1031 Exchange Into REIT Shares: Why It Fails and the DST-721 Path

Key takeaways

• You can't buy REIT shares as replacement property in a 1031 exchange. Section 1031 covers only real property, and the Treasury regulations list stock and other securities as property that is not real property.
• A DST interest is different. Under Revenue Ruling 2004-86, a properly structured DST interest can qualify as replacement property, because each investor is treated as owning a share of the real estate itself.
• The indirect path has two steps. First, a 1031 exchange into a DST that has a 721 exit. Later, if the REIT's operating partnership chooses to buy the property, your DST interest becomes operating partnership units in a Section 721 contribution that is generally tax-deferred.
• The second step is not in your control. The REIT may never use its option, the timing is set by the program, and the value you receive in units can be lower than what you put in.
• Once you hold operating partnership units, that money is out of the 1031 world for good. Turning units into cash or REIT shares is generally a taxable event.
• In my offering records as of October 2026, 44 DST offerings (58%) have an optional 721 exit, 13 (17%) have a mandatory one, 17 (22%) have none, and 2 are unclear.

Why don't REIT shares qualify for a 1031 exchange?

This is the question behind most searches on this topic, so let me answer it carefully before getting to the workaround.

A 1031 exchange is a tax rule that lets you sell investment or business real estate and buy other real estate without paying capital gains tax right away. The tax is deferred, which means it's pushed into the future. It isn't erased.

A REIT, or real estate investment trust, is a company that owns, and usually operates, income-producing real estate. You buy shares in the company. Some REITs trade on a stock exchange. Others, called non-traded REITs, are sold through brokers and don't trade on an exchange.

On the surface, the two seem made for each other. You sell a building. A REIT owns buildings. Why not put the sale money into the REIT and keep deferring?

The answer comes from three places in the law. Each one closes the door from a different side.

What the statute says

Section 1031(a)(1) says no gain or loss is recognized when real property held for business or investment use "is exchanged solely for real property of like kind." Both sides of the trade must be real property. Like-kind means of the same nature or character. The IRS says real properties are generally like-kind to each other, whether they're improved or unimproved.

That word "real" matters more than it used to. Before 2018, Section 1031 also covered some personal property, such as equipment and vehicles. The Tax Cuts and Jobs Act of 2017 changed the statute to say "real property" throughout. The change applies to exchanges completed after December 31, 2017. The IRS explains that "Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property."

Even under the old, broader rule, stock never qualified. The older text had a list of excluded property, and stocks, bonds and partnership interests were on it. So REIT shares have never been 1031 replacement property, under the old law or the new.

What the Treasury regulation adds

In 2020, the Treasury issued a regulation that defines real property for Section 1031. It's 26 CFR 1.1031(a)-3, and it applies to exchanges beginning after December 2, 2020.

The regulation starts with a plain definition. Real property "means land and improvements to land," plus "unsevered natural products of land, and water and air space superjacent to land." Superjacent just means directly above.

Then it gets specific about paper assets. It lists intangible assets that "are not real property for purposes of section 1031," and it says that's true "regardless of the classification of such property under State or local law." The list includes:

• Stock, other than a few narrow kinds the regulation names, such as shares in a housing cooperative
• "Other securities or evidences of indebtedness or interest"
• Interests in a partnership, with one narrow exception for partnerships that elected out of the partnership tax rules
• "Certificates of trust or beneficial interests"

A share of a REIT is stock in a company, or a similar ownership interest in a trust that the tax code treats like a corporation. Either way, it lands on the excluded list. It doesn't matter that the REIT owns nothing but buildings.

"But the REIT owns real estate"

This is the part that trips people up. A REIT must hold mostly real estate to keep its special tax status. Under 26 U.S.C. 856(c), at least 75% of the value of a REIT's total assets must be real estate assets, cash and government securities at the end of each quarter. At least 75% of its gross income must come from real-estate sources such as rents.

None of that helps you in a 1031 exchange. The tax code looks at what you own, not at what the company owns. You own shares. The REIT owns the buildings.

The definition in Section 856(a) makes the same point. A REIT is "a corporation, trust, or association" whose ownership "is evidenced by transferable shares" and which "would be taxable as a domestic corporation" if not for the REIT rules. In other words, the tax code built REITs to work like corporations that pass income through. A share of a corporation is not a share of its land.

Why a DST interest is treated differently

A Delaware statutory trust, or DST, is a trust that holds title to one or a few properties. Many investors each own a beneficial interest in it. At first glance, that looks like it should fail too, since "beneficial interests" are on the excluded list.

The difference is how the IRS treats a properly built DST. In Revenue Ruling 2004-86, the IRS concluded that a DST meeting strict limits is a grantor trust. In that case, each investor is "considered to own an undivided fractional interest" in the property "for federal income tax purposes." So for tax purposes, you're treated as owning a slice of the building, not just a trust certificate.

That's why the ruling says "A taxpayer may exchange real property for an interest in the Delaware statutory trust" without recognizing gain, "if the other requirements of § 1031 are satisfied." A DST interest can qualify as replacement property. A REIT share can't. My DST guide explains how the trust works day to day.

The trade-off for that tax treatment is rigidity. Under the ruling, the trustee can't accept new money from investors, can't renegotiate the loan, and can't swap the property for other property. Those limits become important when we get to the 721 step.

Which real estate holdings can be 1031 replacement property?

Here's a quick way to see where REITs fall among the things people consider buying with exchange money. This is general information. Your qualified intermediary and CPA need to confirm any specific purchase.

A tenancy-in-common, or TIC, means two or more people each own an undivided share of the same property directly. The sibling guide on what counts as like-kind property walks through the full definition, including the gray areas.

Notice the pattern. Everything that can qualify puts you in the position of owning real estate for tax purposes. Everything that can't puts a company or partnership between you and the land.

What happens if you use exchange money to buy REIT shares?

Suppose you ignore the rule, or you don't know it. You sell a rental, and you ask to put the proceeds into REIT shares. What actually happens?

The QI won't buy them for you

A qualified intermediary, or QI, is the independent company that holds your sale money during a 1031 exchange so you never touch it. The QI buys your replacement property for you, using that money. A QI's job is to complete a valid exchange. Buying stock with exchange funds isn't one, so you would generally need to take the cash out to buy the shares yourself. My guide to the qualified intermediary's role covers how the QI agreement works.

The exchange fails for that money

If you identify REIT shares as your replacement property, that identification doesn't count, because shares aren't like-kind to real property. If that's the only thing you identified, nothing valid is left.

If you catch the mistake early, there's a fix. Under 26 CFR 1.1031(k)-1(c)(6), an identification "may be revoked at any time before the end of the identification period," using a signed written document sent to the same person who received the identification. You can then identify real property instead, as long as you're still within the 45 days.

Once the window closes, the QI releases the money under the terms of your agreement, and your sale is treated as a regular taxable sale.

The gain becomes taxable

The gain on the money that wasn't reinvested becomes taxable. The tax year it's reported in can depend on when the QI releases the money, so have your CPA confirm the timing. Either way, the deferral you planned on is gone for that portion.

What about only part of the money?

You can do a partial exchange. You reinvest some proceeds in real property and take the rest as cash. The cash you keep is called boot. Under Section 1031(b), gain is recognized up to the amount of money and other non-like-kind property you receive. You can then buy REIT shares with that after-tax cash if you want. That's a legitimate plan. It just isn't a tax-deferred purchase of REIT shares. My guide on partial exchanges and boot shows how the math works.

So how do people end up in a REIT without paying the tax first?

They use a different section of the tax code. Section 721(a) 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."

That's the key. You can't trade real estate for REIT shares tax-deferred. But you can generally contribute real estate to a partnership for a partnership interest tax-deferred. And many REITs own their buildings through a partnership.

The UPREIT structure

An UPREIT is an "umbrella partnership real estate investment trust." The REIT sits on top. Below it sits an operating partnership, or OP, which actually owns the buildings. The REIT controls the OP and owns most of it.

When someone contributes property to the OP, they receive OP units. An OP unit is a partnership interest. It's usually designed to match one REIT share in value and in distributions. Later, a unitholder can usually ask to redeem units for cash or REIT shares, at the REIT's choice and on its terms.

So a 721 exchange doesn't put you in REIT shares. It puts you in units of the REIT's partnership. Those units usually track the shares closely. You can read how units are taxed, and what you can do with them, in my guide to operating partnership units.

Why not contribute your property directly?

You can, in theory. In practice, the REIT has to want your exact building. REITs buy to fit a strategy, so they look for big properties in the markets and property types they already favor. Bringing in a new partner also means contracts, debt modeling and decades of gain tracking, and that work costs roughly the same for a small building as for a huge one.

For most individual owners of rentals, small apartment buildings or single-tenant properties, a direct contribution isn't a realistic option. That's where the DST comes in. My 721 exchange guide covers direct contributions and the full set of 721 rules.

How does the DST-then-721 path work?

The DST works as a bridge between the two tax rules. Section 1031 gets you from your property into the DST. Section 721 can later get you from the DST into the REIT's operating partnership.

Step one uses Section 1031

You sell your property and complete a 1031 exchange into a DST interest. This part follows all the normal exchange rules: a QI holds the money, you identify replacement property in writing within 45 days, and you close within 180 days or your tax return due date (with extensions) for the year of the sale, whichever comes first.

The DST you pick is sponsored by a company affiliated with a REIT. People often call this a "721 DST" or a "721-eligible DST." The trust's documents give the REIT's operating partnership a right to acquire the property later.

Step two uses Section 721

Some time later, the OP may exercise that right. The property is usually valued by an appraisal at that point. Your DST interest is then exchanged for OP units at that value. Because you're contributing property to a partnership for an interest in it, Section 721 generally applies and the gain stays deferred.

Your tax basis carries over. Basis is your tax cost in an investment, after depreciation. Under Section 722, your basis in the partnership interest starts with your adjusted basis in what you contributed. So the old gain from your original property, and any gain carried through earlier exchanges, rides along into the units.

Why the DST has to come first

The DST does two jobs that you can't do alone. First, it turns your exchange money into something Section 1031 accepts. Second, it gathers many investors' money into one institutional-size property that the REIT actually wants to own. A REIT that would never take your fourplex might want the large building that your DST owns.

Why there's a wait between the steps

You can't do both steps at once. For the 1031 to work, you must hold the DST interest "for investment," as the statute says. If the plan from day one were to pass straight through the DST into a partnership, the 1031 itself could be questioned.

Section 1031 doesn't put a number of years on this. Each program's tax counsel sets when the option can be used, and the private placement memorandum describes it. A private placement memorandum, or PPM, is the legal document that describes a private offering like a DST, including its risks, fees and terms. Read the section on the 721 exit closely, and ask what the earliest exercise date is.

How to do a 1031 exchange into a REIT through a DST, step by step

Here is the full sequence, from the decision to the units. Each step has a question you should be able to answer before you move on.

Step 1: Decide whether you really want to end up in a REIT

Start with the hardest question. Are you done with 1031 exchanges for this money? Once your DST interest becomes OP units, you can't exchange that money into real estate again. If you might want to buy a property directly in ten years, the 721 path closes that door. My side-by-side guide on 721 vs. 1031 exchanges lays out the trade-offs.

Step 2: Run the numbers on your sale

Ask your CPA for your adjusted basis, the depreciation you've taken, your expected gain, and your loan balance. Without those, you can't tell how much tax the exchange defers, or whether the DST's debt will replace your old debt. You also need them later, because they carry into the units.

Step 3: Line up a QI before closing

The QI must be in place before your sale closes. Once you receive the money, it's too late to start an exchange. Choose the QI, sign the exchange agreement, and make sure the closing agent sends the proceeds to the QI.

Step 4: Confirm you can invest in a DST

DSTs are securities sold in private offerings, and most are sold only to accredited investors. An accredited investor is someone who meets the SEC's income, net worth or license tests. Under the SEC's rules, an individual generally qualifies with income over $200,000 in each of the past two years ($300,000 with a spouse or spousal equivalent) and a reasonable expectation of the same this year. Net worth over $1 million, not counting your primary home, also qualifies. So does holding a Series 7, 65 or 82 license in good standing.

Step 5: Screen for a 721 exit and its type

Not every DST has a 721 exit. Among those that do, the exit can be optional or mandatory. Ask three questions about each one:

1. Does the OP have the right to buy the property, and when can it first use that right?
2. Is the exit optional, meaning you may get a choice, or mandatory, meaning your interest converts if the OP acts?
3. What happens if the OP never acts? Will the property be sold for cash, which would let you do another 1031 exchange?

Step 6: Read the REIT's documents, not just the DST's

This step is easy to skip. Your long-term investment isn't the DST. It's the REIT's operating partnership. Ask for the REIT's prospectus and the operating partnership agreement. A prospectus is the public offering document a public REIT files with the SEC. Look at fees, how units are redeemed, any lockup period, and how distributions have been funded. A lockup is a stretch of time after you receive units during which you can't redeem them.

Step 7: Identify and close within the deadlines

Identify the DST interest in writing by day 45 after your sale. Close by day 180 or your tax return due date (with extensions) for the year of the sale, whichever comes first. If you identify a backup property after day 45, it doesn't count. A backup only works if it was identified in writing within the 45 days. Your QI and the sponsor handle the paperwork, and the IRS gets a Form 8824 with your tax return for the year of the exchange.

Step 8: Hold the DST interest

You're now a DST investor. You report your share of the property's income and expenses each year. Distributions may be paid, but they are not guaranteed. The OP's option may be used at some point, or it may not.

Step 9: If the option is used, review the conversion

You'll get a notice. The property's value is set, usually by appraisal, and you learn how many units you'll receive. Ask your CPA to record your basis in the units and your share of the OP's debt. Debt matters here, because under Section 752, a drop in your share of partnership debt counts as money paid to you. If it's large enough, it can create taxable gain at conversion.

Step 10: Plan your exit from the units

You now hold OP units and receive a Schedule K-1 each year. A K-1 is the tax form a partnership sends each partner showing their share of its income and deductions. When you redeem units for cash, or swap them for REIT shares, you generally owe tax on the gain tied to those units. Many people plan to redeem in pieces over several years, and some plan to hold until death.

What can change the timeline?

The path has a clear order, but not a fixed calendar. Here are the main ways it can play out.

Two things stand out. First, nothing on that list is in your control. The OP decides, and the documents decide the rest. Second, a DST with a 721 exit is still a DST. If you buy one only for the REIT units at the end, you should be fine owning the DST alone if the end never comes.

A worked example: three ways to get from a rental to REIT exposure

This is a hypothetical example with round numbers. It doesn't represent any offering or any investor. The fee number is made up to show the math. It isn't typical of any offering, and it isn't tax advice. Your CPA should run your actual figures.

The starting point

Say you own a small apartment building with no loan. You sell it for $1,800,000 and pay $80,000 in selling costs. Your net sale price is $1,720,000.

You bought it years ago, and after $300,000 of depreciation, your adjusted basis is $520,000. Depreciation is the yearly tax deduction for wear and tear on a building, and it lowers your basis.

Your gain is $1,720,000 − $520,000 = $1,200,000.

The federal tax on a regular sale

Assume you're in the top federal brackets. The IRS notes that "unrecaptured section 1250 gain," which is the part of your gain that comes from depreciation, is "taxed at a maximum 25% rate." The rest of a long-term gain is taxed at up to 20%. The 3.8% net investment income tax applies above $250,000 of income for joint filers and $200,000 for most other filers. Assume your other income already exceeds that threshold, so the 3.8% applies to the whole gain.

• Depreciation portion: $300,000 × 25% = $75,000
• Remaining gain: $900,000 × 20% = $180,000
• Net investment income tax: $1,200,000 × 3.8% = $45,600
• Federal total: $300,600, before any state tax

Path A: Sell, pay the tax, buy REIT shares

You keep $1,720,000 − $300,600 = $1,419,400. You buy REIT shares with it. Your basis in the shares is what you paid, so your old gain is behind you. You have no deferred tax and full flexibility.

Path B: 1031 into a DST with a 721 exit

You exchange the full $1,720,000 into a 721 DST. Say the hypothetical up-front costs are 8% of the investment, or $137,600. That leaves about $1,582,400 working in real estate. Your basis in the DST interest is your old $520,000, because the basis carries over in a 1031 exchange.

Three years later, the OP uses its option. To keep it simple, say the appraised value of your share equals $1,582,400, and each unit is valued at $25. You receive 63,296 units. Your basis in them is still about $520,000, ignoring depreciation during the DST years. You carry roughly $1,062,400 of deferred gain in those units. That's less than the original $1,200,000 only because the hypothetical fees lowered the value.

Path C: 1031 into a DST without a 721 exit

You exchange the same $1,720,000 into a DST with no 721 feature. Using the same hypothetical 8% cost, about $1,582,400 works in real estate. When the property sells, you can do another 1031 exchange, or pay the tax then.

Side by side

What the example shows

Path B starts with about $163,000 more working for you than Path A. That's the value of deferral, after the hypothetical fees. But it comes with strings. You carry about $1 million of deferred gain. You'll owe tax on it when you redeem units, unless you hold them until death. And you only reach the REIT if the OP decides to act.

The numbers also flip easily. With a smaller gain, the fees in Path B can cost more than the tax you defer. With a large state tax, the deferral can be worth more. That's why the comparison has to be run on your real numbers.

To keep the math readable, I've left out state tax, depreciation during the DST years, and any debt. A loan on your old property adds another layer, because you need to replace that debt in the exchange. My DST vs. REIT guide covers the debt side and the ongoing tax reporting for each.

What if you mainly want liquidity and diversification?

Some people who ask about a REIT aren't attached to the REIT itself. They want what a REIT offers: a spread across many buildings, no landlord duties, and some way to get money out. It's worth asking whether that's you, because there may be simpler ways to get some of it.

Spread your exchange across several DSTs

A single DST usually owns one property or a few. Splitting your exchange across several DSTs, from different sponsors and in different property types or regions, gives you some diversification while keeping every dollar in the 1031 world. You still give up liquidity, though, because each DST is illiquid until its property sells.

Split between a 721 DST and other DSTs

You don't have to choose all or nothing. You can place part of your equity in a DST with a 721 exit and the rest in DSTs without one. If the 721 happens, part of your money moves into the OP. The rest stays exchangeable. Lower minimums make this easier to do.

Take some cash, pay tax on it, and buy REIT shares

If you want true daily liquidity for part of the money, you can take that part as boot, pay the tax on it, and buy listed REIT shares. The rest goes into a 1031 replacement. You lose deferral on the cash, but you get exactly the liquidity you asked for.

Use money from outside the exchange

If you already have cash or a brokerage account, you can buy REIT shares with that. Your exchange money stays in real estate, and your REIT exposure comes from money that was never part of the exchange.

How does an optional exit differ from a mandatory one?

This is one of the most important lines in a 721 DST's documents. It's also easy to miss.

With an optional exit, the documents may give you a choice when the OP acts. You might take units, or you might stay out. If you stay out, the documents explain what happens next. Sometimes the property is sold, and you get cash you could take into another 1031 exchange. Read the terms, because "optional" can mean different things in different programs.

With a mandatory exit, your DST interest converts if the OP acts. You go along whether or not you want to at that point.

Which one fits depends on your goal:

• If your goal is to end up in a REIT, a mandatory exit removes one decision later. But you still can't force the OP to act.
• If you're unsure, an optional exit keeps more choices open. You can decide later, when you know more about your health, your plans and the REIT itself.
• If you want to keep exchanging for life, a DST with no 721 exit avoids the question entirely.

Mistakes to avoid on the way to a REIT

These are common errors on this path. Most are easy to avoid if you catch them before you sell.

1. Trying to identify REIT shares as replacement property. They don't qualify. If they're the only thing you identify, your exchange can fail and your gain becomes taxable.
2. Assuming a 721 DST means you'll get REIT units. It doesn't. The OP has an option, not a duty. Plan as if you might own the DST until the property is sold.
3. Buying a mandatory exit by accident. If you aren't sure you're done with 1031 exchanges, read the exit terms closely before you invest.
4. Reading only the DST's PPM. Your long-term holding is the REIT's operating partnership. Its prospectus and partnership agreement set your fees, your redemption rights and your limits.
5. Ignoring the debt math. If your share of debt drops when you convert, part of that drop can be taxed as if you received cash. Ask how the OP assigns debt to people who come in from its DST programs.
6. Thinking conversion means cash. A 721 gives you units, not money. Turning units into cash or REIT shares is generally taxable, and redemption limits can slow it down.
7. Putting all of your exchange equity on one path. One DST, one REIT and one exit is a lot of concentration. Splitting your equity keeps some options open.
8. Planning the timeline around a specific year. The OP's timing is its own. If you need the money by a certain date, this path may not fit.
9. Assuming fees are similar. DST fees and REIT fees are separate layers. Add them up before you compare paths.
10. Skipping your CPA and attorney. The REIT path turns on tax law and on contract terms. Bring both in before you sell, not after.

Risks to weigh before you take this path

The DST-then-721 path involves two securities, one after the other. Each carries risk.

• Loss of principal. Real estate values can fall. You can lose some or all of your investment, and units you receive at conversion can be worth less than your original equity.
• Distributions are not guaranteed. DST and REIT distributions can be reduced or stopped.
• Illiquidity. DST interests generally can't be sold until the property sells. The SEC's bulletin on private placements says investors "should be prepared to hold the securities indefinitely." OP units can have lockups and redemption limits too.
• The option may never be used. You may never reach the REIT.
• Loss of 1031 eligibility. Once you hold units, that money can't go into another 1031 exchange.
• Limited control. You have no say in property decisions at the DST, and very little at the OP.
• Conflicts of interest. The sponsor and the REIT are affiliated, and the REIT is the buyer at a price set by an appraisal the program arranges.
• Fees. Up-front and ongoing fees at both levels reduce what reaches real estate.
• REIT-specific risks. Investor.gov warns that "Non-traded REITs are illiquid investments" and "generally have high up-front fees." Listed REIT prices can swing with the stock market.
• Tax events you don't choose. Debt changes at the OP, or an OP sale of the property you contributed, can trigger gain. Under Section 704(c), gain on contributed property is shared "so as to take account of the variation" between its tax basis and its value when contributed. In plain words, your old gain follows that building inside the OP.
• Tax-law change. Everything here reflects current law, which can change.

Who might the DST-then-721 path fit?

This isn't a recommendation. It's a way to test the idea against your own situation.

The path tends to fit someone who has finished managing property and is ready to stop exchanging. It fits someone who wants to own a slice of a large, diversified portfolio rather than one building. It also fits someone who can wait for the REIT's timing and has other money for emergencies.

It's often a poor fit for someone who might want to buy property directly again. It's also a poor fit for someone who needs a large sum of cash by a set date, or who would be unhappy staying in a DST for years if the option is never used.

Age and estate plans matter, too. Under Section 1014, heirs generally receive a basis equal to "the fair market value of the property at the date of the decedent's death." That applies to OP units, DST interests and REIT shares alike. Units are often easier to divide among heirs than a share of one building. That divisibility is one reason some people consider the 721 path later in life.

How I look at 721 programs

Before founding my firm, I worked in real estate acquisitions, management and development, and my background includes more than $10 billion of real estate investment activity.

For a DST with a 721 exit, I look at the same five due-diligence areas as any DST: broker-dealer review, investment manager audit, investment offering review, real estate assessment and institutional underwriting. A 721 DST also raises questions specific to the 721 step. Is the exit optional or mandatory? When can the option first be used? What are the REIT's fees and redemption terms? How does the OP assign debt to people coming from its DST programs? What happens if the option is never used?

When we meet, I'll show you 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

If you want a REIT at the end of your exchange, the first thing to know is how common the 721 exit is. 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.

The 721 exit is common, and its type varies

In my offering records as of October 2026, 44 offerings (58%) have an optional 721 exit into a REIT's operating partnership, and 13 (17%) have a mandatory one.

For someone asking whether they can 1031 into a REIT, this matters in two ways. First, the indirect path isn't rare. You'll likely have several 721 DSTs to compare. Second, the type of exit varies a lot. The 13 mandatory offerings decide the REIT question for you if the OP acts. The 17 with no 721 exit keep you in the 1031 world.

Minimums make splitting possible

The median minimum investment in my offering records as of October 2026 is $100,000. Minimums range from $25,000 to $500,000, and 21 offerings (28%) start at $25,000. If you're unsure about ending up in a REIT, a lower minimum lets you test the path with a smaller slice of your exchange.

Hold periods frame the wait

A projected hold of 10 years 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 OP's option can end the DST phase sooner than the projected hold. It can also never be used, in which case the projected hold is the better guide.

Debt shapes the conversion

On debt, 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%. For a REIT-bound investor, the all-cash group means no DST loan to unwind at conversion. A leveraged DST helps with the first step, replacing your old loan, but it puts more weight on how the OP handles your debt share in the second.

Frequently asked questions

Can I use 1031 exchange money to buy REIT shares?

Not as part of a valid exchange, because exchange money can go only into real property and REIT shares are stock. If you take the cash out to buy shares, the gain on that amount is generally taxable. The tax-deferred alternative is a 1031 into a DST with a 721 exit, which may later lead to REIT operating partnership units.

Does a non-traded REIT qualify for a 1031 exchange?

No. A non-traded REIT's shares are still shares, even though they don't trade on an exchange. The Treasury regulation lists stock and other securities as property that is not real property, no matter how state law classifies them.

Can a DST interest count as real property for a 1031 exchange?

It can qualify, if the DST is properly structured. Under Revenue Ruling 2004-86, each investor in such a trust is treated as owning a fractional share of the property for federal income tax purposes. The DST must follow strict limits on what the trustee can do.

How long does it take to go from a 1031 exchange to REIT units?

There's no fixed answer, because the operating partnership decides if and when to use its option. The PPM states the earliest date the option can be used. It may also never be used, so plan as if you might hold the DST until the property is sold.

Does buying REIT shares with my own savings affect my 1031 exchange?

No, as long as the money isn't from your exchange proceeds. Your exchange funds stay with the QI and go into real property, and REIT shares bought with outside money are a separate purchase. Just keep the two clearly apart in your records.

What if I already identified REIT shares by mistake?

If you're still within the 45-day window, you can generally revoke that identification in a signed writing and identify real property instead. After day 45, only real property you identified in time can count, so call your QI right away.

Will I get REIT shares or OP units?

You'll get OP units when the 721 happens. Later, you can usually ask to redeem units, and the REIT chooses whether to pay cash or issue shares. Turning units into shares is generally taxable even though no cash changes hands.

Can I force the REIT to buy my DST property?

No. The option belongs to the operating partnership, and the trust documents set the terms. If it's never used, the property may be sold for cash, and you could do another 1031 exchange with your share.

Can I buy REIT shares with part of my sale proceeds and exchange the rest?

Yes. That's a partial exchange: the cash you keep is taxable boot, and the rest can stay deferred in real property such as a DST. You can then buy REIT shares with the after-tax cash.

Who can invest in a DST that has a 721 exit?

Most DSTs are private offerings sold only to accredited investors, and a DST with a 721 exit is no different. An individual generally qualifies with income over $200,000 in each of the past two years ($300,000 with a spouse or spousal equivalent) and a reasonable expectation of the same this year, net worth over $1 million excluding a primary home, or a Series 7, 65 or 82 license in good standing.

What happens if the REIT's value drops before my DST converts?

You receive units at the value set when the option is used. If the property's value has dropped, you get fewer units than your original equity would have bought. You can lose some or all of your investment on this path.

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. § 752, Treatment of certain liabilities (Cornell LII)
• 26 U.S.C. § 704, Partner's distributive share (Cornell LII)
• 26 U.S.C. § 856, Definition of real estate investment trust (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)
• 26 CFR § 1.1031(k)-1, Treatment of deferred exchanges (Cornell LII)
• IRS Revenue Ruling 2004-86
• IRS, Like-kind exchanges: real estate tax tips
• IRS, About Form 8824, Like-Kind Exchanges
• IRS Topic No. 409, Capital Gains and Losses
• Investor.gov, Updated Investor Bulletin: Accredited Investors
• Investor.gov, Private Placements under Regulation D
• Investor.gov, Real Estate Investment Trusts (REITs)