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In an UPREIT transaction, a property owner looking to defer taxable gain on the sale of a property may transfer the property to the UPREIT in exchange for limited operating partnership units (OP Units). Taxes on the gain are deferred until the seller later redeems the OP Units for shares of the REIT. Although a powerful tax deferral and diversification strategy for real estate owners to consider, 721 exchanges are complex and may not be suitable for all investors.

Potential Benefits of a 721 Exchange/UPREIT Structure


By transferring a single property to an UPREIT in exchange for OP Units in an operating partnership, the seller of the property may gain access to indirect ownership of a larger portfolio of properties.


In an UPREIT structure, owners of OP Units may be able to convert their units for shares of common stock of the REIT, which may provide access to liquidity options. However, the conversion may be a taxable transaction and in such event may cause the holder of the OP Units to recognize tax liability at the time of such conversion.

Estate Planning

OP Units can be split equally and either held or liquidated by the holder’s heirs or estate, receiving a step-up in basis, paying no capital gains and depreciation recapture taxes.

Hands-Off Investing

By transferring a property to an UPREIT in exchange for OP Units in an operating partnership, the seller of the property no longer will have to worry about property management responsibilities.

Frequently Asked Questions

Can 1031 exchange be performed after a 721 exchange?

REIT shares are not eligible to be used in a 1031 exchange, therefore once a 721 exchange is completed, capital gains taxes can no longer be deferred via a 1031 exchange.

Can DST interests be used in a 721 exchange?

Property owners can contribute DST interests to an UPREIT in exchange for OP Units as part of a 721 transaction. Taxes on this transaction are deferred during the time the OP Units are held, typically between 12 to 24 months. Investors may receive distributions from OP Units*.

How does a 1031 exchange differ from a 721 exchange?

Both transactions allow property owners the ability to defer capital gains tax on the sale of a business or investment real property. However, a 721 exchange transaction allows property owners to contribute real property in exchange for interests in an operating partnership of a REIT that is structured as an UPREIT. With a 1031 exchange, property owners exchange property for other like-kind property.

Important Disclosures

This page includes a brief and general description of Section 721 of the Internal Revenue Code. All investors should consult their own tax advisors regarding a Section 721 tax strategy.

Important Risk Factors to Consider

Investments in real estate assets are subject to varying degrees of risk and are relatively illiquid. Several factors may adversely affect the financial condition, operating results and value of real estate assets. These factors include, but are not limited to:

  • changes in national, regional and local economic conditions, such as inflation and interest rate fluctuations;
  • local property supply and demand conditions;
  • ability to collect rent from tenants;
  • vacancies or ability to lease on favorable terms;
  • increases in operating costs, including insurance premiums, utilities and real estate taxes;
  • federal, state or local laws and regulations;
  • changing market demographics;
  • changes in availability and costs of financing;
  • acts of nature, such as hurricanes, earthquakes, tornadoes or floods
  • economic risks associated with a fluctuating U.S. and world economy, including those resulting from the novel coronavirus and resulting pandemic.