721 exchange FAQ

OP Units are equity interests in the UPREIT’s operating partnership. They: Provide income similar to REIT dividends. Are often convertible to REIT shares or cash after a lock-up period. Maintain tax deferral from the original DST investment.

One cannot buy into a REIT for their 1031 exchange as the ownership of the REIT is typically in the form of shares rather than direct ownership of real estate as required by the like-kind exchange tax law. Intermediary/Accommodators will not wire funds into REIT for this reason. If a client desires to be invested in REIT, they first need to invest in a DST - per the IRC Revenue Ruling 2004-86 - where the DST is likely to be acquired by the REIT in the future utilizing section 721 and therefore maintaining full tax deferral as long as all [...]

A DST is a legal entity used in real estate investing, often as a replacement property in a 1031 exchange. It allows multiple investors to own fractional interests in income- producing properties (e.g., apartments, retail centers) managed by a trustee, offering passive income and tax deferral.

An UPREIT (Umbrella Partnership Real Estate Investment Trust) is a structure where a REIT controls an operating partnership. Investors contribute property (or DST interests) to the partnership in a tax-deferred 721 exchange and receive OP Units, which may later be convertible into REIT shares or cash.

A DST to 721 UPREIT transaction involves transferring ownership of a Delaware Statutory Trust (DST) property into an Umbrella Partnership Real Estate Investment Trust (UPREIT) under Section 721 of the Internal Revenue Code. This allows investors to exchange their fractional DST interests for Operating Partnership (OP) Units in an UPREIT, deferring capital gains taxes while transitioning to a more diversified and potentially more liquid investment.