721 Exchange Funds: How UPREIT DSTs, Evergreen Funds, and Non-Traded REITs Work, And Which One Fits Your Exchange

What Is a 721 Exchange Fund? (Definition and Taxonomy)

The legal foundation is IRC Section 721(a)^[1]:

"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."

In plain English: contributing property to a partnership in exchange for a partnership interest generally does not trigger immediate gain, though exceptions can apply. A 721 exchange fund is any real estate vehicle structured around that principle, with an operating partnership that will absorb contributed property and issue OP units in return.

The critical distinction from a standard 1031-only Delaware Statutory Trust is the exit path. A traditional DST is acquired through a 1031 exchange, held for income, and sold at disposition, with the investor choosing whether to 1031 again or take the taxable gain. A 721-eligible DST adds a second option: contribute the DST interest to the sponsor's REIT operating partnership at maturity, receiving OP units instead of a cash payout.

OP units are not REIT shares. They are partnership interests in the REIT's operating partnership, the entity that owns the real estate. Most large REITs hold property through this umbrella partnership structure, which is why the 721 path and the UPREIT structure are inseparable. Our guide to what an UPREIT is explains the underlying plumbing. The complete DST guide covers the trust mechanics and Revenue Ruling 2004-86.

What Are the Five Types of 721 Exchange Funds?

The five types of 721 exchange funds are 721 Required UPREIT DSTs, 721 Optional UPREIT DSTs, non-traded REIT operating partnerships that accept direct contributions, evergreen funds, and interval or tender-offer vehicles. Each is profiled below.

721 Required UPREIT DSTs

A 721 Required UPREIT DST is designed to convert automatically into OP units in the sponsor's REIT on the sponsor's timeline, typically 2-3 years after closing, depending on offering terms, eligibility, and transaction approval. Investors do not elect whether to convert. The sponsor absorbs the trust, and OP units replace the DST interest.

As of mid-2026, Hines uses a 721 Required structure, labeled "721 Required" on offering materials. Confirm the current structure in the private placement memorandum, because sponsors update terms between offerings.

The appeal is certainty: you know that you will likely end up in the REIT when you purchase the DST. The cost is equally clear. According to Anchor1031, purchasing a DST with a mandatory 721 means committing to enter a REIT in roughly two years with no way of knowing that REIT's composition, debt levels, or performance at that future date. The conversion valuation is set through the sponsor's appraisal process, not a public market, and the timing is not yours to choose. Furthermore, a sponsor could choose not to absorb your DST if it underperforms.

721 Optional UPREIT DSTs

A 721 Optional UPREIT DST gives the investor an election at conversion: take OP units or take a cash exit that can fund another 1031 exchange. The hold period before the election window opens is typically 2-5 years.

As of mid-2026, Bluerock, for example, offers a 721 Optional structure, labeled "721 Optional" on certain offerings. Confirm terms in the private placement memorandum for the specific offering.

The appeal is optionality. If the REIT's portfolio has shifted in ways you do not like, or if your tax situation has changed, you preserve the ability to stay in the 1031 chain instead. The tradeoff: electing the cash-out is a taxable event. The election is set at subscription, not at maturity. Only certain DSTs carry the 721 Optional option, and you cannot retrofit it afterward.

As the 721 market has matured, more sponsors have added optional conversion paths alongside required ones. That trend favors investors who want to evaluate the REIT's track record before committing.

Non-Traded REIT Operating Partnerships (Contribute-Directly Platforms)

Some non-traded REITs accept property contributions directly into their operating partnerships without requiring a DST as an intermediate step. Blackstone's BREIT, Starwood's SREIT, and Ares Real Estate Income Trust are among the platforms that have accepted or currently accept direct contributions. Brookfield Real Estate Income Trust is a non-traded REITs in the same category whose operating partnerships are reached through the sponsors' own DST programs.

The practical barrier is scale. Direct contributions typically require institutional-grade property, often $10 million or more, because the REIT's investment committee must approve each acquisition. Individual investors with smaller properties may reach these same REITs through the two-step DST path instead.

Redemption gate risk is the structural concern that deserves the most attention. Non-traded REIT operating partnership units are subject to the REIT's share repurchase program, and those programs can be limited or suspended. Blackstone's BREIT began limiting redemptions in late 2022, and Starwood's SREIT cut its redemption caps in May 2024^[2], reducing monthly limits from 2% to 0.33% of NAV. SREIT then went further, suspending repurchases in April 2026 for all but death, qualifying disability, and accounts under $5,000^[5]. Both REITs continued operating, but investors learned the difference between a feature and a right. The caps were in the documents from the start, and some investors never read that far. Our guide to understanding redemption gates before you commit basis covers the due diligence, and our analysis on evaluating the acquiring REIT walks through NAV mechanics and portfolio composition.

Evergreen Fund Structures

An evergreen fund is an open-end, perpetual-life vehicle with no forced exit date. Investors hold indefinitely, receive ongoing distributions, and can request redemptions at periodic windows, typically quarterly, subject to board-imposed caps.

As of mid-2026, several multifamily sponsors run evergreen funds of this type. Each is reached through the sponsor's own DST program after a two-year hold, and the HZ fund also accepts direct contributions of qualifying apartment properties. Confirm terms and availability in each fund's current offering documents.

The appeal for the investor holding to death is the absence of a forced maturity. There is no disposition event that restarts the 1031 clock or triggers a conversion decision you did not initiate. Distributions continue, the fund reinvests, and the OP units remain in the estate. The risk is the same as any open-end vehicle: redemption windows are subject to caps and can be suspended, and NAV is set by the sponsor's appraisal process rather than by a public market.

Interval REIT / Tender-Offer Vehicles

This heading covers two distinct structures that share a periodic liquidity feature but differ in a way that matters.

Interval funds are registered under the Investment Company Act of 1940 and must make periodic repurchase offers at NAV, typically 5-25% of outstanding shares per quarter. The repurchase obligation is mandatory, not discretionary. Unlike a standard non-traded REIT's share repurchase program, an interval fund cannot simply suspend the program at the board's discretion.

Tender-offer funds are not registered under the 1940 Act and make repurchase offers at the board's discretion. The board sets the timing, pricing, and percentage, and can reduce or eliminate offers entirely. A typical example is a continuously offered closed-end fund registered under the 1940 Act that elects REIT status and offers quarterly tender offers of up to 5% of NAV at the board's discretion. Funds of this type often publish no DST-to-721 pathway at all, which makes them a useful liquidity benchmark rather than a destination a DST investor can actually reach.

According to Anchor1031, judge a class by its worst years, not its best ones. Periodic tender offers or repurchase windows look attractive in calm markets. In stressed markets, these programs can be reduced (tender-offer funds) or oversubscribed (interval funds, where the mandatory offer is prorated if requests exceed the cap). The fund type determines whether the liquidity is a structural obligation or a discretionary feature, and that distinction matters most when investors stop thinking about it.

For a full roster of which sponsors run each type of fund, the 2026 directory profiles each platform. You can also browse current 721-eligible DST offerings to see what is available now.

How Do You Start a 721 Exchange With a Multifamily Sponsor?

To start a 721 exchange with a multifamily sponsor, one potential route is to follow the two-step path: 1031 into a multifamily DST that carries a 721 option (Required or Optional), hold through the seasoning window of at least two years by industry practice (not a statutory requirement), and let the sponsor absorb the DST into its multifamily REIT at maturity, depending on offering terms, eligibility, and transaction approval. The DST route is not universal, and timing and availability depend on the structure. Multifamily is the largest sector inside the 721 exchange fund universe, and multifamily DSTs are the most common structure to feed multifamily REITs.

Multifamily is a sector Anchor1031 spends a lot of time in because it makes up one of the largest classes of DSTs on the market today. We work across many multifamily sponsors rather than being tied to any single sponsor, which lets us compare the current programs on your specific exchange, including 721 Required and 721 Optional structures side by side, before you sign subscription documents. If you are considering a multifamily 721 sponsor, set up a call with us at Anchor1031 and we will map the current options against your timeline and estate plan.

Direct contribution is the institutional route. An owner contributes a large property, typically $10 million or more, directly to a REIT's operating partnership when the REIT's investment committee elects to acquire that specific asset.

The two-step path is one potential route for individual investors: a qualifying 1031 exchange into a 721-eligible DST, a holding period that varies by structure and offering, and then a possible contribution of the DST interest to the REIT's operating partnership under IRC Section 721. Investors unfamiliar with 1031 exchange fundamentals should start there, because the 45-day identification and 180-day close deadlines from IRC Section 1031 apply to the first step. The 721 contribution has no statutory deadlines of its own, though the sponsor controls the conversion timeline. The step-by-step 721 process maps each phase.

There can be no promise or guarantee at the time of DST purchase that a 721 transaction will happen. The REIT sponsor elects whether to acquire the DST, and a DST marketed as 721-eligible is offering a possibility, not a commitment.

How Do Fees Compare Across 721 Exchange Fund Types?

Every 721 exchange fund carries a fee stack, and the layers vary by vehicle type. The ranges below are historical observations across non-traded REIT programs, disclosed in each offering's documents:

These ranges are documented in Anchor1031's analysis of the seven UPREIT downsides that investors inherit at conversion.

Evergreen and tender-offer funds typically charge a management fee plus an incentive allocation, which may differ from the REIT model above. Interval funds registered under the 1940 Act disclose total expense ratios in their prospectuses, which makes comparison easier.

I bring up fee loads early in every 721 conversation because fees are the one variable that works against the investor in every market condition. The holdings and the management quality determine whether the return justifies the cost. The fee disclosure determines whether you knew what you were paying before you committed.

How Liquid Is Each 721 Exchange Fund Type?

Liquidity in a 721 exchange fund is never what it looks like in a brochure. Every vehicle type has a different redemption structure, and every one of them has limits.

UPREIT DSTs (721 Required and 721 Optional): No liquidity during the DST hold period. The DST is an illiquid investment with no established secondary market. Liquidity arrives only at conversion (OP units) or cash-out election (721 Optional only).

Non-traded REIT OP units: Subject to the REIT's share repurchase program, with typical caps of 2% of NAV monthly and 5% of NAV quarterly. Those caps are not permanent. Starwood's SREIT reduced its caps^[2] to 0.33% of NAV monthly in May 2024 and described the reduction as temporary, projected at 6-12 months. It was not: SREIT raised the caps only partway in mid-2025 and then suspended repurchases for most investors in April 2026^[5]. Blackstone's BREIT limited redemptions for roughly 15 months from late 2022, eventually returning to full fulfillment^[3] by February 2024.

Evergreen funds: Quarterly redemption windows with fund-imposed caps. Redemptions are at the board's discretion and can be suspended.

Interval funds: Mandatory repurchase offers, typically 5-25% of outstanding shares per quarter, at NAV. The offer is legally required, but if requests exceed the cap, they are prorated.

Tender-offer funds: Repurchase offers at the board's discretion, with no legal obligation to continue them.

The liquidity structure of a 721 exchange fund deserves more scrutiny than its distribution rate. The distribution is what you receive while things are going well. The redemption terms are what you face when they are not.

How Are 721 Exchange Funds Taxed?

The tax treatment of OP units follows partnership rules, not REIT dividend rules, and the distinction matters for how you plan.

At contribution: IRC Section 721 generally defers the gain. The deferred appreciation carries into your OP units, and the partnership tracks that gain to you specifically. A qualifying contribution generally does not trigger immediate gain at this step, though exceptions can apply.

During the hold: Distributions from the operating partnership are reported on a Schedule K-1, with a character mix of ordinary income, capital gain, and return of capital that varies by year and by the fund's underlying portfolio. Distribution rates are not guaranteed and may vary.

At conversion to REIT shares: Exchanging OP units for REIT shares is a recognition event under IRC Section 731^[4]. The deferred gain becomes taxable. Some investors convert in stages across several tax years to manage the bill; any conversion is subject to the partnership agreement's terms and restrictions.

At death: OP units held at death qualify for a step-up in basis on OP units to fair market value under IRC Section 1014 and current law, eliminating the deferred capital gain for heirs. Congress has repeatedly proposed limiting basis step-up, so treat this as current law rather than a permanent guarantee, and confirm your plan with your estate attorney.

The short version: contributing generally does not trigger immediate gain, though exceptions can apply. Holding generates K-1 income. Converting or selling triggers the deferred gain. Holding to death eliminates it for heirs under current law. Consult your CPA before contributing, converting, or gifting OP units, because outcomes depend on individual circumstances.

Which 721 Exchange Fund Fits Your Situation? (Decision Matrix)

The right fund type depends on your timeline, your need for control, and whether estate planning or current income leads the decision. Five questions sort the options:

What is your conversion timeline? If you want a defined exit from the DST into a REIT, a 721 Required UPREIT DST offers more certainty at the cost of flexibility, with the conversion still depending on offering terms, eligibility, and transaction approval. If you want to evaluate the REIT before committing, a 721 Optional DST preserves the 1031 option. If you want no forced conversion at all, an evergreen fund removes the decision from the calendar.

How important is ongoing liquidity? If you need periodic access to capital, an interval fund with mandatory repurchase offers provides the strongest contractual basis, though even mandatory offers can be prorated when requests exceed the cap. A tender-offer fund provides discretionary liquidity. A DST provides none during the hold period.

How much property are you contributing? Direct contributions to non-traded REIT operating partnerships typically require institutional-scale assets. Individual investors with smaller properties may use the two-step DST path. Minimums vary by sponsor and offering.

Is estate planning the primary goal? For investors holding to death, the fund type that pairs best is one with no forced conversion and no maturity event, typically an evergreen structure or a long-duration REIT holding. The step-up in basis at death eliminates the built-in gain under current law. Confirm your estate plan with your attorney.

Have you vetted the sponsor's track record through stress? Check whether the fund manager navigated 2022-2024 with or without gating redemptions. The answer tells you more than any marketing deck. Our guide on how to run due diligence on a 721 fund covers the full checklist, and the real 721 UPREIT case study shows what a completed sequence looks like from the investor's side.

Should You Keep Swapping DSTs or 721 Into a Fund?

For the long-time owner ready to retire from active management, you face the choice between staying in the world of DSTs or crossing over into a 721 exchange fund, a move that gives up 1031 optionality for that equity.

Staying in DSTs preserves every option. You review a new offering at each maturity, choose new sponsors, and maintain 1031 optionality indefinitely. Investors can build a diversified DST portfolio within the same 1031 exchange, holding a 721 Required DST alongside a traditional exit DST that preserves the option of another 1031 at maturity. The pattern suits the investor who still wants to make choices and who accepts single-offering concentration with a new decision every 5-7 years.

Crossing into a 721 fund trades choice for finality. Every future real estate decision belongs to the REIT's management team. You gain diversification, simplified estate planning, and an exit from portfolio oversight. You give up 1031 optionality, accept illiquidity governed by the fund's redemption terms, and inherit the fund's fee stack permanently.

Selling outright and paying the tax is the honest third option for owners whose liquidity needs outrank estate outcomes, or whose cost basis makes the tax bill manageable.

According to Anchor1031, none of these branches is wrong by default. The happiest investors are the ones who chose deliberately, and the right starting point for learning about your options is speaking about your situation with your Anchor1031 rep, your CPA, and your estate attorney, after reading pros and cons of the DST-to-721 pathway.

Frequently Asked Questions

Next Steps for the Owner Choosing a Fund Type

The fund type is the structural decision that shapes everything after it: your conversion timeline, your fee exposure, your liquidity terms, and your estate plan. Start by naming which of the five types matches your goals, then evaluate sponsors within that category rather than the reverse.

Critical action steps: confirm your conversion timeline preference with your CPA and estate attorney, determine whether a 721 Required, 721 Optional, evergreen, or direct-contribution path fits your estate plan, browse current 721-eligible DST offerings to see which structures are currently available, and have a specialist help you pick the right 721 fund type to walk through your situation.

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