Private & Non-Traded REITs and the 721 Exchange

I keep seeing liquidity described as a footnote when investors compare REITs. It is not a footnote. The day you need capital is when the distinction between a public, non-traded, and private REIT becomes real.

First-order thinking says that a REIT offers institutional real-estate income without buying or managing buildings. That is true. Second-order thinking asks how the price is set, whether you can sell, what the fee stack takes, how the distribution is characterized, and what happens after a 1031 exchange reaches a 721 program. Those questions determine whether the structure fits the capital.

This guide covers private and non-traded, advisor-sold REITs, including NAV REITs, and their place in the deferral toolkit. For the related mechanics, see the 721 exchange guide and the DST guide. Together, they explain where a DST can ultimately land.

The essentials

• Every REIT must distribute at least 90% of taxable income and meet ownership tests, but public, non-traded, and private REITs differ sharply in liquidity, pricing, access, and cost.
• Liquidity is the defining trade-off. Non-traded and private REITs commonly limit redemptions to 2% of NAV per month and 5% per quarter, and they can gate requests in stressed markets.
• Ordinary REIT dividends can qualify for the 20% Section 199A deduction, made permanent in 2025. Return-of-capital distributions defer tax by reducing basis. Non-traded REITs are also the usual home for 721/UPREIT programs.

01 · What a REIT Is

A real estate investment trust, or REIT, owns or finances income-producing real estate and elects special tax treatment. When it meets the rules, it generally avoids corporate-level tax and passes income through to shareholders as distributions.

Most are equity REITs, holding properties such as apartments, industrial facilities, data centers, or retail. Mortgage REITs hold real-estate debt instead. The appeal is professional management and diversified real-estate income in a single security, without tenants or direct property management.

02 · The Three Kinds: Public, Non-Traded, Private

The structure changes the investment experience.

Private REITs are unregistered and limited to accredited investors. Non-traded REITs are SEC-registered, but they do not trade on an exchange. That distinction may sound administrative; in practice, it affects the way you value the holding and exit it.

03 · How REITs Qualify

Public, non-traded, and private REITs face the same federal tests. A REIT must distribute at least 90% of its taxable income to shareholders each year, hold most of its assets and earn most of its income from real estate, have at least 100 shareholders, and satisfy the 5/50 rule: no five individuals may own more than 50% of the shares in the second half of the year.

Failing the distribution threshold triggers a 4% excise tax. These requirements help explain why a private REIT still needs a real shareholder base rather than serving a single owner.

04 · Private & Non-Traded REITs Up Close

Since 2017, a particular non-traded structure has become prominent: the NAV REIT. Blackstone’s BREIT helped establish the model; Starwood, Nuveen, and others followed. These perpetual-life vehicles are priced at net asset value monthly or quarterly rather than at a continuously quoted market price, and they are generally sold through advisors.

The intention is steady income and less day-to-day price movement than a public REIT. A true private REIT goes further: it is unregistered, limited to accredited investors, often has higher minimums and longer lock-ups, and offers the least public transparency. Smoother NAV-based pricing can be appealing. It does not remove economic risk; it changes how and when that risk appears in the reported price.

05 · Which REIT Fits You?

The right type depends chiefly on the liquidity you need, whether you are accredited, and your tolerance for public-market volatility. A useful four-question screen is:

1. Is being able to sell anytime essential, acceptable only periodically, or is a years-long lock-up acceptable?
2. Are you investing without special qualification, under suitability standards, or as an accredited or institutional investor?
3. Do you value daily price transparency and lower cost, steady income with NAV pricing, or private institutional access?
4. Are daily market price swings acceptable, would smoother NAV pricing be preferable, or is a private valuation and long horizon the objective?

Daily liquidity, lower cost, and price transparency point toward a publicly traded REIT, with the trade-off that the market price can swing independently of near-term property values. Limited liquidity and a preference for professional management and smoother NAV pricing point toward a non-traded NAV REIT; that is the usual home for 721/UPREIT programs, but redemptions can be capped or gated and fees can be higher. Accredited or institutional investors who can lock up capital for years may consider a private REIT, accepting higher minimums, less transparency, and manager-set NAV.

This is a fit framework, not a recommendation. Suitability, actual documents, and the source of the capital still matter.

06 · Liquidity & Redemptions: The Defining Risk

There is no exchange sale for a non-traded or private REIT. You request a redemption from the REIT. Those requests are commonly capped at 2% of a fund’s NAV per month and 5% per quarter. In calm markets, that may be sufficient. When many investors request capital at once, the fund can gate redemptions and fill only a fraction of each request rather than sell properties at fire-sale prices.

During the 2022–23 stress, BREIT filled only part of redemption requests for months. An investor should plan to hold this capital for years, not treat it as emergency liquidity.

Illustrative redemption / liquidity modeler

The source model starts with a $100,000 position and a 35% quarterly fill rate. It displays the amount out after one year, the quarters needed to get 90% out, and the amount still locked after one year. At a 100% fill rate, it labels the situation “Full liquidity (ungated)” and notes that a full position can be redeemed promptly, subject to the standard caps.

At a partial quarterly fill, the model compounds the remaining balance. At the 35% default, about 82% of the position, roughly $82,149, comes out in the first year; roughly $17,851 remains locked. It takes 6 quarters, or about 1.5 years, to get 90% out. That result is labeled heavily gated. The model is illustrative. Programs differ, redemptions are often pro-rated when a fund gates, and the prospectus controls.

07 · REIT Taxation & the 20% Deduction

REIT distributions can have several tax characters. The bulk is often ordinary dividends, taxed at ordinary rates. Qualified REIT dividends may receive the Section 199A 20% deduction, which the 2025 law made permanent. At the top rate, the illustration moves 37% to about 29.6% on the eligible amount.

Many non-traded REIT distributions also include return of capital. That portion is not taxed currently; it reduces cost basis and defers tax until sale. It is not a free return. It is a timing difference, and a distribution funded largely by return of capital can mean an investor is receiving some of their own capital back.

Illustrative REIT dividend tax calculator

The source calculator uses a $50,000 annual REIT distribution, a 35% ordinary income tax rate, and a 40% return-of-capital portion. It reports current tax, effective tax rate on the distribution, the amount saved by the 20% deduction, and the return of capital deferred.

In that example, $20,000 is return of capital and $30,000 is the ordinary-dividend portion. The deduction leaves $24,000 taxable, producing about $8,400 of current tax, a 16.8% effective rate on the whole distribution, and about $2,100 saved by the deduction. It treats the non-ROC portion as ordinary REIT dividends eligible for the deduction, ignores capital-gain and qualified-dividend slices and state tax, and is not tax advice. A qualified CPA should confirm the actual 1099-DIV treatment, basis consequences, and tax result.

08 · The 721 / UPREIT Connection

This is where the guide connects to a 1031 and DST sequence. Non-traded NAV REITs are common destinations for 721 UPREIT programs. A REIT’s operating partnership acquires a Delaware Statutory Trust, and DST investors receive operating-partnership, or OP, units rather than cash. The intended result is gain deferral under Section 721.

The path is often described as 1031 → DST → 721 → non-traded REIT: sell property in a tax-deferred exchange, hold a passive DST, then enter a larger, diversified REIT for income and eventual, limited liquidity. The qualification matters. A person cannot 1031 directly into REIT shares. Once OP units are held, another 1031 exchange generally is no longer available, and converting OP units to REIT shares is a taxable event. Read the 721 exchange guide before treating the sequence as a planning certainty.

That makes redemption terms and NAV mechanics central due-diligence items before the journey begins.

09 · Fees & What to Watch

Non-traded and private REITs have historically carried heavier costs than public REITs. Costs can include upfront selling commissions, dealer-manager fees, ongoing management fees, and, in some NAV REITs, a performance fee often around 12.5% of total return above a hurdle.

Three questions deserve direct answers. How is NAV calculated and how often, given that a manager sets it rather than a market? How much of the distribution is return of capital rather than earned income? And what is the complete fee stack after all layers have been counted? Fees directly reduce net return.

10 · Due Diligence on a Private REIT

Before investing, work through a six-point readiness check. The first three are non-negotiable:

1. I understand that capital may be locked up and redemptions can be gated.
2. I understand that NAV is set by the manager, not by a public market.
3. I have reviewed the full fee load: selling, management, and performance fees.
4. I have checked how much of the distribution is return of capital versus earned income; high ROC can flatter a yield.
5. I have reviewed the sponsor or manager track record and the portfolio.
6. I meet the required investor qualification, including accredited status for a true private REIT.

A 0/6 readiness result is a reason to work through the list, not a reason to rush. At 4/6, settle the remaining points. At 6/6, confirm the fund-specific details in the prospectus with an advisor. This is not merely a scoring exercise; it is an assessment of whether the capital can safely bear the trade-offs.

11 · Risks

Liquidity and gating define the category, but they are not the only risks. NAV risk exists because the price is a manager estimate, and critics have argued that some NAVs can lag economic reality. Fee drag reduces net return. High return-of-capital payouts can make a distribution look more sustainable than it is. Leverage and interest-rate exposure can affect the portfolio. Sponsor concentration adds another layer of reliance.

The first-order appeal is tax deferral and current income. The second-order reality is that tax advantages do not repair weak underlying real estate. Diligence the portfolio and manager first, and the structure second.

12 · Frequently Asked Questions

What’s the difference between a non-traded REIT and a private REIT?

A non-traded REIT is SEC-registered but does not trade on an exchange. It is generally open to most investors subject to suitability requirements. A private REIT is unregistered, generally limited to accredited and institutional investors, has higher minimums, and usually offers the least transparency and liquidity.

Can I really not sell when I want?

Correct. Non-traded and private REITs have no exchange. You request a redemption, commonly limited to 2% of NAV monthly and 5% quarterly. In stressed markets requests can be gated and only partially filled. Plan to hold for years.

How are REIT dividends taxed?

Most REIT distributions are ordinary dividends taxed at ordinary rates, though qualified REIT dividends can receive a 20% Section 199A deduction made permanent in 2025. Return of capital is not taxed currently; it reduces basis and is taxed when the investment is sold. Tax character should be confirmed on the actual 1099-DIV with a CPA.

How do REITs connect to a 1031 or DST?

You cannot 1031 directly into REIT shares. In a 721 UPREIT path, an investor first 1031s into a DST. A REIT operating partnership can later acquire the DST and issue OP units, often in a non-traded REIT. The intended exchange defers gain but ends the ability to 1031 again from those OP units.

Are private REITs only for accredited investors?

True private REITs are unregistered securities limited to accredited and institutional investors. Registered non-traded REITs are generally available to more investors, subject to suitability standards and state limits.

13 · Glossary

REIT

A company that owns or finances income real estate, distributes at least 90% of taxable income, and avoids corporate tax when it satisfies the rules.

Non-Traded REIT

An SEC-registered REIT that does not trade on an exchange, is priced by periodic NAV, and has limited redemptions.

Private REIT

An unregistered REIT for accredited and institutional investors, generally with higher minimums and lock-ups.

NAV REIT

A perpetual-life non-traded REIT priced at net asset value and sold through advisors, such as a BREIT-style structure.

Redemption Gating

Limiting or pro-rating redemptions when requests exceed program caps.

Return of Capital

A distribution that is not current income; it reduces basis and defers tax until sale.

Section 199A Deduction

The 20% deduction on qualified REIT dividends made permanent in 2025.

721 / UPREIT

Contributing property, often a DST, to a REIT operating partnership in exchange for tax-deferred OP units.

Explore the REIT strategy

This guide anchors the REIT library, with an emphasis on private and non-traded REITs and the 721 path. These resources go deeper on structure, evaluation, income, and the 1031 investor’s plan:

• REITs Explained: How Real Estate Investment Trusts Work
• Types of REITs: Equity, Mortgage & Hybrid
• How to Invest in a Private REIT: Minimums, Yield & Liquidity
• Public vs. Non-Traded REITs: A Liquidity Trade-Off
• Are Private REITs Safe? Liquidity, Redemptions & Risk
• How to Evaluate a REIT: FFO, AFFO & NAV
• REIT Taxation: How REIT Dividends Are Taxed
• How REITs Pay Dividends: The 90% Distribution Rule
• Can You 1031 Into a REIT? The DST + 721 Path
• REITs and 1031 Exchanges: Why REIT Shares Don’t Qualify
• REIT Risks Every Investor Should Know
• REIT Due Diligence Checklist
• DST vs. REIT: Key Differences for 1031 Exchange Investors

14 · Sources & References

Internal Revenue Code, 26 U.S.C. §856 — definition of a real estate investment trust and its qualification requirements. Internal Revenue Code, 26 U.S.C. §857 — taxation of REITs and their beneficiaries, including the income-distribution requirement. U.S. Securities and Exchange Commission, Real Estate Investment Trusts (REITs) — SEC investor.gov overview of public, non-traded, and private REITs.

1. Internal Revenue Code, 26 U.S.C. §856, on the definition of a real estate investment trust and its qualification requirements.
2. Internal Revenue Code, 26 U.S.C. §857, on REIT taxation and beneficiaries, including the income-distribution requirement.
3. U.S. Securities and Exchange Commission, Real Estate Investment Trusts (REITs), an Investor.gov overview of public, non-traded, and private REITs.

15 · Disclosures

This material is for educational and informational purposes only and does not constitute investment, legal, tax, or financial advice, nor an offer or solicitation with respect to any security. Non-traded and private REITs are illiquid, may be gated or suspended from redemptions, carry substantial fees, are priced by manager-determined NAV rather than a public market, and may lose value, including loss of principal. Private REITs are generally limited to accredited investors.

REIT distributions vary in tax character (ordinary dividends, qualified dividends, capital gain, and return of capital); the Section 199A deduction applies to qualified REIT dividends and was made permanent at 20% under the 2025 law. Calculator outputs are simplified estimates and ignore state tax and certain distribution components. Consult a qualified CPA, attorney, and your financial advisor before investing.

About Baker 1031 Research

Baker 1031 Research is the REIT, DST & UPREIT Desk. It covers the full tax-advantaged real-estate toolkit—1031 exchanges, DSTs, 721 UPREITs, REITs, mineral interests, and Opportunity Zones—to help investors plan the entire arc.

Right now, I would treat the liquidity budget as capital that cannot be negotiated after the fact: keep near-term needs in genuinely available assets, and make a non-traded or private REIT earn its place through the portfolio, manager, fee, redemption, and tax details. How are you weighing current income against access to your capital?