Can You 1031 Exchange Into a REIT? Here Is What Actually Works (2026)

Can You 1031 Into a REIT?

No, not directly. IRC Section 1031 restricts like-kind exchange treatment to real property, and REIT shares are securities. One potential route for individual investors involves a qualifying 1031 exchange into a DST followed by a possible contribution to an operating partnership: sell your property, 1031 into a 721-eligible DST, hold through a seasoning period that varies by structure and offering, then, if a 721 transaction is offered and approved, contribute the DST interest to the REIT's operating partnership under IRC Section 721 in exchange for OP units. The DST route is not universal, and timing and availability depend on the structure. The rest of this guide walks through that pathway and the reason a direct 1031 into a REIT is closed to individual investors.

Why Can't You 1031 Directly Into a REIT?

IRC Section 1031 restricts like-kind exchange treatment to real property. REIT shares trade as securities, and securities are excluded from 1031 treatment. OP units, while closer to real estate economically, are classified as partnership interests under the tax code, not as real property.

An investor who sells a rental building and wants to end up in a diversified REIT portfolio cannot get there in a single 1031 exchange. A DST is one potential bridge: it qualifies as real property for 1031 purposes, and it is property a REIT can absorb under IRC Section 721. Without an intermediate step like that, the investor generally either keeps exchanging into individual properties or sells and pays the tax.

How Do You 1031 Exchange Into an UPREIT Through a DST?

One potential pathway from direct ownership to REIT ownership runs through four stages. Each one generally defers the gain to the next, though exceptions can apply:

1. Sell the relinquished property and 1031 into a DST. Engage a qualified intermediary before closing so the proceeds never touch your hands. Identify replacement DSTs within 45 days and close within 180 days per the IRS exchange deadlines^[4]. The DST you select should carry a 721 structure, either 721 Required or 721 Optional, if the REIT end state is your goal.
2. Hold the DST through the seasoning window. Industry practice, not a statute, is for the 721 contribution to occur at least two years after the DST interest is acquired, and the DST must be acquired for investment use, not with intent of immediate resale into a REIT. During this hold, you collect any distributions, which are not guaranteed, and do nothing else. The DST is passive by design.
3. The sponsor may elect to acquire the DST into its REIT. In a 721 Required structure, the conversion happens on the sponsor's timeline. In a 721 Optional structure, you choose between OP units and a cash exit that can fund another 1031. There can be no promise or guarantee at the time of DST purchase that a 721 transaction will happen.
4. Receive OP units in the REIT's operating partnership. Your basis carries over, your deferred gain comes with it, and a qualifying contribution generally does not trigger immediate gain under IRC Section 721, though exceptions can apply. You now hold a partnership interest in a diversified portfolio you did not have to assemble. Our guide to what an UPREIT is explains the structure in detail.

The full pros and cons of the DST-to-721 pathway covers what to weigh at each stage. The complete DST guide explains the trust mechanics, and the comparison of UPREIT DST fund types maps which vehicle structures accept contributions.

Which REITs Take DST-to-721 Conversions Today? (Named Sponsor Table)

The sponsor landscape shifts, but as of mid-2026, these REITs and platforms accept or have accepted DST-to-721 contributions. Confirm the current status and conversion terms in the private placement memorandum before committing:

I remind every investor who looks at a table like this: sponsor participation changes. The lineup that exists when you buy the DST may look different by the time the conversion window opens. In 2 years, the REIT's performance, debt, or the market environment may be materially different than it is today. Evaluate every offering as a standalone DST first. The current sponsors that take DST-to-721 conversions directory profiles each platform in detail, and you can browse UPREIT-eligible DST offerings to see what is currently available.

Public vs Public Non-Traded vs Private REITs, Which End State Are You Actually Choosing?

Not all REITs work the same way, and the label "REIT" covers three very different structures. Most DST-to-721 pathways end in a public non-traded REIT, and understanding what that means is part of the due diligence before you contribute.

The label tells you how the REIT is regulated. The portfolio is what your money actually owns.

Public traded REITs offer genuine liquidity but almost never accept DST-to-721 contributions. Public non-traded REITs are the most common destination for DST investors, offering NAV-based pricing and sponsor-managed redemption programs that can be limited or suspended. Blackstone's BREIT began limiting redemptions in November 2022, and Starwood's SREIT cut its caps in May 2024^[5]. Both REITs continued operating, but investors learned the limits of redemption programs firsthand.

Our guide on how to evaluate the acquiring REIT covers NAV methodology and sponsor track records. The guide to REIT redemption gates explains the due diligence questions that matter most, and the DST vs REIT comparison maps the structural differences between the two vehicles.

How Do the Tax Outcomes Compare Across the Four Paths?

Four paths, one property. Consider a simplified hypothetical: a $2 million sale with $1 million in built-in gain, an assumed 32% combined federal and state marginal tax rate applied to the entire gain, and an owner in their mid-70s whose estate plan matters as much as current income. The example does not model depreciation recapture, fees, or other transaction costs. It assumes current law for the step-up, and actual outcomes depend on individual circumstances.

The fourth path is the only one that can deliver passive diversified exposure and preserve the step-up, depending on offering terms, eligibility, and transaction approval. It is also the only one that closes the 1031 door permanently. That tradeoff is the whole decision.

For the $1 million gain in this example, a straight sale at the assumed rate produces a roughly $320,000 tax bill in year zero. Every other path can generally defer that bill, though exceptions can apply, and each carries a different ongoing cost: active management in the second path, single-offering concentration and a new decision cycle every 5-7 years in the third, and permanent loss of 1031 optionality in the fourth.

According to Anchor1031, the fourth path fits best when estate planning leads the strategy and the owner intends to hold OP units for life. The step-up in basis under IRC Section 1014 eliminates the deferred capital gain for heirs under current law. Consult your CPA before choosing a path, because outcomes depend on individual circumstances. The real 721 UPREIT case study walks through an actual client scenario.

What Do You Give Up by Choosing the REIT Path?

The REIT path gives up more than most marketing materials acknowledge. I bring this up because the costs tend to surface two or three years into the hold, when the initial relief of being done with tenants has worn off and the constraints are all that remain.

First, 1031 optionality ends. IRC Section 1031 applies only to real property, and OP units are partnership interests. Once the 721 contribution closes, that equity can never be exchanged again under IRC Section 1031. If you sell the OP units or convert to REIT shares (each subject to the partnership agreement's terms and restrictions), the full deferred gain comes due.

Second, property-level control disappears. The REIT's management decides what to buy, sell, refinance, and operate. You have no vote on individual asset decisions.

Third, redemption programs are subject to limits. Blackstone's BREIT began limiting redemptions in November 2022, and Starwood's SREIT cut its redemption caps in May 2024 and suspended repurchases for most investors in April 2026. Redemption is a feature the sponsor controls, not a right the investor holds, and SREIT is the reminder that a cap called temporary can be tightened instead of lifted. The full picture is in our guide to REIT redemption gates, and the seven UPREIT downsides catalog each structural cost in detail.

Fourth, NAV opacity. The sponsor's appraisal process sets the value you transact at, and you cannot commission your own.

Fifth, a fee stack that compounds over long holds: asset management typically 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. Those ranges come from our analysis in how to evaluate the acquiring REIT and are disclosed in each offering's documents.

What Do You Gain, Including the Section 199A Deduction?

What you gain on the REIT path starts with continued deferral and ends with a deduction some owners have never used, the Section 199A deduction on qualified REIT dividends. Investors can continue their tax deferral under IRC Section 721, since a qualifying contribution of the DST interest for OP units generally does not trigger immediate gain, though exceptions can apply. They can also diversify across a large REIT portfolio instead of a single building or a single DST, with fully passive ownership: no property decisions, no midnight calls, and no loan applications.

Distributions from the REIT are paid monthly or quarterly depending on the program. They can be a mix of ordinary income, capital gain, and return of capital. In some REITs, investors may be able to access their basis first which means tax-free distributions. Distribution rates and liquidity are not guaranteed and may vary based on portfolio performance and sponsor decisions.

Under current law, qualified REIT dividends are eligible for a 20% deduction under IRC Section 199A^[6]. This deduction reduces the effective tax rate on REIT dividend income and is one structural advantage that DST distributions do not carry.

Estate planning benefits are the capstone: OP units divide cleanly among heirs far more easily than a rental property, and under IRC Section 1014^[7] the basis resets to fair market value at death under current law. Congress has repeatedly floated proposals to limit the step-up, so confirm treatment with your estate attorney and treat the rule as current law rather than a permanent promise.

What If the Sponsor Doesn't Elect a 721 Conversion?

A 721 Optional DST gives the sponsor the option to acquire the trust into its REIT, not the obligation. If the sponsor passes on the 721, the DST follows its other maturity path: typically a property sale followed by either a cash distribution or the opportunity to 1031 exchange into another DST.

According to Anchor1031, a well-structured 721 Optional DST is not necessarily a failed investment when the 721 does not happen. The DST was underwritten as a standalone real estate holding and should stand on its own economics.

A 721 Required DST works differently. The conversion is built into the structure from day one, and the investor does not get a choice. The right time to understand that commitment is before you sign the contribution agreement, not when the conversion notice arrives.

Should You Keep Swapping DSTs, 721 Into a REIT, or Sell and Pay Tax?

There are three main options for passive 1031 investors. The right answer depends on what you want your next ten years to look like.

Keep swapping DSTs if you want to preserve 1031 optionality, review a new offering at each maturity, and accept single-offering concentration with a new decision cycle every 5-7 years. The DST lane keeps every door open. The 721 exchange vs 1031 exchange comparison maps this in detail.

Sell and pay the tax if you need the cash, if your basis is high enough that the bill is modest, or if you are done with real estate entirely. According to Anchor1031, for an owner with substantial deferred gains and heirs, this is rarely the tax-efficient path, but it is the honest one when liquidity needs outrank estate planning.

Cross into a REIT through a 721 if the goal is finality. Every future real estate decision is made by someone else, a diversified portfolio you never have to reassemble, and OP units that qualify for a basis step-up for your heirs under current law, all depending on offering terms, eligibility, and transaction approval. Investors can build a diversified DST portfolio and hold both a 721 Required DST and a traditional exit DST within the same 1031 exchange, which means the choice is not necessarily all-or-nothing.

The distinction matters here: the REIT path trades control for passive ownership, and a 721 may suit the investor who wants to be finished with real estate decisions.

Frequently Asked Questions

Next Steps for the Owner Ready to Map the Path

The answer to the original question is no, you cannot 1031 exchange directly into a REIT. But the two-step DST-to-UPREIT pathway is one potential route for individual investors, and it has a track record now measured in billions of dollars of completed transactions. The sequence can run: sell your property, 1031 into a DST with a 721 structure, hold through a seasoning period that varies by structure and offering, and receive OP units in a diversified REIT's operating partnership, depending on offering terms, eligibility, and transaction approval.

The planning starts now, not at the DST maturity notice. Critical action steps: confirm your deferred-gain exposure with your CPA, evaluate whether a 721 Required or 721 Optional structure matches your preference for optionality, browse UPREIT-eligible DST offerings, and map your 1031-to-REIT path with a specialist to walk through your specific timeline and sponsor options.

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