What are single-step and two-step exchanges?
In a 721 exchange, an investor contributes property to a partnership in exchange for OP units. These units represent an ownership interest in the partnership. So, OP unit holders receive the same distributions and appreciation as the owners of the partnership interests. There are two ways to participate in a 721 exchange.
Single-step exchange:
This approach typically applies to owners of institutional real estate, such as REITs and real estate investment firms. The partnership acquires the investor’s property directly, and the investor receives partnership interest.
Two-step exchange:
Many individual real estate investors own properties that do not qualify as institutional assets. In this case, investors use a two-step 721 exchange. First step: The investor sells their property and completes a 1031 exchange into a Delaware Statutory Trust (DST). In the second step, the operating partnership of a REIT may choose to acquire the DST in exchange for OP units.