Capital Gains Management with UPREIT Liquidity

Tax Planning Beyond the 1031 Exchange

For many real estate investors, the 1031 exchange is a powerful way to defer capital gains taxes when selling an investment property. However, once investors transition from active properties to Delaware Statutory Trust (DST) to 721 UPREIT structure, new opportunities for tax planning emerge—particularly when it comes to managing capital gains through liquidity events.

Converting DST ownership into Operating Partnership (OP) units provides investors with the ability to exchange into a REIT’s diversified portfolio while still deferring taxes. The real flexibility comes when those OP units are eventually converted into REIT shares.

How OP Units Convert to Liquidity

When DST investors choose the 721 UPREIT path, they receive OP units in a REIT’s operating partnership. Over time, and subject to sponsor-specific restrictions, investors can typically convert OP units into REIT shares.

Once REIT shares are obtained, investors can choose to sell those shares at the current net asset value subject to the capacity constraints of the REIT’s Share Repurchase Program—obtaining liquidity. Importantly, this process puts timing control back into the hands of the investor.

Spreading Sales Across Multiple Years

One of the most significant tax planning benefits of OP Units is that they can be converted and sold incrementally. Unlike a direct property sale or a DST liquidation (which generally trigger a one-time capital gains event),  UPREIT allocations provide the ability to:

• Sell in stages across multiple years, spreading the recognition of gains.
• Match sales with income needs, such as retirement distributions or major purchases.
• Coordinate with tax brackets, avoiding large single-year gains that push investors into higher tax rates.
• Harvest losses elsewhere in a portfolio to offset gains more effectively.

This flexibility can be particularly valuable for high-net-worth investors who want to carefully manage their overall tax exposure.

Example Scenario

Imagine an investor who rolled $1 million of DST ownership into OP units through a 721 UPREIT. After the lock-up period, those OP units can be converted into REIT shares of equal value.

Instead of converting and selling all $1 million in one year (and potentially recognizing a very large capital gain), the investor could:

• Convert & sell $250,000 in Year 1,
• Another $250,000 in Year 2,
• And so on over four years.

This strategy helps smooth out taxable income, reduce exposure to higher tax brackets, and provide greater planning control.

Considerations for Investors

While UPREIT liquidity offers powerful tax planning options, investors should keep in mind:

• Net Asset Value Risk
  REIT share values fluctuate with updates to the net asset value. Timing of sales should account for both taxes and market conditions.
• Loss of 1031 Eligibility
  Once DST ownership is converted into OP units, those assets are no longer eligible for future 1031 exchanges.
• Sponsor-Specific Terms
  Lock-up periods, conversion rights, share repurchase terms and timing flexibility vary among REIT sponsors.

How 721 UPREIT Solution presented by Corcapa 1031 Advisors Can Help

At 721 UPREIT Solution presented by Corcapa 1031 Advisors, we go beyond simply identifying DST opportunities. We help investors understand the long-term tax and liquidity implications of the DST-to-721 UPREIT strategy. By working closely with your tax advisors and estate planners, we help design a plan that balances:

• Ongoing tax deferral through the 1031 and 721 structures,
• Strategic capital gains management with staged sales of REIT shares, and
• Your income and estate planning goals.

Final Thoughts

For investors seeking both continued tax efficiency and eventual access to liquidity, the 721 UPREIT structure offers unique advantages. By spreading the conversion and sale of REIT shares across multiple years, investors can smooth out taxable income, manage capital gains, and align their real estate strategy with their broader financial plan.

At 721 UPREIT Solution presented by Corcapa 1031 Advisors, we’re here to help you explore these strategies and unlock the full estate and tax planning potential of your investments.