721 Exchange vs 1031 Exchange: Which Fits the Owner Ready to Simplify? (2026)
721 exchange vs 1031 exchange: side-by-side comparison table, worked $2M example, decision framework for owners choosing their exit strategy.
Is a 721 Exchange an Alternative to a 1031 Exchange?
A 1031 exchange defers capital gains tax when you swap one investment property for another like-kind property, and the swap can be repeated indefinitely. A 721 exchange defers gain when you contribute property to a REIT's operating partnership in exchange for OP units, but it ends future 1031 eligibility for that equity. A qualifying contribution of property to a partnership generally does not result in immediate gain recognition under IRC Section 721. Exceptions and other tax consequences may apply, including those involving debt relief or disguised sales. The two can be used in sequence rather than as alternatives: one or more 1031 exchanges, then a possible 721 contribution where the offering provides for it (our guide to what an UPREIT is covers the receiving structure).
The distinction that governs everything downstream is permanence. A 1031 keeps the door open for the next swap. A 721 closes it. IRC Section 1031[1] applies only to real property, and OP units are partnership interests, so once you hold them, that equity cannot be 1031 exchanged again. The short version: a 721 permanently trades future flexibility for simplicity, and the trade only makes sense if you are genuinely finished making property decisions.
Stephen Haskell, Partner at Anchor1031, walks through the five differences that matter between a 721 exchange and a 1031 exchange, a simplified hypothetical illustration of a $2 million property with $1 million of built-in gain under five exits, and who each path may fit.
If you have held rental property for decades and the patience for another 45-day identification deadline is running out, this comparison is written for you. Both the 1031 exchange and the 721 exchange generally defer capital gains tax on real estate (exceptions can apply), but they serve different stages of an owner's life. Understanding what a 1031 exchange is and how it compares to a 721 matters most when you are deciding whether your next exchange should be your last.
Some owners discover the 721 exchange after years of 1031 swaps into Delaware Statutory Trust offerings. One day a DST goes full-cycle, another identification deadline looms, and the question shifts: do I really want to do this again? This article lays the two strategies side by side, with a 12-row comparison table, a hypothetical $2 million example, and a decision framework, as part of the complete 721 exchange strategy guide.
DST and REIT investments involve risk, including possible loss of principal. Distributions are not guaranteed, fees reduce returns, DST interests and OP units are illiquid private placements, REIT redemption programs can be limited or suspended, and there is no assurance that a future 721 transaction will occur. This article is for educational purposes only and does not constitute tax, legal, or investment advice. Consult your CPA and estate attorney before acting on any strategy described here.
721 Exchange vs 1031 Exchange: What Is the Difference?
The core difference between a 721 exchange and a 1031 exchange: a 1031 defers tax while keeping your equity in real property you can exchange again, and a 721 moves your equity into a REIT's operating partnership permanently and ends the 1031 chain. The table below compares the two exchanges across 12 dimensions. For a deeper look at where DSTs sit in the spectrum, see the DST vs REIT comparison.
| Dimension | 1031 Exchange | 721 Exchange |
|---|---|---|
| Legal basis | IRC Section 1031[1] | IRC Section 721[2] |
| Property type accepted | Like-kind real property (including DST interests) | Property the REIT's operating partnership elects to acquire |
| Ownership after | Direct real property or DST beneficial interest | OP units in the REIT's operating partnership |
| Timeline | 45-day identification, 180-day close | No statutory deadline, sponsor-driven timing (typically 2-7 years via DST path) |
| Facilitator | Qualified intermediary (QI) | REIT sponsor |
| Fee structure | QI fee plus closing costs (typically $800-$1,500 plus attorney) | Ongoing REIT fees: asset management 0.5-1.5% of NAV, property management 2-4% of gross revenue, acquisition 1-2%, disposition 1-3% |
| Ongoing management | DST sponsor during the hold | REIT management team |
| Distributions | DST distributions (not guaranteed, may vary) | OP unit distributions reported on K-1 (not guaranteed, may vary) |
| Liquidity | Illiquid until the property or DST sells | Limited, subject to the partnership agreement's terms and restrictions, through REIT redemption programs that are not guaranteed and can be suspended |
| Estate treatment | Step-up in basis on real property or DST interest under IRC Section 1014 (under current law) | Step-up in basis on OP units under IRC Section 1014 (under current law) |
| Repeatability | Unlimited consecutive exchanges | One-way, no further 1031 exchanges on that equity |
| Reversibility | Fully reversible at each cycle (sell, 1031 again, or pay the tax) | Irreversible. Converting OP units to REIT shares triggers tax under IRC Section 731 |
1031 vs 721 Exchange: Which Path Fits Your Exit?
Presented in reverse order, the same choice reads differently. If you frame the question as 1031 vs 721 exchange, you are asking whether to preserve optionality or accept finality. The 1031 keeps every future decision open, at the cost of continuing to choose a property or DST every 5 to 7 years. The 721 ends the sequence of decisions and passes the equity to a REIT's operating partnership, but it closes the 1031 door for that capital permanently.
The table is the framework. The five differences below are where the framework turns into a decision.
Current Offerings
A 721 Optional DST lets you decide later.
It qualifies as 1031 replacement property now and keeps the 721 election open until the sponsor's conversion window. See which current offerings carry it, and create a free account for full access to our marketplace.
See 721 Optional DSTsHow Does Each Exchange Work?
Each exchange runs on its own clock: a 1031 exchange runs on the IRS's 45-day and 180-day deadlines, and a 721 exchange via the DST path runs on the sponsor's conversion schedule after a multi-year DST hold.
1031 exchange step by step
A standard 1031 exchange runs in seven steps: sell the relinquished property, engage a qualified intermediary to hold the proceeds, identify up to three replacement properties within 45 calendar days, close on the replacement within 180 calendar days, take title, manage the new property, and decide whether to exchange again at disposition. The complete 1031 exchange guide covers each step and the rules that govern it.
The clock is strict. Miss either the 45-day identification window or the 180-day closing deadline[3] and the entire exchange fails, triggering immediate capital gains tax on the deferred amount.
721 exchange step by step (direct + two-step DST-to-UPREIT)
Two paths exist. Institutional owners with large properties can contribute directly to a REIT's operating partnership when the REIT wants that specific asset. One potential route for individual investors involves a qualifying 1031 exchange into a DST followed by a possible contribution to an operating partnership. The DST route is not universal, and timing and availability depend on the structure. The two-step DST-to-UPREIT path generally works like this:
- Complete a 1031 exchange into a DST that carries a 721 option
- Hold through the seasoning period (generally at least two years by industry practice; the period is not set by statute)
- The REIT sponsor absorbs the DST and issues OP units under IRC Section 721[2], depending on offering terms, eligibility, and transaction approval
No 45-day or 180-day deadlines apply to the 721 contribution itself. The 1031 leg into the DST carries those deadlines, but the subsequent conversion runs on the sponsor's timeline, not the IRS clock.
What Are the Five Biggest Differences Between a 721 and a 1031 Exchange?
Five differences separate a 721 exchange from a 1031 exchange, and the first one, repeatability, drives the other four.
1. Repeatability. A 1031 exchange can run indefinitely. Sell, swap, hold, sell, swap again. A 721 is a one-way door. IRC Section 1031 applies only to real property, and OP units are partnership interests, so once your equity converts, the 1031 option for that money is gone for good.
2. Control. A 1031 preserves your ability to choose the next property, the next sponsor, and the timing of each decision. A 721 hands all of that to the REIT's management team. I bring this up with every investor who tells me they want to keep their options open: the 721 is the right tool only when you are certain you no longer want to make those decisions.
3. Liquidity. After a 1031, your equity is locked in direct real estate or a DST until the property sells. After a 721, your equity sits in OP units with access to the REIT's redemption program, but that program is not guaranteed. The 2022-2024 gate wave at BREIT and SREIT showed that sponsors can limit withdrawals exactly when investors most want out. A 721 gives you a window that direct property does not offer, but the window is the sponsor's to close.
4. Timelines. A 1031 imposes strict IRS deadlines: 45 days to identify, 180 days to close[4]-1). A 721 via the DST path carries no statutory deadline on the conversion itself, though the 1031 leg into the DST still runs the usual 45/180 clock.
5. Cost structure. A 1031 exchange typically costs $800-$1,500 for the qualified intermediary plus attorney and closing fees. A 721 embeds costs in the REIT's ongoing structure: asset management fees of 0.5-1.5% of NAV annually, property management fees of 2-4% of gross revenue, acquisition fees of 1-2%, and disposition fees of 1-3%. If you place a hypothetical $1 million into a REIT portfolio running a 1.5% annual asset management fee, that is $15,000 a year before the other layers. These ranges vary by sponsor and are disclosed in the private placement memorandum. According to Anchor1031, those layers typically add up to a total fee drag of roughly 4% to 8% over a multi-year hold, depending on share class, sponsor, and holding period.
According to Anchor1031, the most consequential difference is the first one: repeatability. Every other tradeoff flows from the fact that a 721 exchange is permanent and a 1031 exchange is not.
What Happens to a $2M Property With $1M of Built-In Gain Under Each?
The table below illustrates five exit paths for the same hypothetical $2 million rental property with $1 million of built-in capital gain. Figures are simplified for illustration using an approximate combined rate of 32% and should not be treated as a projection of any specific tax outcome.
| Path | Tax at exit | Ongoing role | At death |
|---|---|---|---|
| Sell for cash | ~$320,000 combined (federal, state, depreciation recapture) | None | Heirs inherit cash, no further deferral |
| 1031 into replacement property | $0 deferred | Active management continues | Step-up in basis on property under IRC Section 1014 |
| 1031 into DST | $0 deferred | Passive (DST sponsor manages) | Step-up in basis on DST interest under IRC Section 1014 |
| 1031 into DST, then 721 into REIT | Generally $0 at each step, assuming no disguised sale or debt-relief gain | Passive (REIT manages) | step-up in basis on OP units under IRC Section 1014, deferred gain potentially eliminated under current law |
| Convert OP units to REIT shares (later, subject to the partnership agreement's terms and restrictions) | Taxable event under IRC Section 731 | Standard securities holder | Depends on timing of conversion and subsequent share sales |
Assumptions and limitations. The 32% is a single approximate combined rate, applied to the full $1 million of built-in gain, that stands in for federal tax, state tax and depreciation recapture together; the example does not separate the part of the gain that comes from prior depreciation. It is used for illustration and is not a calculation of any investor's federal, state, net investment income, or depreciation recapture taxes. The example excludes transaction costs, fees and loads, including the qualified intermediary and closing costs of a 1031 and the ongoing REIT fees described above. It compares tax outcomes only and does not show the illiquidity of DST interests and OP units, limits on REIT redemption programs, distributions that are not guaranteed, the risk of a failed 1031 exchange, the permanent loss of 1031 eligibility after a 721, or the possibility that a 721 transaction never occurs. Actual results depend on individual circumstances and should be run with a CPA.
The fourth path preserves the most deferral for the longest. The deferred gain generally carries through every step and is recognized only if the investor converts OP units to REIT shares or sells, though exceptions can apply. Holding the units until death positions heirs for a basis step-up that can eliminate decades of deferred gain under current law. Congress has repeatedly proposed limits to basis step-up, so treat the rule as current law rather than a permanent promise. Consult your CPA before converting, because outcomes depend on individual circumstances including state residency and the character of gain at recognition.
For a real-world version of this sequence, read the real 721 UPREIT case study of a hotel owner who deferred 100% of the tax on $350,000 of leftover exchange equity using the DST-to-UPREIT path.
When Is a 1031 Exchange the Better Choice?
A 1031 exchange is the better fit for the investor who still wants to be in the real estate business:
- You want to choose your own properties, sponsors, and timing at every exchange cycle
- You value 1031 optionality and want to keep the door open for a future 721 if you change your mind
- You accept that each swap restarts an illiquid hold period with a new DST or property
- Your estate plan does not require the simplicity of a single REIT holding
The 1031 also suits the investor whose timeline is flexible. You can spread an exchange across 3 to 5 DSTs instead of committing everything to one or two REITs, and a standard DST keeps the option of another 1031 at exit. An owner in their late 60s might run two more DST cycles before deciding whether to convert. The comparison of 721 exchange vs DST explores this fork at the point where a DST investor may face it.
A third option always exists: sell outright and pay the capital gains tax. For a long-time owner with substantial deferred gains, a straight sale is rarely the most tax-efficient path, but it is the right call when liquidity needs outrank estate outcomes. Run the numbers with your CPA before deciding.
When Is a 721 Exchange the Better Choice?
A 721 exchange fits the investor who wants every future real estate decision made by someone else:
- You are finished with property management, choosing new DSTs, and 1031 identification deadlines
- Estate planning leads your strategy, and you plan to hold OP units for life so heirs may receive the basis step-up
- You prefer diversified portfolio exposure through a REIT over single-DST concentration
- You have completed multiple 1031 exchanges and want to end the 1031 cycle for your equity
I remind clients considering this path to weigh the costs honestly: the seven UPREIT downsides to weigh documents the fee layers, the loss of 1031 optionality, and the forced-conversion risk that comes with 721 Required structures. Use our guide on how to evaluate the acquiring REIT to vet the portfolio composition, debt levels, and redemption terms before you contribute.
For the owner who already knows they want to stop, it is one potential path out of active landlording, depending on offering terms, eligibility, and transaction approval.
Can You Do Both? The Sequential DST-to-721 Strategy
Yes. One potential route for individual investors involves a qualifying 1031 exchange into a DST followed by a possible contribution to an operating partnership. The DST route is not universal, and timing and availability depend on the structure. The sequence runs: sell the property, 1031 into a DST that offers a 721 option, hold through the seasoning period (generally at least two years by industry practice; the period is not set by statute), and contribute the DST interest to the operating partnership of the REIT under IRC Section 721.
One compliance point belongs in every conversation about this path: there can be no promise or guarantee at the time of DST purchase that a 721 transaction will happen. A DST marketed as 721-eligible is offering a possibility, not a commitment. The REIT sponsor elects whether to acquire the DST, and market conditions or portfolio strategy can change that election.
The choice that matters at DST purchase is whether the offering is 721 Required or 721 Optional. A 721 Required DST converts automatically on the sponsor's timeline. A 721 Optional DST gives you an election window to choose between OP units and a cash exit that can fund another 1031 exchange. According to Anchor1031, 721 Optional structures generally favor the investor because they preserve the decision until you have seen the REIT's actual performance during the hold.
For the full pros and cons of a 721 via DST, including the forced-conversion risk in 721 Required structures, see the balanced treatment in our spoke article.
Full Transcript
The transcript of the video above, by chapter, lightly edited for readability. Select a timestamp to play that part of the video.
What is the difference between a 721 exchange and a 1031 exchange?
So what is the difference between a 721 exchange and a 1031 exchange? The biggest difference is arguably permanence. A 1031 exchange defers capital gains tax when you swap one investment property for another like-kind property, and you can repeat it indefinitely. A 721 exchange defers gain when you contribute property to a REIT's operating partnership in exchange for OP units, and it ends future 1031 eligibility for that equity. A 1031 exchange keeps the door open. A 721 closes it.
I'm Steve Haskell, a partner at Anchor1031, and most of my work is helping investors understand what can go wrong in these offerings before they commit. This video is based on the written comparison by my partner, Tom Wall, linked in the description. In the next ten minutes, we'll go over the five differences that actually matter, what happens to a $2 million property under each path, and who each one is really for.
Is a 721 exchange an alternative to a 1031 exchange?
So is a 721 exchange an alternative to a 1031 exchange? Usually not. The two can be used in sequence rather than as alternatives: a series of 1031 exchanges ending in a final 721 contribution into a REIT. Here is why the sequence works that way. IRC Section 1031 applies only to real property. OP units are partnership interests, so once you hold them, the equity cannot be 1031 exchanged again. That is not a policy choice by the sponsor. It is what the statute says.
The two also run on completely different clocks. A 1031 runs on the IRS deadlines, 45 days to identify replacement property and 180 days to close, and missing either one fails the entire exchange and triggers the tax you were deferring. The 721 contribution itself has no statutory deadline at all. It runs on the sponsor's conversion schedule after a multi-year DST hold. If you take the two-step path, the 1031 leg into the DST still carries the 45 and 180-day clock. The conversion that follows does not.
So the real question is not which one to pick, it is whether your next exchange should be your last.
What are the five biggest differences between a 721 and a 1031 exchange?
What are the five biggest differences between a 721 and a 1031 exchange? There are five, and the first one drives the other four. One, repeatability. A 1031 can run indefinitely. Sell, swap, hold, sell, swap, hold again. A 721 is a one-way door, and once your equity converts, the 1031 option of that money is gone for good.
Two, control. A 1031 preserves your ability to choose the next property, the next sponsor, and the timing of every decision. A 721 hands all of that to the REIT's management team. At Anchor1031, we bring this up with every investor who tells us they want to keep their options open. The 721 is the right tool only when you are certain you no longer want to make those decisions.
Three, liquidity. After a 1031, your equity is locked in direct real estate or a DST until the property sells. After a 721, your equity sits in OP units with access to the REIT's redemption program, but that program is not guaranteed. We saw BREIT, SREIT, and other REITs turn off their redemption from 2022 to 2024. It showed that sponsors can limit withdrawals exactly when investors most want out. A 721 gives you a window that direct property does not offer. The window is the sponsor's to close.
And number four, timelines, which we just covered. Strict IRS deadlines on one side, the sponsor schedule on the other. And five, cost structure. A 1031 exchange typically costs $800 to $1,500 for the qualified intermediary, plus attorney and closing fees.
A 721 embeds its cost in the REIT's ongoing structure. Asset management of 0.5% to 1.5% of net asset value annually. Property management fees of 2% to 4% of gross revenue. Acquisition fees of 1% to 2%, and a disposition fee of 1% to 3%. Put $1 million into a REIT portfolio running a 1.5% annual asset management fee, and that is roughly $15,000 a year before the other layers.
Those ranges vary by sponsor and are disclosed in the private placement memorandum. Our estimate at Anchor1031 is that the layers add up to a total drag of roughly 4% to 8% over a multi-year hold, depending on share class, sponsor, and how long you hold.
What happens to a $2M property with $1M of gain under a 1031 vs a 721 exchange?
So what actually happens to a $2 million property with $1 million of built-in gain under a 1031 exchange versus a 721 exchange? Take that same property down five different exits, and the outcomes differ sharply. These figures are simplified for illustration at an approximate combined rate of 32%, and they are not a projection of any one specific tax outcome. Talk to your own CPA for your own tax situation to determine what's best for you.
If you sell this one for cash, roughly $320,000 goes to federal tax, state tax, and depreciation recapture. Now, you can take that cash, give it to your heirs, go on vacation. There's no further tax deferral. In a 1031 into another property you own, the tax is zero, it's deferred, but active management continues. You are still the landlord. If you 1031 into a DST, that tax is still zero, and now the sponsor manages it. You are passive, and at death, the DST interest gets a step-up in basis under IRC Section 1014.
Now 1031 into a DST and then a 721 into a REIT, and the tax is zero at each step. The REIT manages everything, and at death, the OP units get that same step-up under Section 1014, which eliminates the deferred gain for heirs under current law. And if you later convert those OP units into REIT shares, that is a taxable event that recognizes the deferred gain.
The fourth path preserves the most deferral for the longest. The gain carries through every step and is recognized only if you convert or sell. Congress has repeatedly proposed limits to basis step-up, so treat it as current law rather than a permanent promise. And talk to your CPA before converting, because the outcomes depend on your state of residency and the character of the gain.
When is a 1031 exchange the better choice than a 721 exchange?
When is a 1031 exchange the better choice? A 1031 is the better fit for the investor who still wants to be in the real estate business. That means you want to choose your own properties, sponsors, and timing at every exchange cycle. You value the optionality and want the door open for a future 721 if you change your mind. You accept that each swap restarts an illiquid hold period, and your estate plan does not require the simplicity of a single REIT holding.
The 1031 also suits the investor whose timeline is flexible. You can spread the exchange across multiple DSTs, say three to five DSTs, instead of committing everything to just one or two REITs. And a standard DST keeps the option of another 1031 at exit. An owner in their late sixties might run two more DST cycles before deciding whether to convert at all.
And there's always a third option, sell outright and pay the capital gains tax. For a longtime owner with substantial deferred gains, a straight sale is rarely the most tax-efficient path, but it is the right call when liquidity needs outrank estate outcomes. Run those numbers with your CPA before deciding on what's best for you and your family.
When is a 721 exchange the better choice?
So when is a 721 exchange the better choice? A 721 usually fits the investor who wants every future real estate decision made by someone else. You are finished with property management, finished choosing new DSTs, and finished with the identification deadlines. Estate planning leads your strategy, and you plan to hold the OP units for life, so heirs receive the step-up. You would rather have diversified portfolio exposure through a REIT than concentration in a single DST. And you have already completed multiple 1031 exchanges and want a final destination for the equity.
Tom's written guide is blunt about weighing the costs honestly, and so are we. The fee layers are real. The loss of 1031 optionality is permanent, and 721 Required structures carry forced conversion risk. Before you contribute, vet the acquiring REIT, portfolio composition, debt levels, and redemption terms. The one-way door is not a trap. It is the exit for the owner who already knows they want to stop and just needs the structure to make it permanent.
Can you do both a 1031 exchange and a 721 exchange?
Can you do both a 1031 exchange and a 721 exchange? Yes. And for individual investors, doing both a 1031 exchange and then a 721 exchange is the standard route. It starts with a 1031 exchange into a DST that offers a 721 option, then a hold through the seasoning period, generally at least two years by industry practice, but it's not a statute. And then the contribution of the DST interest to the REIT under IRC Section 721.
One compliance point belongs in every conversation about this path. There can be no promise or guarantee at the time of DST purchase that a 721 transaction will happen. A DST marketed as 721-eligible is offering a possibility, not a commitment. The REIT sponsor elects whether to acquire the DST, and market conditions or portfolio strategy can change that election.
So the choice that actually matters is made at purchase, not at maturity. Is the offering 721 Required or 721 Optional? A 721 Required DST converts automatically on the sponsor’s timeline. A 721 Optional DST gives you an election window to choose between OP units and a cash exit that can potentially fund another 1031 exchange. Our view is that optional structures generally favor the investor, because they preserve the decision until you have seen how the REIT actually performed during the hold period.
If you are deciding whether your next exchange should be your last, the structure of the DST you buy now is what decides it for you later. A 721 Optional DST qualifies as 1031 replacement property today and keeps the election open until the sponsor's conversion window, which is the version of this decision you can still change your mind about down the road.
Tom's full written comparison guide is linked in the description. And if you want to walk your own property timeline and estate plan through both strategies, the link to schedule that with us at Anchor1031 is there too.
Frequently Asked Questions
What's the difference between a 1031 exchange and a 721 exchange?
A 1031 exchange swaps one investment property for another like-kind property and can be repeated indefinitely. A 721 exchange contributes property to a REIT's operating partnership in exchange for OP units, generally deferring gain under IRC Section 721[2], though exceptions can apply. The critical difference is finality: a 1031 keeps the tax-deferral cycle going, while a 721 ends it permanently for that equity.
Can I do a 1031 exchange after a 721 UPREIT?
No. IRC Section 1031[1] applies only to real property, and OP units are partnership interests, so they do not qualify as like-kind property. Once your equity converts to OP units, it cannot re-enter the 1031 exchange world. Converting OP units to REIT shares triggers a taxable event under IRC Section 731[5].
Which has better tax deferral, 1031 or 721?
Both generally defer gain at the time of the transaction, though exceptions can apply. The difference is what happens next. A 1031 can be repeated, extending deferral through every subsequent swap. A 721 defers the gain into OP units and, if held until death, positions heirs for a step-up in basis under IRC Section 1014[6] that can eliminate the deferred gain under current law.
Do 721 exchanges have the 45-day / 180-day rule?
No. The 45-day identification and 180-day closing deadlines apply only to 1031 exchanges under Treasury Regulation 1.1031(k)-1[4]-1). If you use the two-step DST path, the 1031 leg into the DST carries those deadlines, but the subsequent 721 contribution to the REIT does not.
What are the fees for a 721 vs 1031 exchange?
A 1031 exchange typically costs $800-$1,500 for the qualified intermediary plus attorney and closing costs. A 721 exchange carries ongoing REIT fees: asset management (0.5-1.5% of NAV annually), property management (2-4% of gross revenue), acquisition fees (1-2% of purchase price), and disposition fees (1-3% of sale price). These ranges vary by sponsor and are disclosed in each offering's private placement memorandum. According to Anchor1031, the combined layers typically total roughly 4% to 8% over a multi-year hold, depending on share class and sponsor.
Can I convert a 1031 into a 721 later?
Yes. One potential route for individual investors involves a qualifying 1031 exchange into a DST followed by a possible contribution to an operating partnership: choose a DST with a 721 option, hold through the seasoning period, and contribute the DST interest to the operating partnership of the acquiring REIT under IRC Section 721. The DST route is not universal, and timing and availability depend on the structure. In a 721 Optional DST, the decision about whether to convert is made during the hold, not at the initial 1031 exchange.
Next Steps for the Owner Choosing Their Path
The choice between continuing 1031 exchanges and crossing into a 721 comes down to whether you want to keep making real estate decisions or be done with them. If the answer is done, the 721 exchange through the DST-to-UPREIT route is one potential path out of active landlording, depending on offering terms, eligibility, and transaction approval.
Start by identifying where you are in the cycle. If you own property or hold a DST approaching disposition, the decision window is now. Map your deferred gain exposure with your CPA, decide whether you want the optionality of a 721 Optional DST or the planned conversion of a 721 Required DST, and vet the acquiring REIT's redemption terms before you commit.
You can browse current DST offerings to see what is available, and compare your options with a specialist who can walk through your specific timeline, tax situation, and estate plan.
About the Author
Thomas Wall, Partner
Thomas Wall has nearly a decade of experience in alternative investments and real estate. He has helped financial advisors at banks and wirehouses navigate a broad spectrum of equity, debt, and retirement investments at AIG which contributed to over $200MM of capital invested. From there, Thomas specialized in helping real estate investors navigate the transition from active management to passive real estate investing. He advises high-net-worth investors on 1031 exchanges, DSTs, private real estate offerings, and REITs. He has helped investors through hundreds of 1031 exchanges, placing over $230MM of equity into real estate. Today, with Anchor1031, he focuses on providing his investors with the tools they need to accurately assess risk and successfully defer taxes when repositioning their real estate portfolio and making the transition from active manager to passive investor.
Continue Learning
The 721 Exchange Strategy
One potential path out of active landlording: a 1031 into a DST, then a possible 721 contribution for REIT operating partnership units, with the tradeoffs.
What Is an UPREIT? The Umbrella Partnership REIT Structure Explained (2026)
What is an UPREIT? Umbrella Partnership REIT structure explained: 1992 origin, three-layer diagram, named examples, and how the DST-to-UPREIT path works.
Step-Up in Basis on Real Estate
Step-up in basis on real estate: how IRC Section 1014 works, community property doubles, whether depreciation recapture is erased, and OP units from 721 exchanges.
Ready to Plan Your Exit From Active Landlording?
Talk through how the 1031, DST and 721 steps fit your property, your timeline and your estate plan.
Sources
This article cites the following primary and industry sources. Numbers correspond to the citation markers in the text above.
- Legal Information Institute, Cornell Law School. 26 U.S.C. Section 1031. https://www.law.cornell.edu/uscode/text/26/1031
- Legal Information Institute, Cornell Law School. 26 U.S.C. Section 721. https://www.law.cornell.edu/uscode/text/26/721
- Internal Revenue Service. Instructions for Form 8824, Like-Kind Exchanges. https://www.irs.gov/instructions/i8824
- Legal Information Institute, Cornell Law School. 26 CFR 1.1031(k)-1, Treatment of Deferred Exchanges. https://www.law.cornell.edu/cfr/text/26/1.1031(k)-1
- Legal Information Institute, Cornell Law School. 26 U.S.C. Section 731. https://www.law.cornell.edu/uscode/text/26/731
- Legal Information Institute, Cornell Law School. 26 U.S.C. Section 1014. https://www.law.cornell.edu/uscode/text/26/1014
Disclosure
Tax Complexity and Investment Risk
Tax laws and regulations, including but not limited to Internal Revenue Code Section 1031, bonus depreciation rules, cost segregation studies, and other tax strategies, contain complex concepts that may vary depending on individual circumstances. Tax consequences related to real estate investments, depreciation benefits, and other tax strategies discussed herein may vary significantly based on each investor's specific situation and current tax legislation. Anchor1031, LLC and Quincy Wells Capital, LLC make no representation or warranty of any kind with respect to the tax consequences of your investment or that the IRS will not challenge any such treatment. You should consult with and rely on your own tax advisor about all tax aspects with respect to your particular circumstances. Please note that Anchor1031 and Quincy Wells Capital, LLC do not provide tax advice.
The information contained in this article is for general educational purposes only and does not constitute legal, tax, investment, or financial advice. This content is not a recommendation or offer to buy or sell securities. The content is provided as general information and should not be relied upon as a substitute for professional consultation with qualified legal, tax, or financial advisors.
Tax laws, regulations, and IRS guidance regarding 1031 exchanges, opportunity zone investments, and related real estate strategies are complex and subject to change. Information herein may include forward-looking statements, hypothetical information, calculations, or financial estimates that are inherently uncertain. Past performance is never indicative of future performance. The information presented may not reflect the most current legal developments, regulatory changes, or interpretations. Individual circumstances vary significantly, and strategies that may be appropriate for one investor may not be suitable for another.
All real estate investments, including 1031 exchanges and opportunity zone investments, are speculative and involve substantial risk. There can be no assurance that any investor will not suffer significant losses, and a loss of part or all of the principal value may occur. Before making any investment decisions or implementing any 1031 exchange strategies, readers should consult with their own qualified legal, tax, and financial professionals who can provide advice tailored to their specific circumstances. Prospective investors should not proceed unless they can readily bear the consequences of potential losses.
While the author is a partner at Anchor1031, the views expressed are educational in nature and do not guarantee any particular outcome or create any obligations on behalf of the firm or author. Neither Anchor1031 nor the author assumes any liability for actions taken based on the information provided herein.