What Is a 721 Exchange (UPREIT) DST? A Plain Guide

A 721 exchange DST is a Delaware statutory trust that can later move its property into a real estate investment trust's operating partnership in return for partnership units, using Section 721 of the tax code. In my offering records as of October 2026, 57 of 76 DST offerings (75%) include an optional or mandatory 721 exit.

Key takeaways

• A 721 exchange, also called an UPREIT transaction, lets you trade real estate for units in a REIT's operating partnership without paying tax at that moment. The tax is deferred, not erased.
• A DST can act as a bridge. You 1031 into the DST first. Later, the DST's property may be contributed to a REIT's operating partnership, and you receive operating partnership (OP) units.
• Once you hold OP units, your 1031 journey ends. OP units are not real property, so you can't do another 1031 exchange with them.
• Turning OP units into REIT shares, or selling them, is generally a taxable event. You can control timing by converting a little at a time, within the REIT's rules.
• The price is set by an appraisal or valuation process. When the sponsor's own REIT is the buyer, that creates a conflict of interest you should look at closely.
• In my records, 44 offerings (58%) have an optional 721 exit, 13 (17%) have a mandatory one, and 17 (22%) have none. Which one you pick matters a lot.

What is a 721 exchange (UPREIT) DST, in plain English?

Let me start with the simple version. Then we'll add the details one piece at a time.

A DST, or Delaware statutory trust, is a legal entity that owns real estate. Many investors buy a share of a DST. Each investor owns a slice of the trust, and the trust owns the building. DST interests can qualify as replacement property in a 1031 exchange.

A 1031 exchange is a tax rule. It lets you sell investment real estate and buy other investment real estate without paying capital gains tax right away. The tax is pushed into the future. That is why we call it tax-deferred.

A 721 exchange is a different tax rule. It lets you contribute property to a partnership in return for an ownership stake in that partnership. Again, no tax is due at the moment of the swap.

An UPREIT is a common way large REITs are set up. The name stands for "umbrella partnership real estate investment trust." The REIT sits on top. Underneath it is a partnership that holds the real estate. That partnership is called the operating partnership, or OP.

So a "721 exchange DST" is a DST built with a possible path into a REIT. You put your 1031 money into the DST. Later, the DST's property may be contributed to a REIT's operating partnership. You walk away holding OP units instead of a DST interest.

Some people call this a "DST to UPREIT" strategy. Others call it a "721 exit." It all describes the same idea.

What does Section 721 of the tax code say?

Section 721 is short. It lives in the Internal Revenue Code, which is the main body of federal tax law. You can read it at 26 U.S.C. §721 on Cornell's Legal Information Institute.

The core sentence in subsection (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."

Let me translate. "Recognized" is a tax word. It means "counted on your tax return this year." So if you give property to a partnership and get a partnership interest back, you usually don't owe tax on that swap right now.

There is an important exception in subsection (b). It says the rule doesn't apply when the partnership would be treated as an "investment company" if it were a corporation. In plain terms, Congress didn't want people using partnerships to swap stocks and bonds around without tax. Your tax advisor will look at this. For a typical REIT operating partnership that owns real estate, it is a known issue that the deal's lawyers handle.

Here is the big point to remember. Section 721 is not the same as Section 1031. They are two separate rules. Section 1031 swaps real estate for real estate. Section 721 swaps property for a partnership interest. A 721 exchange DST uses both rules, one after the other.

How is a 721 exchange different from a 1031 exchange?

This is where many investors get confused. So let's put the two rules side by side.

Section 1031 says no gain is recognized when real property held for business or investment "is exchanged solely for real property of like kind." Since the Tax Cuts and Jobs Act, the IRS says, "Section 1031 now applies only to exchanges of real property," according to its like-kind exchange tax tips page. The IRS also explained this change in a news release on like-kind exchanges being limited to real property.

A 1031 exchange also has strict deadlines. You must identify replacement property within 45 days of selling. You must close within 180 days, or by your tax return due date if that comes first. You report the exchange on IRS Form 8824.

Section 721 has no 45-day or 180-day clock. It also doesn't need "like-kind" property. You just need to contribute property to a partnership in return for a partnership interest.

Here is the catch. An OP unit is a partnership interest. It is not real property. So once you hold OP units, you can't 1031 them into a new building. Your chain of 1031 exchanges stops there.

What is an UPREIT, and why do REITs use them?

A REIT, or real estate investment trust, is a company that owns income-producing real estate. Many REITs own hundreds of properties. Some trade on a stock exchange. Others don't trade publicly. Those are called non-traded REITs.

An UPREIT is a REIT with a partnership underneath it. The REIT is usually the general partner of that partnership. The partnership holds most or all of the real estate.

Why set it up this way? Taxes. If you sold your building straight to a REIT for REIT shares, you would generally owe tax right away. But if you contribute your building to the REIT's partnership for partnership units, Section 721 can let you defer the tax.

An Equity Office Properties Trust comment letter filed with the SEC in 2003 explained it well. It said the contributor "generally does not recognize the taxable gain" on a contribution to the operating partnership. It also said a sale or contribution directly to the REIT "would result in the immediate recognition of gain."

Doug Meece of Morgan Stanley put it simply in a 2013 Nareit interview on operating partnership units: "The use of the UPREIT structure was primarily tax-driven."

That's the whole reason UPREITs exist. They give property owners a way to join a large REIT without a big tax bill on day one.

What are operating partnership (OP) units?

OP units are ownership units in the REIT's operating partnership. In that same Nareit interview, Meece described them as "limited partnership shares in a company that are convertible to common shares."

Let's unpack that.

Limited partnership shares. You become a limited partner. A limited partner owns a piece of the partnership but doesn't run it. The REIT, as general partner, makes the decisions.

Convertible to common shares. In most UPREITs, you can later ask to turn your OP units into REIT shares, or into cash. The REIT's partnership agreement sets the rules. Often there is a waiting period first. The REIT may get to choose whether it gives you shares or cash.

Economically similar to shares. OP units are usually designed to track REIT shares. One OP unit often equals one REIT share in value and in distributions. That isn't true in every deal, so read the terms.

Taxed like a partnership interest. As an OP unit holder, you usually get a Schedule K-1 each year, not a Form 1099. Your share of the partnership's income, deductions, and depreciation flows to you. This can be more complex at tax time. Some investors may have to file returns in states where the REIT owns property. Ask your CPA what to expect.

Your old tax basis comes with you. "Basis" is roughly what you paid for an asset, adjusted over time for things like depreciation. When you contribute property under Section 721, your low basis generally carries over into your OP units. That's how the tax stays deferred. It doesn't disappear.

What is a DST, and how can it qualify for a 1031 exchange?

To see why a DST makes a good bridge, you need to know how a DST can qualify for 1031 in the first place.

The IRS addressed this in Revenue Ruling 2004-86. A revenue ruling is the IRS's official answer to a specific tax question. In that ruling, the IRS said a DST investor can be treated as owning a direct interest in the real estate, not just a trust interest. That's how a DST interest can qualify as like-kind replacement property, as long as the other 1031 rules are met.

The ruling also put tight limits on what the trustee can do. For example, the trustee can't buy new property, accept new money from investors, or renegotiate the loan or the leases. The trustee can make only minor non-structural changes, unless the law requires more. These limits keep the DST passive. They also mean the DST can't adapt much if things change.

Most DSTs are sold as private placements under Regulation D. That usually means they're open only to accredited investors. The SEC's accredited investor page lists the main tests for individuals. One is "Net worth over $1 million, excluding primary residence (individually or with spouse or partner)." Another is "Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years" and a reasonable expectation of the same this year.

DST interests are securities. Back in 2005, the NASD (now FINRA) issued Notice to Members 05-18 about similar tenant-in-common programs. It noted that in these exchanges, "interests in real property are exchanged for instruments that generally are securities." That's why DSTs are sold through broker-dealers with suitability and due diligence duties.

A few plain risks apply to every DST. Distributions are not guaranteed. DST interests are illiquid, meaning you generally can't sell them quickly. You have limited control. And you can lose some or all of your investment.

How does a DST work as a bridge into a REIT?

Here's why the DST fits in the middle. A REIT operating partnership would love to buy good buildings with OP units. But you can't 1031 straight into OP units. They aren't real property.

So the sponsor does it in two stages.

Stage one: the 1031. You sell your rental property. Your qualified intermediary holds the money. A qualified intermediary, or QI, is a neutral company that holds your sale proceeds so you never touch them, which the 1031 rules require. You then buy a DST interest with that money. Because the DST interest counts as real property for 1031 purposes, your gain stays deferred.

Stage two: the 721. After some years, the DST's property may be contributed to the REIT's operating partnership. In return, the DST investors receive OP units. Section 721 lets that swap happen without current tax, as long as the deal is structured properly.

The DST is the bridge between "I own a building" and "I own part of a big REIT." Without the DST, you'd usually have no clean way to get from one to the other while keeping your tax deferral.

Many sponsors who offer 721 DSTs also run their own REIT. They use DSTs to gather properties and investors, and later move some of those properties into their REIT. That's a real business model. It can work well for some investors. It also creates conflicts, which I'll cover below.

How does a 721 exchange DST work, step by step?

Here is the full path from your current rental to OP units and beyond. Every deal is different, so treat this as a general map.

Step 1: Sell your relinquished property

Your "relinquished property" is the property you're selling. Before you close, you sign an exchange agreement with a qualified intermediary. The sale money goes to the QI, not to you.

Step 2: Identify replacement property within 45 days

You have 45 days from closing to name your replacement property in writing. A DST with a 721 feature can be one of the properties you name. You can name more than one property, within the identification rules, so you have backups.

Step 3: Close on the DST within 180 days

You must close on the replacement property within 180 days of your sale, or by your tax return due date if earlier. Because DST properties are already bought by the sponsor, closing can often happen in two to three business days once the paperwork, funding, and approvals are complete.

Step 4: Hold the DST interest

Now you own a slice of the DST. The trust collects rent. It may pay you monthly distributions, which are not guaranteed. You get annual tax reporting. You don't manage tenants or fix roofs.

This holding period matters for taxes too. A 1031 requires that you hold the new property "for investment." Many sponsors design a waiting period of several years before any 721 contribution. Ask your CPA how long you should hold before a 721 happens.

Step 5: The sponsor or REIT starts the 721 process

At some point, the REIT may want to take in the DST's property. What happens next depends on whether the 721 is optional or mandatory. I explain the difference in the next section.

Step 6: The property is valued

The property gets a fair market value. This is usually done with an independent appraisal or another valuation process described in the offering documents. That value sets how many OP units you get.

Step 7: The property is contributed, and you get OP units

The DST property moves into the operating partnership. You receive OP units based on your share of the DST and the agreed value. Under Section 721, this usually isn't a taxable event for you. Your old tax basis carries into the OP units.

Step 8: Hold, convert, or pass on the OP units

From here, you have three broad choices:

• Hold the OP units and receive distributions, which are not guaranteed.
• Convert some or all units into REIT shares or cash, which is generally taxable.
• Keep them until death, so your heirs may get a step-up in basis under current law.

Each choice has tax results. Talk with your CPA and estate attorney before you pick.

What is the difference between an optional and a mandatory 721 feature?

This is one of the most important questions you can ask about any DST. The answer changes how much control you have.

What is a mandatory 721 DST?

In a mandatory 721 DST, the plan from day one is to contribute the property to the REIT's operating partnership. The trust documents give the sponsor or REIT the right to do it. You agree to this when you invest.

When the time comes, you receive OP units. You generally don't get to choose cash instead. Your exit is the REIT. If you don't want to end up in that REIT, a mandatory 721 DST is probably not for you.

Some investors like this. They know where they're headed. They want a large, diversified REIT holding at the end. The DST is just the on-ramp.

What is an optional 721 DST?

In an optional 721 DST, the documents allow a 721 contribution, but they don't require it. The sponsor may also sell the property for cash at the end of the hold. If it sells for cash, you could do another 1031 exchange into new real estate.

Here is a detail that trips people up. "Optional" doesn't always mean you get to choose. In some deals, the option belongs to the sponsor or the REIT. In others, investors get a choice or a vote. In some, investors who don't want OP units can receive cash, which may be taxable unless they 1031 it. The private placement memorandum, or PPM, spells this out. A PPM is the legal disclosure document for a private offering. Read that section carefully, or have me walk you through it.

What does "no 721" mean?

Some DSTs have no 721 feature at all. At the end, the trust plans to sell the property for cash. You then decide whether to 1031 again, pay tax, or do something else.

Which is more common?

In my offering records as of October 2026, optional 721 exits are the most common. The table below shows the breakdown.

That means three out of four DSTs I track have some kind of path into a REIT. If you want to keep doing 1031 exchanges for the rest of your life, you need to pay close attention to this line in every offering.

How is the price set when a DST is contributed to a REIT?

When your property moves into the operating partnership, the number of OP units you get depends on two numbers. The first is the value of the DST property. The second is the value of each OP unit.

Valuing the DST property. Most offering documents call for an independent third-party appraisal. An appraiser looks at rents, expenses, comparable sales, and market cap rates. Some deals also use a fairness opinion, which is a report from an outside firm saying whether the terms are fair. The PPM tells you which method applies.

Valuing the OP units. If the REIT trades on a stock exchange, OP units usually track the share price. If the REIT is non-traded, the unit value is often based on the REIT's latest net asset value, or NAV. NAV is the REIT's estimate of what its assets are worth, minus its debts, per share.

Why this matters to you. If the property is valued low, or the OP units are valued high, you get fewer units. Both numbers matter. And in many deals, the REIT buying the property is affiliated with the sponsor that sold you the DST. That's a conflict of interest. The same company can sit on both sides of the trade.

Good questions to ask:

• Who picks the appraiser, and is the appraiser independent of the sponsor?
• Is there a fairness opinion? Who pays for it?
• Is the OP unit value based on a recent NAV? How often is NAV updated?
• Do investors get to vote? What happens if I vote no?
• Are there fees charged at the time of the 721 contribution?

What do you gain with a 721 exit?

A 721 exit can solve real problems for some investors. Here are the main potential benefits.

Diversification

A single DST often holds one property or a small group of properties. A REIT may own dozens or hundreds of properties across many cities and property types. When you trade DST property for OP units, your money is spread across the REIT's whole portfolio.

That can lower the risk that one bad tenant or one weak market hurts you badly. It doesn't remove risk. The REIT as a whole can still lose value.

Potential liquidity

DST interests are illiquid. There's usually no easy way to sell early. OP units can offer more flexibility. After any waiting period, you may be able to convert units into REIT shares or cash.

If the REIT is publicly traded, you could then sell the shares on the stock market. If the REIT is non-traded, your access to cash depends on the REIT's redemption program, which usually has limits. More on that below.

Potential liquidity also means you can convert a little at a time. That lets you spread the tax over several years instead of paying it all at once.

Estate planning and step-up in basis

This is a big reason many older investors look at 721 exits. Under current law, when you die, assets you leave to heirs generally get a new tax basis. 26 U.S.C. §1014 says the basis of property acquired from a decedent is generally "the fair market value of the property at the date of the decedent's death."

That's called a step-up in basis. If your heirs inherit OP units worth $1,200,000 that had a basis of $300,000, their new basis may be about $1,200,000. If they convert soon after, the deferred gain may never be taxed.

OP units can also be easier to split among heirs than a building. Three children can each get a third of the units. They don't have to agree on when to sell a property.

Tax law can change. This works under current law, and your estate attorney should confirm how it applies to you.

Less hands-on work

Like a DST, OP units are passive. You don't manage property. You don't plan the next 1031 under a 45-day deadline. For investors who are tired of the 1031 treadmill, that can be a relief.

Possible continued deferral

As long as you hold the OP units and don't convert or sell them, the deferred gain generally stays deferred. There are exceptions. Certain events in the partnership can trigger tax, which I cover next.

What do you give up with a 721 exit?

Every benefit comes with a trade-off. These are the ones I make sure every client understands before investing in a DST with a 721 feature.

No more 1031 exchanges

This is the biggest one. Once you hold OP units, you can't do a 1031 exchange with them. OP units are partnership interests, and since 2018 Section 1031 covers only real property.

If your long-term plan was "swap until I drop," a 721 exit changes that plan. You're trading the flexibility of future real estate swaps for a REIT holding.

Converting OP units to shares is generally a taxable event

Turning OP units into REIT shares or cash is treated as a sale or exchange. Under 26 U.S.C. §1001, gain on a sale or exchange is generally recognized unless another rule says otherwise. When you convert, the deferred gain tied to those units generally becomes taxable.

This surprises people. They hear "convertible" and think "free switch." It's not free. The good news is you can often control timing by converting in smaller pieces over several years.

Concentration in one REIT

Yes, a REIT may own many properties. But all your money is now tied to one company, one management team, and one set of decisions. If that REIT stumbles, all of your OP units are affected.

Before the 721, you might have owned interests in three or four DSTs from different sponsors. After several 721s into one sponsor's REIT, you could be heavily concentrated.

Limited control

As a limited partner, you don't vote on most decisions. The REIT decides what to buy, what to sell, how much to borrow, and how much to pay out. Some of those decisions can affect your taxes.

Tax events you don't control

In an UPREIT, the REIT may sell the property you contributed. If it does, part of the deferred gain on that property may be allocated to you. Some REITs agree to "tax protection" for a period of time, meaning they promise not to sell or to cover some tax cost. Many don't, and the terms vary.

Debt can also matter. If your DST had a loan, and the way that debt is shared changes after the 721, it can create taxable income in some cases. Also, Congress wrote 26 U.S.C. §707 to treat certain contributions paired with payments back to the partner as sales. If you receive cash around the time of a 721, ask your CPA whether this rule applies.

Non-traded REIT liquidity limits

Many 721 DSTs lead into non-traded REITs. That's important to understand. Investor.gov's REIT page says, "Non-traded REITs are illiquid investments." It also says they "generally cannot be sold readily on the open market."

Non-traded REITs usually offer a share redemption program. That's a way to ask the REIT to buy back your shares. These programs often have monthly or quarterly limits. In times of stress, a REIT can limit or pause redemptions. So "potential liquidity" really does mean potential.

Investor.gov also warns about cost and value. It says non-traded REITs "generally have high up-front fees," with commissions and offering fees that "usually total approximately 9 to 10 percent of the investment." It notes that some don't give a per-share value estimate "until 18 months after their offering closes." And it says non-traded REITs "frequently pay distributions in excess of their funds from operations."

Not every REIT is structured the same. NAV REITs, for example, update their values more often. FINRA's REIT page explains that fixed-price REITs "typically appraise their assets far less frequently than NAV REITs." Read the REIT's own disclosures before you accept OP units.

Conflicts of interest when the sponsor's REIT is the buyer

When a sponsor sells you a DST and its affiliated REIT later buys the property, the sponsor is on both sides. It wants a fair price for DST investors. It also wants a good price for its REIT. Those goals pull in opposite directions.

Investor.gov notes that non-traded REITs "typically have an external manager instead of their own employees." It adds that fees tied to acquisitions and assets under management "may not necessarily align with the interests of shareholders."

This doesn't mean every 721 is unfair. It means you should look at how the price is set, who checks it, and what fees get paid when the deal happens.

More complex taxes

OP unit holders often get K-1s, which can arrive later than 1099s. You may owe state taxes in places where the REIT owns property. That can mean more tax prep cost.

Worked example: following one investor from rental to OP units

Let's walk through simple, hypothetical numbers. These are made up to show the mechanics. Your real numbers, tax rates, and results will be different. I'm also ignoring depreciation during the DST and REIT holding periods, which would lower your basis and raise your future taxable gain.

The starting point

Say you sell a rental for $1,000,000. You have no mortgage on it. Your adjusted basis is $400,000. That means your gain is $600,000.

Say your combined federal and state tax on that gain, including depreciation recapture, would be about 30%. That's $180,000. Again, your real rate depends on your income, your state, and your depreciation history.

Stage one: 1031 into a DST with a 721 feature

You do a 1031 exchange. All $1,000,000 goes through your qualified intermediary into a DST with an optional 721 feature. You pay no tax at this point, assuming the exchange is done correctly. Your basis in the DST interest carries over at $400,000.

Stage two: The 721 contribution

Seven years later, the sponsor's REIT decides to take in the DST property. An independent appraisal values your share of the DST at $1,150,000. The OP units are valued at $25 each.

$1,150,000 ÷ $25 = 46,000 OP units.

You receive 46,000 OP units. Under Section 721, this generally isn't taxable. Your basis carries over, still $400,000. Your deferred gain is now $750,000 ($1,150,000 minus $400,000).

Stage three: Converting some units

Two years later, you want cash for a family need. You convert 10,000 OP units into REIT shares and sell them. Say the value is still $25 per unit. That's $250,000.

Your basis is spread across all your units. $400,000 ÷ 46,000 units is about $8.70 per unit. So 10,000 units carry about $86,957 of basis.

Your taxable gain on this conversion is about $250,000 − $86,957 = $163,043. At a 30% combined rate, that's about $48,913 in tax. The other 36,000 units stay deferred.

Stage four: Estate planning

You hold the remaining 36,000 units for the rest of your life. Say they're worth $25 each at your death. That's $900,000.

Under current law, your heirs may receive a stepped-up basis of about $900,000. If they convert soon after, there may be little or no taxable gain on those units. The deferred gain from your original rental could largely go untaxed.

What could go wrong in this example?

Plenty, and I want to be honest about it.

• The appraisal could come in lower than $1,150,000.
• The REIT's unit value could fall after the 721. If OP units drop to $18, your 46,000 units are worth $828,000.
• The REIT could limit redemptions right when you need cash.
• The REIT could sell your contributed property, creating taxable income for you.
• Distributions could be cut or stopped.
• Tax law, including the step-up rule, could change.

How does a DST with a 721 exit compare to other paths?

Let's compare three common paths for the same $1,000,000 sale from the example. This is a general comparison, not a promise about any one investment.

Each path fits a different kind of investor. The direct REIT path gives up deferral right away, but it's simple and flexible. The repeat-1031 path keeps the most control over future real estate, but you face deadlines and decisions every few years. The 721 path ends your 1031 chain but can simplify things and help with estate planning.

Who might a 721 exit fit, and who might it not?

I don't think there's one right answer. Here's how I think about fit when I talk with clients.

A 721 exit may fit you if:

• You're tired of managing property and don't want to keep doing 1031 exchanges.
• Your main goal is to pass assets to heirs, and you plan to hold for life.
• You want broad diversification and are comfortable with one sponsor's REIT.
• You value the chance to convert small pieces to cash over time.
• You understand and accept the liquidity limits of the REIT you'll end up in.

A 721 exit may not fit you if:

• You want to keep exchanging into new real estate for decades.
• You might need a large amount of cash on short notice.
• You're uncomfortable with a sponsor setting the price for its own REIT.
• You don't want K-1s or multi-state tax filings.
• You already have a lot of money with one sponsor.

If you're unsure, an optional 721 DST or a DST with no 721 feature keeps more of your choices open. But read the PPM, because "optional" can mean different things.

What questions should you ask before buying a DST with a 721 feature?

When I review offerings with clients, I tell them why I'm considering each one, what I like, and where I have reservations. For 721 DSTs, these are the questions I work through.

1. Is the 721 optional, mandatory, or not offered? If optional, who holds the option?
2. Which REIT would receive the property? Is it affiliated with the DST sponsor?
3. Is the REIT traded or non-traded? If non-traded, what are its redemption limits?
4. How will the property be valued? Independent appraisal? Fairness opinion? Investor vote?
5. How are OP units valued? Market price, NAV, or something else?
6. What is the waiting period before OP units can be converted?
7. Can the REIT pay cash instead of shares when I convert?
8. Is there any tax protection if the REIT sells my contributed property?
9. What fees are paid at the 721 contribution and inside the REIT?
10. How is debt handled? Could the 721 shift loan amounts in a way that creates tax?
11. What does the REIT's portfolio look like? Property types, locations, leverage, tenants.
12. What's the REIT's track record on distributions and redemptions?

My due diligence covers five areas: broker-dealer review, investment manager audit, investment offering review, real estate assessment, and institutional underwriting. I partner with outside auditors in each area. It's ongoing, not a one-time check. For 721 DSTs, the investment manager audit and offering review carry extra weight, because you're really evaluating two things: the DST and the REIT behind it.

Mistakes to avoid with a 721 exchange DST

Here are the mistakes I watch for most closely.

Mistake 1: Not reading the 721 section of the PPM

The 721 terms can sit deep in the offering documents. If you skip them, you may not learn you bought a mandatory 721 DST until the OP units show up. Find that section before you invest.

Mistake 2: Assuming "optional" means you choose

As I explained above, the option may belong to the sponsor or REIT. Know who decides.

Mistake 3: Thinking OP units can be 1031 exchanged

They can't. OP units are partnership interests, not real property. If you plan to keep exchanging, a mandatory 721 DST ends that plan.

Mistake 4: Assuming conversion carries no tax

Converting OP units to REIT shares or cash is generally taxable. Plan conversions with your CPA. Spreading them out may help manage your tax bill.

Mistake 5: Ignoring the REIT itself

Investors spend hours on the DST property and minutes on the REIT. But if a 721 happens, you'll own the REIT for years. Study its portfolio, debt, fees, and redemption history.

Mistake 6: Overlooking the conflict of interest

When the sponsor's REIT buys the sponsor's DST property, ask how the price is protected. Independent appraisals and fairness opinions help. They don't remove the conflict.

Mistake 7: Counting on liquidity you may not get

Non-traded REIT redemption programs have limits. They can be reduced or paused. Don't put money you might need soon into a path that ends in a non-traded REIT.

Mistake 8: Concentrating too much with one sponsor

If all your DSTs feed into the same REIT, you could end up with most of your net worth in one company. Spread your DST choices across sponsors if that matters to you.

Mistake 9: Forgetting your estate plan

The step-up in basis is a key benefit of holding OP units for life. But it only helps if your estate plan is set up well. Talk to an estate attorney about who inherits the units and how.

Mistake 10: Skipping your own tax and legal advice

I'm not your CPA or attorney. Neither is the sponsor. Before you invest, confirm the plan with your CPA, your attorney, and your qualified intermediary.

What my data shows

I keep detailed records on every DST offering I look at. As of October 2026, my offering records cover 76 DST offerings from 38 sponsors. Here's what they show about 721 exits and related features.

Three out of four DSTs have a path into a REIT

57 of 76 offerings (75%) include either an optional or mandatory 721 exit. Of those:

• 44 offerings (58% of all 76) have an optional 721 exit.
• 13 offerings (17%) have a mandatory 721 exit.
• 17 offerings (22%) have no 721 exit.
• 2 offerings were unclear from the documents.

This tells me something important. If you're picking a DST today and you want to keep doing 1031 exchanges, the default product in the market isn't built only for you. You need to look for the 17 offerings with no 721 feature, or make sure you understand the terms of the optional ones.

It also tells me sponsors see value in feeding properties into REITs. That's a business reason, not a reason you should or shouldn't do it.

Mandatory 721 DSTs are a minority

Only about one in six offerings I track has a mandatory 721. That means most investors who end up in a REIT will do so through an optional structure. That's why I spend so much time on the question "who holds the option?"

Other numbers that matter for 721 decisions

Some of my other data points help put 721 DSTs in context:

• Status: 16 offerings are open, 6 have limited availability, 24 are under review, 25 are closed, and 5 are ones I reviewed and passed on.
• Minimum investment: The median minimum is $100,000. Minimums range from $25,000 to $500,000. 21 offerings (28%) start at $25,000.
• Projected hold period: 10 years is the most common projected hold (31 offerings). Others range from 5 to 10 years, 7 years, and a few 2-year programs. The hold period affects when a 721 might happen.
• Leverage: 36 of 76 offerings (47%) are all-cash, with no debt. 16 (21%) have a loan-to-value above 50%. Loan-to-value, or LTV, is the loan amount divided by the property's value. Among leveraged offerings, the median LTV is about 49%. Debt can affect how a 721 is taxed, so it's worth checking.
• Projected year-1 distribution rates: Across the 71 offerings that published one, the median projected rate was 4.7%, with a range of 4.0% to 9.0%. These are projections, not promises. Distributions are not guaranteed.
• Property types: Multifamily leads with 31 offerings (41%), then industrial with 18 (24%) and net lease with 15 (20%, including energy royalty programs). There are also 5 self-storage, 4 retail, and 3 medical office offerings.
• Size and location: The median offering is about $65 million in total capitalization. Properties span 33 states. Florida (14), Texas (13), North Carolina (8), and Georgia (7) are the most common.

I also track more than 1,100 full-cycle 1031 DST investments for performance. "Full cycle" means the property was bought, held, and then sold or otherwise exited. That history helps me ask sharper questions about how a sponsor has handled exits in the past.

How I help investors evaluate 721 DSTs

I'm Jerry Baker, founder of Baker 1031 Investments. My offices are in San Francisco and Los Angeles. I studied applied mathematics and applied statistics at Babson College. Before founding my firm, I worked in acquisitions, management, and development at ValueRock Realty Partners, Faris Lee Investments, Westport Capital Partners, and Arbor Bay Capital Partners. Over my career, I've been involved in more than $10 billion of real estate investment activity.

I offer DSTs from more than 20 institutional sponsors. Here's how working with me usually goes:

1. Introductory call. We talk about your property, your timeline, and your goals. For 721 decisions, I want to know your estate plans and how long you want to keep exchanging.
2. Review opportunities together. I show you offerings and explain why I'm considering each one, what I like, and where I have reservations. For 721 DSTs, I walk through the exit terms in the PPM line by line.
3. Close. I coordinate paperwork with the sponsor and your qualified intermediary. Since the properties are already acquired, closing can often take two to three business days once paperwork, funding, and approvals are complete.

Securities are offered through Aurora Securities, Inc., member FINRA/SIPC. Baker 1031 Investments is independent of Aurora Securities.

Frequently asked questions

What is a 721 exchange in real estate?

A 721 exchange is a swap of property for an interest in a partnership under Section 721 of the tax code. In real estate, it usually means contributing a property to a REIT's operating partnership in return for OP units. Gain is generally deferred at the time of the swap.

Is a 721 exchange the same as a 1031 exchange?

No. A 1031 exchange swaps real estate for like-kind real estate, with 45-day and 180-day deadlines. A 721 exchange swaps property for a partnership interest, with no like-kind requirement. A 721 exchange DST uses a 1031 first and a 721 later.

Can I do a 1031 exchange directly into a REIT?

Generally, no. REIT shares and OP units are not real property, so they don't qualify as 1031 replacement property. That's why investors often 1031 into a DST first and then reach the REIT through a later 721 contribution.

Can I 1031 exchange my OP units later?

No. OP units are partnership interests, and Section 1031 now applies only to real property. Once you hold OP units, your chain of 1031 exchanges ends.

Do I pay taxes when my DST is contributed to a REIT?

Generally, the 721 contribution itself is not a taxable event if structured properly. But certain things, like changes in your share of debt or cash you receive around the deal, can create tax. Ask your CPA to review the specific terms.

Do I pay taxes when I convert OP units to REIT shares?

Generally, yes. Converting OP units to REIT shares or cash is treated as a sale or exchange, so the deferred gain on those units usually becomes taxable. Many investors convert in smaller pieces over several years to spread out the tax.

What happens to my OP units when I die?

Under current law, your heirs may receive a step-up in basis to the units' fair market value at your death. That can reduce or remove the deferred gain if they convert afterward. Confirm this with your estate attorney, since tax laws can change.

What is the difference between an optional and a mandatory 721 DST?

In a mandatory 721 DST, the property is planned to go into the REIT, and you'll receive OP units. In an optional 721 DST, the documents allow a 721 but don't require it, so the property might be sold for cash instead. Check the PPM to see who holds the option.

How many DSTs have a 721 exit?

In my offering records as of October 2026, 57 of 76 DST offerings (75%) have an optional or mandatory 721 exit. That's 44 optional (58%), 13 mandatory (17%), 17 with none (22%), and 2 unclear.

Who decides the value of my DST property in a 721?

The offering documents set the process. Usually an independent appraisal sets the property's value, and sometimes a fairness opinion is added. Because the buyer is often the sponsor's own REIT, ask who picks and pays the appraiser.

Can I sell my OP units if I need cash?

Sometimes, after a waiting period, by converting them to REIT shares or cash. If the REIT is non-traded, you depend on its redemption program, which often has limits and can be paused. Don't count on quick access to cash.

Who can invest in a 721 exchange DST?

Most DSTs are private placements open only to accredited investors. For individuals, that generally means a net worth over $1 million excluding your home, or income over $200,000 ($300,000 with a spouse or partner) in each of the past two years. Your broker-dealer will confirm your eligibility.

Sources

• 26 U.S.C. §721, Nonrecognition of gain or loss on contribution (Cornell LII)
• 26 U.S.C. §1031, Exchange of real property held for productive use or investment (Cornell LII)
• 26 U.S.C. §1014, Basis of property acquired from a decedent (Cornell LII)
• 26 U.S.C. §1001, Determination of amount of and recognition of gain or loss (Cornell LII)
• 26 U.S.C. §707, Transactions between partner and partnership (Cornell LII)
• IRS: Like-kind exchanges, real estate tax tips
• IRS: Like-kind exchanges now limited to real property
• IRS: About Form 8824, Like-Kind Exchanges
• IRS: Internal Revenue Bulletin 2004-33, including Rev. Rul. 2004-86
• SEC: Accredited investors
• SEC: Equity Office Properties Trust comment letter on UPREITs (2003)
• Investor.gov: Real estate investment trusts (REITs)
• FINRA: Real estate investment trusts, alternatives to ownership
• FINRA (NASD): Notice to Members 05-18
• Nareit: Operating partnership units and REITs (2013 interview)