn't erased. It's deferred. The gain you didn't pay tax on carries into the new property and waits there.

The 721 exchange

A 721 exchange is the informal name for a contribution under Section 721(a). It says "No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership."

A partnership, for tax purposes, is a business owned by two or more people or companies that passes its income and deductions through to its owners. It doesn't pay income tax itself.

In real estate, the partnership is usually a REIT's operating partnership. A REIT, or real estate investment trust, is a company that owns income-producing real estate. In an UPREIT, short for "umbrella partnership REIT," the REIT owns its buildings through an operating partnership, or OP. When you contribute property to the OP, you receive OP units, which are partnership interests usually designed to match one REIT share in value and distributions. My 721 exchange guide covers the mechanics of the structure in full.

The one-sentence difference

A 1031 trades real estate for real estate. A 721 trades real estate for a partnership interest. Everything else in this guide follows from that.

721 exchange vs 1031 exchange: how do they compare side by side?

Here are the differences that matter most when you're deciding. Later sections go through each one.

The QI holds your sale money during a 1031 exchange so you never touch it. A DST usually owns one property or a handful. Under Revenue Ruling 2004-86, a properly structured DST interest can qualify as 1031 replacement property, because each investor is treated as owning a share of the real estate. My DST guide explains how they work.

How do the rules and paperwork compare?

The statutes are very different in length and in how much they ask of you. Here's how each rule handles the same practical questions.

Deadlines

Section 1031 has two hard deadlines. You must identify replacement property in writing within 45 days after your sale. You must receive it within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first. Miss either one, and the exchange fails for the property involved. A backup property identified after day 45 doesn't count; it only works if it was identified in writing within the 45 days. My guide to the 45-day identification rules covers how to name properties correctly.

Section 721 has no deadline at all. The contribution happens when the partnership accepts it. The timing pressure in a 721 comes later, from rules about when you can take money back out.

Who holds the money

In a deferred 1031 exchange, your sale proceeds go to the QI, not to you. If you receive the money, or have the right to it, the exchange can fail. The QI must be in place before your sale closes.

A 721 needs no QI, because there's no sale in the middle. You, or your DST, contribute property directly to the partnership.

What can be traded

Section 1031 covers real property only. The Treasury definition of real property, 26 CFR 1.1031(a)-3, lists items that "are not real property for purposes of section 1031." The list includes stock, other securities, and "Interests in a partnership," with one narrow exception that doesn't apply to a REIT's OP. That's the rule that keeps OP units and REIT shares out of the 1031 world.

Section 721 doesn't care what kind of property you contribute. It does have one exception, in Section 721(b), for partnerships that would be an "investment company" if they were a corporation. That rule targets people who pool stock portfolios. Your tax counsel will check it, but it isn't aimed at an OP that owns buildings.

How debt is treated

Debt is where both rules get technical, and where surprise tax often comes from.

In a 1031 exchange, debt that's paid off on your old property counts like cash you received, unless you replace it. Section 1031(d) says that when the other side takes on your liability, "such assumption shall be considered as money received by the taxpayer on the exchange." In practice, to defer all your gain, you generally buy replacement property of equal or greater value and reinvest all your cash. A leveraged DST can help, because your share of its loan generally counts toward replacing your old loan. My guide to DST debt and leverage shows how that works.

In a 721, the rule comes from Section 752. A decrease in your share of partnership debt "shall be considered as a distribution of money to the partner by the partnership." Under Section 731, you owe tax when money distributed "exceeds the adjusted basis" of your partnership interest. So if your share of debt drops a lot when you convert, and your basis is low, you can owe tax without receiving any cash.

How basis carries over

Basis is your tax cost in an investment, after depreciation. Your gain on a sale is roughly the price minus your basis.

Both rules carry your old basis forward. Under Section 1031(d), the new property's basis "shall be the same as that of the property exchanged," adjusted for any cash you received and any gain you recognized. Under Section 722, your basis in the partnership interest starts with your adjusted basis in the property you contributed. Either way, the old gain comes with you.

Rules that look back two years

Each rule has a two-year look-back aimed at a different kind of abuse.

Section 1031(f) covers exchanges between related persons. If you or the related person disposes of the property within two years, the deferral can be lost.

For a 721, the disguised sale rules apply. Under 26 CFR 1.707-3, if you contribute property and the partnership transfers money to you within two years, "the transfers are presumed to be a sale of the property to the partnership" unless the facts clearly show otherwise. Regular distributions from the partnership's operating cash flow are treated differently. Under 26 CFR 1.707-4, an operating cash flow distribution "is presumed not to be part of a sale" unless the facts clearly show otherwise. That's one reason to treat OP units as a long-term holding, not a quick route to cash.

Reporting

A 1031 exchange is reported on Form 8824, which the IRS says is used to "report each exchange of business or investment property for property of a like kind." After that, you report the replacement property's income on your own return.

A 721 contribution isn't reported on Form 8824. Your CPA records your basis in the units and your share of the partnership's debt, and checks whether the disguised sale rules call for a disclosure. Each year after, you receive a Schedule K-1, the tax form a partnership sends each partner showing their share of income and deductions. K-1s often arrive later than other tax forms, so you may need to file an extension.

Who controls the investment under each path?

Control is one of the biggest practical differences, and it shifts in steps.

With direct ownership, every decision is yours: the tenant, the repairs, the loan, the sale date. That's also the work many people want to leave behind.

In a DST, you already give up nearly all control. Under Revenue Ruling 2004-86, the trustee "may not renegotiate the terms of the debt" and may not swap the property for another. But you still own a share of a specific building, and the DST sells it at some point. When it does, you can do another 1031 exchange.

In OP units, you give up even the link to a specific building. The REIT can sell what you contributed, buy assets you'd never pick, take on debt, change distributions or merge with another company. As a limited partner, your vote is narrow at most. A limited partner is an owner who shares in profits and losses but doesn't run the business.

One more point on control: in a 1031, you decide that the exchange happens. In the common DST-to-721 route, the REIT's partnership decides whether and when to convert your DST interest into units. You can't force it.

Which path gives you more liquidity?

Liquidity means how quickly you can turn an investment into cash without a big loss.

After a 1031

A building you own directly can be sold whenever you choose, but selling takes months. You also sell it all at once. A DST is less liquid. You generally can't cash out until the sponsor sells the property. The SEC's bulletin on private placements says investors "should be prepared to hold the securities indefinitely."

After a 721

OP units are usually more flexible. After a holding period set by the partnership agreement, you can usually ask to redeem some or all of your units. The REIT then chooses whether to pay cash or issue REIT shares.

That flexibility has limits. If the REIT is non-traded, which means its shares aren't listed on an exchange, redemptions run through a program the board controls. Investor.gov warns that "Non-traded REITs are illiquid investments." Read the prospectus, the offering document a public REIT files with the SEC, for any limits on how much the REIT will buy back, and when. If the REIT is listed, shares you receive can be sold on an exchange, but at whatever the market price is that day.

Liquidity isn't free

Redeeming units for cash is generally a taxable event. Depending on how the redemption is set up, it may be treated as a sale of units to the REIT or as a cash distribution from the partnership, and the tax math differs. Swapping units for REIT shares is generally taxable too, even though no cash changes hands. So the liquidity of units is real, but each use of it costs tax. My guide to OP units walks through how that tax is figured.

How does diversification compare?

Diversification means spreading your money so that one bad property, tenant or market doesn't sink the whole investment.

With a 1031 chain, you build diversification yourself. You can split one sale across several DSTs from different sponsors, in different property types and regions. Each one is still concentrated, though. A single DST usually owns one property or a handful.

With OP units, you get diversification across a REIT's whole portfolio, which can include many buildings in many markets. But it all sits with one management team, one balance sheet, one board and one fee structure. You've traded property concentration for manager concentration.

Neither is better in general. It's a question of which risk you'd rather hold.

What happens at death under each path?

For many people weighing a 721, this is the deciding question.

The step-up applies to both

Under Section 1014, property passed at death generally gets a basis equal to "the fair market value of the property at the date of the decedent's death." That applies to real estate, DST interests and OP units alike. So under current law, the deferred gain from a lifetime of 1031 exchanges, or from a 721 contribution, may never be taxed if you hold until death.

Congress can change this rule. Treat it as current law, not a permanent feature.

Divisibility differs

Units are easy to split. If you leave 90,000 units to three children, each can take 30,000 and choose a different path. One can redeem for cash, one can convert to shares, and one can keep holding.

With a building or a DST interest, heirs inherit shared ownership of a specific property. They have to agree on decisions, or wait for the sponsor to sell. That's harder when siblings want different things.

The timing trade-off

The estate benefits of units arrive at death. The cost, which is losing future 1031 exchanges, starts the day you convert. If you're 60 and healthy, that could be decades of giving up flexibility. The sibling guide on 721 tax and estate planning covers gifting, trusts and charitable planning in more depth.

Which path keeps future 1031 exchanges open?

Once your money is in OP units, there's no tax-deferred way back into direct real estate.

Here's why. OP units are partnership interests, and the Treasury regulation excludes them from real property. REIT shares are stock, which is excluded too. So neither units nor shares can be traded for real estate under Section 1031. My sibling guide on whether you can 1031 into a REIT explains the same rule from the other direction.

To get back into a building, you'd have to redeem units or sell shares, pay the tax on your deferred gain, and buy real estate with what's left. At that point, you're starting over with after-tax money.

Compare that with a 1031 chain. Each time a property sells, you can choose again: another exchange, a DST, a 721 DST, or paying the tax. The 1031 path keeps every option open. The 721 path picks one and closes the rest.

That doesn't make a 721 a bad choice. It means the decision deserves the same weight as selling for cash, because for future exchanges it's just as final.

My sibling guide on 721 exchange pros and cons weighs that loss of 1031 eligibility against the upsides of units.

When should a DST come first?

For most individual property owners, the 721 doesn't come instead of a 1031. It comes after one.

Why REITs rarely take small properties directly

A direct 721 is a negotiated deal, and the REIT sets the bar. It generally looks for institutional-scale buildings that fit its markets and property types. On top of that, every new partner brings paperwork and tax tracking that don't shrink with the size of the building. So a single rental, a small apartment building or a modest retail property rarely gets a direct 721 offer.

How the DST bridge works

The common route has two steps. First, you sell your property and do a 1031 exchange into a DST whose sponsor is tied to a REIT. Second, after a holding period, the REIT's operating partnership may use its option to buy the DST's property for OP units. Your DST interest converts in a Section 721 contribution.

Think of the DST as a translator between the two rules. Section 1031 accepts it as replacement property, and the pooled money of many investors buys a property big enough to interest the REIT.

Why a DST first can also mean deciding later

A DST with an optional 721 exit lets you put off the 721 decision. When the REIT's partnership acts, the documents may let you take units or stay out. By then, you'll know more about your health, your family's plans and the REIT itself.

A DST with a mandatory exit decides it for you if the partnership acts. A DST with no 721 exit keeps you in the 1031 world. Picking among those three is often where the real 721-or-1031 decision gets made.

Splitting the difference

You don't have to put everything on one path. You can put part of your exchange into a DST with a 721 exit and the rest into DSTs without one. If the 721 happens, only part of your money crosses the one-way door.

How does a 721 compare with selling outright or a cash-out refinance?

People weighing a 721 often weigh two other choices too. Here's how they line up.

Selling outright

Selling and paying the tax is the simplest choice. You lose the deferral, but you gain complete freedom with what's left. Nothing is locked up, and there are no partnership forms, redemption limits or one-way doors.

For a high-income seller, the federal tax can include three layers. The IRS notes that the depreciation part of the gain, called "unrecaptured section 1250 gain," is "taxed at a maximum 25% rate." Most of the rest is taxed at up to 20%. On top of that, the 3.8% net investment income tax applies above $250,000 of income for joint filers and $200,000 for most other filers. State tax can add more.

A cash-out refinance

A cash-out refinance means taking a new, larger loan on a property you keep and pulling out the extra as cash. Because you aren't selling, there's no sale to create a gain: under Section 1001, gain comes from "the sale or other disposition of property." So a refinance can give you cash without selling and without a 721. Ask your CPA to confirm how the loan is treated in your situation.

The trade-offs are different. You keep the property and its management work. You take on more debt and a larger payment. If the property later goes into a 1031 exchange, the larger loan is debt you'll need to replace. And refinancing right before or after an exchange raises its own questions, which your CPA should review.

All four choices at a glance

A worked example: one gain, three paths, one cash need

This is a hypothetical example with round numbers. It doesn't represent any offering or any investor, and it isn't tax advice. To keep the math clear, it assumes no debt, no fees, no change in property value and no state tax. It also uses a single 23.8% federal rate, meaning 20% plus the 3.8% tax, even though part of a real gain could be taxed at up to 25%. Your CPA should run your actual numbers.

The starting point

Say you own a rental worth $2,000,000 after selling costs, with no loan. Your adjusted basis is $600,000. Your gain is $2,000,000 − $600,000 = $1,400,000.

Eight years from now, you expect to need $300,000 in cash for a family expense.

Path 1: Sell outright now

Tax: $1,400,000 × 23.8% = $333,200. You keep $1,666,800 to invest however you like. When you need the $300,000 in year eight, you simply take it, with no further tax on this gain.

Path 2: 1031 into DSTs and stay in the 1031 world

You exchange the full $2,000,000 into DST interests. Your basis stays $600,000. No tax is due now.

In year eight, you can't cash out a slice of a DST. Say one of your DSTs happens to sell that year, and you take $300,000 as cash while exchanging the rest. That cash is called boot. Under Section 1031(b), gain is recognized up to the amount of boot you receive. Your gain is far more than $300,000, so all $300,000 is taxable.

Tax: $300,000 × 23.8% = $71,400. Your new basis stays $600,000, and about $1,100,000 of gain remains deferred in the new property.

Path 3: 1031 into a 721 DST, then OP units

You exchange the full $2,000,000 into a DST with a 721 exit. Say the REIT's partnership uses its option in year three, and your share converts to 80,000 units at a hypothetical $25 each. Your basis in the units is $600,000.

In year eight, you redeem 12,000 units, which is 15% of your units, for $300,000. Your basis in those units is 15% of $600,000, or $90,000. Your gain is $300,000 − $90,000 = $210,000. This splits your basis evenly across your units, which is a simplification. How much basis goes with redeemed units, and whether the redemption is treated as a sale of units or as a cash distribution from the partnership, depends on how it's set up and on your share of the partnership's debt.

Tax: $210,000 × 23.8% = $49,980. You keep 68,000 units worth $1,700,000, with a basis of $510,000, so about $1,190,000 of gain remains deferred.

Side by side

What the example shows

The total gain is the same $1,400,000 in every path. What changes is when it's taxed and how much control you have over the timing.

In this simplified example, units let you take cash in a slice, with only part of the slice taxed. The 1031 path taxes boot dollar for dollar up to your gain, and only gives you cash when a property sells. But the 1031 path keeps the door open for more exchanges, and the 721 path closes it.

In real life, debt makes this more complicated. If your share of debt drops at conversion, or when you redeem, part of that drop counts as cash and can add to your gain. Fees, value changes and redemption limits also change the picture.

How to decide between a 721 and a 1031, step by step

Here's an order of questions that helps sort it out. Work through it with your CPA and attorney before you sell.

Step 1: Measure your gain and your debt

Get your adjusted basis, total depreciation taken, expected sale price and loan balance. Those numbers drive the tax at every stage, including how debt is handled if you ever convert to units.

Step 2: Ask whether you'll want another exchange

Picture the next 10 to 20 years. Might you want to buy a property directly again? Move money into a different market? If the answer is "maybe," keep at least part of your money on the 1031 path.

Step 3: Map your cash needs

List the large expenses you can see coming. Money you'll need by a set date doesn't belong in a DST, and it may not be safe to count on OP redemptions either, since they can be limited. Keep that money outside the exchange or plan to take it as boot.

Step 4: Decide how much control you want to keep

If you want to choose properties, tenants and sale dates, direct ownership through a 1031 keeps that. If you're ready to hand it all off, a DST or OP units may fit. Know that OP units mean giving up even the choice of which buildings you own.

Step 5: Think about your estate

Ask who will inherit and how they're likely to get along. If your heirs would likely want different things, units can be easier to divide. If your heirs would rather inherit property they can exchange, a 1031 chain may serve them better. Either way, the step-up applies under current law.

Step 6: Choose your DST's exit type

If you're going the DST route, pick among no 721 exit, an optional one, or a mandatory one. This is often where the real decision gets made. Read the PPM's exit section closely. A PPM, or private placement memorandum, is the legal document for a private offering like a DST.

Step 7: Read the REIT's documents too

If you choose a 721 DST, read the REIT's prospectus and the operating partnership agreement, not just the DST's PPM. They set your fees, your redemption rights, any lockup, and how the partnership assigns debt to new unitholders.

Step 8: Confirm with your CPA, attorney and QI before you sell

Run the plan past your CPA, your attorney and your QI before the sale closes. Once you receive the sale money, a 1031 is no longer available for it.

Which path tends to fit which investor?

These are general patterns, not a recommendation for your situation. Each profile is hypothetical.

Mistakes to avoid when weighing a 721 against a 1031

These errors are common and expensive. Most are easy to avoid if you catch them before your sale closes.

1. Treating a 721 as "just another exchange." It ends your 1031 options for that money. Weigh it like a sale.
2. Assuming you can 1031 out of OP units later. You can't. Units and REIT shares are not real property.
3. Counting on the 721 happening. In the DST route, the REIT's partnership decides whether and when. Plan as if you might stay in the DST until the property is sold.
4. Buying a mandatory exit by accident. If you're unsure you're done with exchanges, read the exit terms closely.
5. Ignoring debt at conversion. A drop in your debt share can create taxable gain. Ask how the partnership assigns debt.
6. Forgetting that liquidity costs tax. Each redemption and each swap into REIT shares is generally taxable.
7. Taking money back too soon. Money from the partnership within two years of your contribution, other than regular operating distributions, can be presumed a disguised sale.
8. Missing the 1031 deadlines because a 721 has none. The DST step still has to meet them. Identify within 45 days, and close within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first.
9. Putting everything on one path. Splitting your equity keeps some money exchangeable.
10. Skipping professional review. Both rules are tax and legal decisions as much as investment ones.

Risks to weigh on either path

Both paths involve real estate and, if you use DSTs or a REIT, securities. Each carries risk.

• Loss of principal. Property values can fall. You can lose some or all of your investment, whether you hold a building, a DST interest or OP units.
• Distributions are not guaranteed. DST and REIT distributions can be reduced or stopped.
• Illiquidity. DSTs generally can't be sold until the property sells. OP units can have lockups and redemption limits.
• Limited control. You have little say in a DST and almost none in an OP.
• Concentration. A DST usually owns one or a few properties. OP units tie you to one REIT's management.
• Fees. DSTs and REITs each charge fees, which reduce what reaches real estate.
• Debt. Debt magnifies losses and, on the 721 path, changes in your debt share can create tax.
• A failed exchange. Missing a 1031 deadline or touching the money can make the gain taxable.
• The 721 may never happen. In the DST route, the option belongs to the REIT's partnership.
• Tax-law change. The rules described here, including the step-up at death, reflect current law and could change.

How I approach the 721-or-1031 question

My background spans acquisitions, management and development work at several real estate investment firms, and more than $10 billion of real estate investment activity.

When the 721 question comes up, it helps to compare DSTs with no 721 exit, an optional one and a mandatory one side by side. When we review the offerings I currently have available, I'll tell you why I'm considering each one, what I like, and where I have reservations. Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments is independent of Aurora.

What my data shows

The 721-or-1031 choice often gets made when you pick a DST, because the DST's documents set its exit. Here's what my offering records as of October 2026 show, across 76 DST offerings from 38 sponsors. These figures describe the offerings I track. They aren't a forecast or a promise about any future offering.

Most offerings have some 721 exit, but not all the same kind

In my offering records as of October 2026, 44 offerings (58%) have an optional 721 exit, 13 (17%) have a mandatory one, and 17 (22%) have none.

Each row maps to a different answer to the 721-or-1031 question:

• None (17 offerings): You stay on the 1031 path. When the property sells, you can exchange again.
• Optional (44 offerings): You put off the decision. When the partnership acts, the documents may let you choose.
• Mandatory (13 offerings): If the partnership acts, you're on the 721 path whether or not you still want it.
• Unclear (2 offerings): The terms need a closer read before anyone can say which path applies.

Minimums make it practical to split

The median minimum investment in my offering records as of October 2026 is $100,000, with a range from $25,000 to $500,000. 21 offerings (28%) start at $25,000. For a 721-or-1031 decision, that means you don't have to commit all your equity to one answer.

Debt shapes the conversion math

36 offerings (47%) are all-cash, with no loan, and 16 (21%) have a loan-to-value above 50%. Loan-to-value, or LTV, is the loan divided by the property's value. The median LTV among leveraged offerings is about 49%. On the 1031 side, a DST's debt can help you replace the loan on your old property. On the 721 side, that same debt raises the stakes on how your debt share is handled at conversion.

Projected holds frame the wait

A 10-year projected hold is the most common, at 31 offerings. Others project 5 to 10 years or 7 years, and a few are 2-year programs. In a 721 DST, the partnership's option can end the DST phase earlier than the projected hold, or not at all.

Frequently asked questions

Which is better for me, a 721 or a 1031 exchange?

Neither is better in general. A 1031 keeps you in real estate with future exchanges open, while a 721 trades that flexibility for units that can be redeemed in slices and divided among heirs. Your age, cash needs and plans for future property decide which fits.

Can I do a 1031 exchange and then a 721 exchange?

Yes, and that's the common sequence. You 1031 into a DST tied to a REIT, and later the REIT's operating partnership may acquire the DST's property for units under Section 721. The second step is the partnership's choice, not yours.

Can I go from a 721 back to a 1031?

Not with the units. OP units are partnership interests, and REIT shares are stock, so neither can be 1031-exchanged. To buy real estate again, you'd redeem or sell, pay the tax, and start over with after-tax money.

Does a 721 need a QI to hold the money?

No. A 721 is a direct contribution of property to a partnership, so there are no sale proceeds for anyone to hold. If you reach the 721 through a DST, though, the 1031 step into the DST still needs a QI.

Are there deadlines in a 721 exchange?

The statute sets no deadlines for the contribution itself. The rules that matter come afterward, such as the two-year presumption that money taken back from the partnership, other than regular operating distributions, may be a disguised sale. The 1031 step into a DST still has its own 45-day deadline.

Which path is better for my heirs?

Both can receive a step-up in basis at death under current law. Units are easier to divide among several heirs, while a 1031 chain lets you keep exchanging during your lifetime. The right answer depends on your age and your heirs' plans.

Is a 721 more liquid than a 1031?

Usually, yes, but with limits. You can often redeem units in slices after a holding period, subject to the partnership's terms and any REIT repurchase limits. A DST interest generally can't be cashed out until the property sells.

Can I split my money between a 721 path and a 1031 path?

Yes. You can put part of your exchange into a DST with a 721 exit and the rest into DSTs without one. That way, only part of your money crosses the one-way door if the 721 happens.

Is it better to take a cash-out refinance instead of a 721?

They solve different problems. A refinance gives you cash without selling, but you keep the property, its management and a larger loan. A 721 hands off management and gives you units, but it ends future 1031 exchanges for that money.

Is a 721 exchange taxable if my debt goes down?

It can be. Under Section 752, a drop in your share of partnership debt counts as money paid to you, and if it exceeds your basis, the excess is taxable gain. Ask how the partnership assigns debt before you invest in a 721 DST.

What happens if I sell my property outright instead?

You pay tax on the full gain, including up to 25% on the depreciation portion and the 3.8% net investment income tax if it applies. In return, you get complete freedom with what's left. For a small gain, that can cost less than the fees of a DST.

Before you act

This guide is for education only. It isn't tax, legal or investment advice. Please confirm every decision with your CPA, attorney and qualified intermediary. DST interests are offered only by private placement memorandum to qualified investors, distributions are not guaranteed, and you can lose your entire investment.

Sources

• 26 U.S.C. § 1031, Exchange of real property held for productive use or investment (Cornell LII)
• 26 CFR § 1.1031(a)-3, Definition of real property (Cornell LII)
• 26 U.S.C. § 721, Nonrecognition of gain or loss on contribution (Cornell LII)
• 26 U.S.C. § 722, Basis of contributing partner's interest (Cornell LII)
• 26 U.S.C. § 731, Extent of recognition of gain or loss on distribution (Cornell LII)
• 26 U.S.C. § 752, Treatment of certain liabilities (Cornell LII)
• 26 CFR § 1.707-3, Disguised sales of property to partnership (Cornell LII)
• 26 CFR § 1.707-4, Disguised sales of property to partnership: special rules, including operating cash flow distributions (Cornell LII)
• 26 U.S.C. § 1001, Determination of amount of and recognition of gain or loss (Cornell LII)
• 26 U.S.C. § 1014, Basis of property acquired from a decedent (Cornell LII)
• 26 U.S.C. § 1411, Net investment income tax (Cornell LII)
• IRS Revenue Ruling 2004-86
• IRS, About Form 8824, Like-Kind Exchanges
• IRS Topic No. 409, Capital Gains and Losses
• Investor.gov, Private Placements under Regulation D
• Investor.gov, Real Estate Investment Trusts (REITs)