721 Exchange Steps and Timeline
For most individual investors, a 721 Exchange is done through a two-step structure: first completing a 1031 exchange into a Delaware Statutory Trust (DST), then later converting that DST interest into OP units.
Typical Two-Step Structure
1. 1031 Exchange
Sell the original property and reinvest proceeds into a DST holding institutional-grade real estate, deferring taxes.
2. DST Hold Period
Hold the DST interest (often ~2 years or until the asset reaches its planned exit).
3. 721 Exchange
Contribute the DST interest (or, less commonly, the property itself) to the REIT’s operating partnership in exchange for OP units, tax-deferred.
4. Optional Liquidity
OP units may later be converted to REIT shares; taxes are generally triggered upon sale of your recently converted REIT shares.
Timing at a Glance
This approach is commonly used by investors looking to step away from active property management, gain diversification, and defer taxes long term—potentially until OP units or REIT shares are sold. Because structures vary, professional tax and legal advice is essential.
Steps and Timeline
Steps and Timeline
Step 1
All steps for 1031 Exchange have been successfully completed.
(See 1031 Exchange Timeline)
Step 2
One of the replacement properties in exchange is a DST to UPREIT program: the sponsor’s REIT / Operating Partnership
Step 3
Operating Partnership exercises FMV option to repurchase the property from the DST. Investors receive units in Operating Partnership (OP Units) or cash, at the Operating Partnership’s sole discretion, in exchange for their DST interests. Investors transition from single property ownership to OP units in a diversified portfolio of properties.
Note: Approximately 2 years from the conclusion of the last sale in the DST property, assuming the options is exercised.
Tax deferral is provided under IRS Code Section 721.
Step 4
After a one-year hold period investors may exchange all or a portion of their OP Units for REIT Common Shares which may be sold pursuant to the terms of the share repurchase program.
Note: The exchange from OP Units to REIT common shares is likely a taxable event unless a “Step-Up” in basis has occured.
Step 5
The Investor may sell REIT shares pursuant to the share repurchase program, an example share repurchase program can generally limit redemptions to 5% per quarter (20% per year) and may be amended, suspended, or terminated. Accordingly, shares may become illiquid. Inquire about the track record of liquidity from Corcapa 1031 Advisors.
Note: Through use of estate planning, investors’ heirs may inherit the operating units on a “stepped-up” basis which may eliminate the deferred taxes altogether.
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