What Is a 721 UPREIT Exchange, and Who Is It Right For?

“A 721 UPREIT is a one-way door, and at Fortitude we treat it that way. We walk through it with the clients who have decided they are genuinely done exchanging and want the estate outcome, not with the ones who still want their options open.”

- Daniel Raupp, Founder & Managing Partner, Fortitude Investment Group LLC

A 721 UPREIT exchange lets a real estate owner contribute property or DST interests to a REIT’s operating partnership in return for OP units, deferring capital gains and depreciation recapture taxes while gaining portfolio diversification. It is a strong fit for investors ready to leave active management permanently and prioritize estate planning, and a poor fit for those who want to keep exchanging or need reliable liquidity.

Key takeaways

• A 721 UPREIT (also called an UPREIT transaction) exchanges real estate or DST interests for operating partnership (OP) units in a REIT.
• It defers capital gains and depreciation recapture taxes and offers diversification across the REIT’s portfolio.
• It is the end of the 1031 road: once you contribute, you cannot do a future 1031 with that capital, and converting OP units to REIT shares is a taxable event.
• The most powerful benefit is the step-up in basis at death, which can eliminate the deferred gain for heirs.
• It fits long-term holders focused on estate planning, not investors who want future exchange flexibility or dependable liquidity.

How does a 721 UPREIT exchange work?

Most individual investors reach a 721 exchange through a two-step path. First, they complete a 1031 exchange into a Delaware Statutory Trust (DST), acquiring a fractional interest in institutional-quality real estate. Later, if the REIT sponsoring that DST acquires the property, the investor can contribute their DST interest to the REIT’s operating partnership in exchange for OP units under Internal Revenue Code Section 721. The DST effectively serves as the bridge between an individual investor and a REIT-level OP unit position.

What are the benefits of a 721 UPREIT?

• Tax deferral. Capital gains and depreciation recapture are deferred at the time of the exchange.
• Diversification. OP units represent an interest in the REIT’s broader portfolio rather than a single property.
• Estate planning. OP units are highly divisible, which simplifies passing wealth to multiple heirs.
• Step-up in basis at death. Heirs may inherit at stepped-up basis, potentially eliminating the deferred gain.
• Simplified reporting. REITs often handle depreciation tracking and file composite state returns.

What are the risks and trade-offs?

• No future 1031 exchange. Contributing to the operating partnership permanently ends the ability to 1031 that capital.
• Conversion is taxable. Converting OP units into REIT shares triggers a taxable event.
• Liquidity is a sponsor-controlled program. Redemptions run through the REIT’s redemption program, which can be limited or paused.
• A future property sale can create tax. If the REIT sells a contributed property, deferred gain may be allocated back to the contributing investor, potentially a tax bill without accompanying cash.

Who is a 721 UPREIT right for?

A 721 UPREIT tends to fit the investor who:

• is ready to exit active management for good;
• values diversification and simplified administration;
• prioritizes estate planning and a step-up in basis over future exchange flexibility; and
• has a genuine long-term hold horizon.

It is generally not the right fit for an investor who may want to 1031 exchange again, who needs dependable access to their capital, or whose time horizon is uncertain.

Frequently asked questions

Is a 721 exchange the same as a 1031 exchange?

No. A 1031 exchange swaps like-kind real property and can be repeated. A 721 exchange contributes property or DST interests to a REIT’s operating partnership for OP units and cannot be followed by another 1031 with that capital.

Can you 1031 exchange out of OP units?

No. Once capital is contributed to the operating partnership, it can no longer be used for a 1031 exchange. Converting OP units to REIT shares is a taxable event.

What is the biggest advantage of a 721 UPREIT?

For many investors it is the step-up in basis at death, which can eliminate the deferred capital gain for heirs, combined with diversification and freedom from active management.

Who can invest in a 721 UPREIT program?

These are private offerings generally available only to accredited investors. Confirm your status with a qualified CPA or attorney.

This article is for informational and educational purposes only and does not constitute tax, legal, or investment advice, or an offer to buy or sell any security. 721 UPREIT and DST investments involve risk, including illiquidity and potential loss of principal, and are generally available only to accredited investors. Consult your own tax and legal advisors regarding your situation. Past performance does not guarantee future results.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Fortitude Investment Group is independent of CIS and CAM.