The Path to Liquidity for DST to 721 UPREIT Investors

Understanding the Journey

For many real estate investors, the Delaware Statutory Trust (DST) has become a popular strategy to complete a 1031 exchange. DSTs offer fractional ownership in institutional-grade real estate, potential passive income, and the ability to defer capital gains tax. But what comes next? How do investors access liquidity from their replacement property portfolio?

That’s where the 721 UPREIT transaction comes into play. A 721 exchange allows DST investors to contribute their ownership interests into an Operating Partnership (OP) of a Real Estate Investment Trust (REIT) in exchange for OP units. These OP units are often referred to as ‘UPREIT units,’ and they open the door to a new path toward liquidity.

Step 1: From DST to UPREIT

With a specific subset of DSTs sponsors may have structured the offering with an option to purchase the property and swap the investors out of the DST and into the UPREIT.  The investors would roll into a 721 UPREIT structure, receiving OP units in exchange for their pro rata share of the property value.

By choosing the 721 path, investors continue to defer capital gains taxes while gaining equity in a diversified REIT portfolio, rather than a single DST asset.

Step 2: OP Units to REIT Shares

Once investors hold OP units, they are typically subject to a lock-up or holding period, often 12 months, depending on the REIT sponsor’s structure. After that period, investors may request to convert OP units into REIT shares.

This conversion is usually done to obtain liquidity by selling the shares at the current net asset value of the REIT, subject to capacity constraints.  Capital gains are realized, and investors should plan for the tax implications.

Step 3: Liquidity & Portfolio Flexibility

The ultimate benefit of the DST-to-721 UPREIT strategy is that it provides investors with a structured path to liquidity. While DSTs themselves are illiquid, OP units and eventual REIT shares create flexibility:

• Access to Liquidity
  Investors can exit real estate holdings gradually, converting OP units into REIT shares and selling them as needed.
• Diversification
  By moving into a REIT portfolio, investors gain exposure to multiple assets, sectors, and geographic markets.
• Tax Management
  Investors can time the sale of REIT shares to manage capital gains and overall tax strategy.

-Estate Planning – Investors who would like their heirs to have a potential path to liquidity may prefer this structure as their heirs would not need to wait for a DST to sell its property in order to obtain liquidity.

Important Considerations

While this path to liquidity is appealing, investors should also be aware of:

• Loss of 1031 Eligibility
  Once OP units are accepted in exchange for DST ownership, investors no longer qualify for future 1031 exchanges with those assets.
• Net Asset Value Exposure
  REIT shares are revalued regularly and net asset value can rise and fall.
• Sponsor Structures
  Terms, timelines, and conversion rights can vary significantly among sponsors.

How 721 UPREIT Solution presented by Corcapa 1031 Advisors Can Help

At 721 UPREIT Solution presented by Corcapa 1031 Advisors, we specialize in guiding investors through every stage of the exchange process—from initial DST selection to understanding exit strategies such as the 721 UPREIT. Our role is to ensure you have a clear view of:

• Your liquidity timeline,
• The tax implications of each choice, and
• The long-term impact on your estate and financial goals.

By aligning these decisions with your overall wealth strategy, we help you make the most of your 1031 exchange and prepare for the eventual liquidity event.

Final Thoughts

The DST-to-721 UPREIT pathway offers a compelling balance between continued tax deferral and access to liquidity. For investors seeking flexibility, diversification, and an eventual exit strategy, it can be a powerful tool.

If you’re considering a 1031 exchange or want to explore your options for future liquidity, the 721 UPREIT Solution presented by Corcapa 1031 Advisors team is here to help.