This article was originally published on May 21, 2024.
Quick Take: An UPREIT, or 721 exchange, lets owners of appreciated investment real estate contribute property to a REIT’s operating partnership (OP) and receive OP units, generally deferring capital gains and depreciation recapture at contribution. Compared with a 1031 exchange, it removes the 45- and 180‑day deadlines. And it shifts investors from single‑asset risk and active management to a diversified, professionally managed portfolio. Investors can use a two‑step path—1031 into a Delaware Statutory Trust (DST), then DST‑to‑UPREIT when available—to access OP units. The units offer potential distributions, redemption programs and estate‑planning advantages.
How can U.S. owners of appreciated real estate defer tax liabilities on the sale or disposal of their property? One potential solution is a 721 exchange. This allows investors to contribute their real estate into the operating partnership of a real estate investment trust (REIT). In exchange, they receive operating partnership units, or OP units. This is an especially effective option for investors who no longer wish to find replacement properties through a 1031 exchange. This path can shift exposure from single assets to a diversified, professionally managed portfolio while preserving potential tax and estate‑planning benefits.
How a 721 Exchange (UPREIT) Works in the U.S.
Under Section 721 of the U.S. Internal Revenue Code, investors can contribute investment real estate to a partnership in exchange for an interest without immediate tax recognition. REITs often hold their properties through an operating partnership or umbrella partnership REIT, or UPREIT. This strategy has become more prevalent in recent years for investors looking for an estate-planning tool that passes down highly appreciated real estate in a tax-efficient manner.
For most individual investors, access typically follows a two‑step path: first completing a 1031 exchange into a Delaware Statutory Trust (DST), then—if and when the REIT’s operating partnership elects to acquire the DST—exchanging DST interests for OP units. This DST‑to‑UPREIT approach has grown among high‑net‑worth investors (HNWIs) and RIAs seeking a tax‑deferral mechanism, diversified portfolio exposure, and estate‑planning efficiency under current U.S. law.
721 Exchanges Vs. 1031 Exchanges: Key Differences for HNWIs and RIAs
A 1031 exchange allows investors to defer capital gains taxes by selling investment property and reinvesting proceeds into “like‑kind” real estate under strict timelines—identify within 45 days and close within 180 days—along with requirements such as using a qualified intermediary and replacing debt as applicable. (If you’re interested in selling a property, use our tax calculator to find out how much money you could save through an exchange versus paying taxes.)
These deadlines can create pressure if investors can’t identify suitable like‑kind replacement properties within the 45‑day identification window. This can increase the chance of overpaying or blowing the exchange and triggering taxes. A 1031 exchange can also keep investors in an ongoing “swap‑till‑you‑drop” cycle of real estate. A 721 UPREIT exchange offers a permanent alternative. This approach removes 1031 timelines, shifts exposure from a single asset to a diversified, professionally managed portfolio, and can simplify estate planning. Note that OP units cannot be used in a future 1031 exchange. Also, liquidity depends on sponsor redemption programs.
Investor Benefits of a 721 Exchange (UPREIT)
Many individual investors access a 721 exchange via a two‑step DST‑to‑UPREIT path. Key benefits of holding operating partnership (OP) units include:
Tax deferral at contribution: Receiving OP units can defer federal and state capital gains, depreciation recapture tax, and the net investment income tax (NIIT); basis and built‑in gain tracking apply under Section 721.
Portfolio diversification: Exchange single‑asset exposure for a diversified, institutional‑quality portfolio that can reduce idiosyncratic property risk.
No 1031 timelines: An UPREIT exchange allows investors to avoid the 45- and 180‑day deadlines and replacement‑property identification pressure.
Passive ownership: Shift from active management to professionally managed exposure within a REIT operating partnership.
Distribution potential and tax efficiency: Stabilized portfolios may provide monthly or quarterly distributions, with portions potentially sheltered by depreciation; rates and tax character vary.
Liquidity programs: Some sponsors offer OP unit redemption programs with stated terms, gates, and holding periods; liquidity is not guaranteed.
Estate‑planning simplicity: OP units are generally easier to divide among beneficiaries, and under current U.S. law may receive a step‑up in basis at death, aiding wealth transfer objectives.
Single‑Step vs. Two‑Step 721 Exchanges (DST‑to‑UPREIT)
In a 721 exchange, investors contribute property to a REIT’s operating partnership and receive operating partnership (OP) units. These units mirror partnership distributions and appreciation. Most individual investors gain access through a two‑step path, while direct single‑step contributions are more common for institutional‑grade owners.
Single‑step 721 exchange (direct contribution): The REIT’s operating partnership acquires an investor’s qualifying property directly, and the investor receives OP units. This path typically fits institutional real estate owners whose assets meet the UPREIT’s acquisition criteria, leverage profile, and timing.
Two‑step 721 exchange (DST‑to‑UPREIT): Many individual real estate investors own properties that do not qualify as institutional assets. In this case, investors use a two-step 721 exchange.
Step 1: The investor completes a 1031 exchange into a Delaware Statutory Trust (DST).
Step 2: If and when the REIT’s operating partnership elects to acquire the DST, investors exchange their DST interests for OP units, generally deferring gain at contribution. Timing, eligibility, and terms are at the sponsor’s discretion; OP units are not eligible for a future 1031 exchange.
What to Know Before You Complete a 721 Exchange
Before pursuing a 721 exchange, understand the structural trade‑offs, liquidity and tax implications that apply to OP units in a REIT operating partnership. Even the best-managed UPREITs or funds can face circumstances and markets beyond their control—including interest rate hikes, pandemics and recessions. Past performance is never a guarantee of future results.
- Loss of direct control: Exchanging property for OP units means you no longer make property‑level decisions (similar to a DST). Decisions are made by the sponsor/REIT.
- No 1031 out of OP units: OP units are not eligible for a future 1031 exchange of property.
- Liquidity limits: Liquidity depends on the sponsor’s redemption program and is not guaranteed. That means OP units may be subject to holding periods, redemption windows, gates and discounts.
- Tax events on exit: Redemptions or conversions of OP units (e.g., into REIT shares or cash) are typically taxable.
- Distribution variability: Distributions are not guaranteed and can be reduced or suspended based on portfolio cash flow, interest rates or market conditions.
- Fees and alignment: Investors should review acquisition and organizational fees, ongoing management fees, and any redemption costs. As well, assess sponsor track record and incentives.
- Documentation matters: Read the partnership and operating agreement for rights, transfer restrictions, tax allocations, and estate transfer mechanics.
The Benefits of Investing with Origin Exchange
Through Origin Investments’ platform, Origin Exchange, U.S. investors can complete a 1031 exchange into professionally managed, institutional‑quality Delaware Statutory Trusts (DSTs). Origin’s IncomePlus Fund may later elect to acquire the DST, enabling a 721 exchange (UPREIT) into OP units.
DST offering: The DST will own real estate consistent with Origin’s stringent investment criteria and quality deals: multifamily properties in the path of growth, geographically diversified in Origin markets across the U.S.
Capital diversification: The operating partnership of Origin’s IncomePlus Fund has an option to acquire the DST in exchange for units in the operating partnership. This option, if it is exercised, would diversify the investor’s risk.
Enhanced liquidity: OP units may be eligible to participate in a redemption program that mirrors the IncomePlus Fund’s program, subject to holding periods, volume limits, gates, fees, and possible suspension; liquidity is not guaranteed.
Low fees: Syndicated DSTs through brokers can have upfront fee structures as high as 14%. We charge an acquisition fee and a fee for organizational and offering expenses. And we don’t pay any brokerage sales commissions. See offering documents for details.
Expert deal sourcing: We leverage local experts in our target markets and use Multilytics®, our proprietary suite of machine-learning models, to identify submarkets with favorable supply‑demand dynamics and growth potential.
Direct access: Investors can access DSTs directly through Origin Exchange without going through a broker, with support from a dedicated team.
Each investor’s goals, portfolio, and estate plan are unique. Direct owners who prefer active control may not find UPREITs optimal. For those aiming to reduce single‑asset risk, improve tax efficiency, and streamline wealth transfer, a DST‑to‑UPREIT pathway can be a strategic option.
Learn More
Find out how you can benefit from an investment through Origin Exchange, and learn more about 1031 exchanges and Delaware Statutory Trusts.
Key Takeaways
- A 721 exchange (UPREIT) contributes property to a REIT’s operating partnership in exchange for operating partnership (OP) units, generally deferring taxes at contribution under Section 721.
- Most individual investors access 721s via a two‑step path: complete a 1031 exchange into a Delaware Statutory Trust (DST), then—if elected—exchange DST interests for OP units (DST‑to‑UPREIT).
- Compared with a 1031 exchange, a 721 removes 45- and 180‑day deadlines and shifts from single‑asset ownership to diversified, professionally managed portfolio exposure.
- OP units are not eligible for a future 1031 exchange. Redemptions or conversions (e.g., into REIT shares or cash) are typically taxable events.
- Distribution potential exists, and portions may be sheltered by depreciation. Distribution rates and tax character vary by sponsor and market conditions.
- Liquidity is programmatic. OP unit redemption programs may have holding periods, caps, gates, fees or suspension. Liquidity is not guaranteed.
- Estate planning can be simplified. OP units are generally easier to divide among beneficiaries; under current U.S. law, assets may receive a step‑up in basis at death.
- Fees matter. Origin Investments does not pay brokerage sales commissions on syndicated DSTs sold through brokers.
- For HNWIs and RIAs in the U.S., the DST‑to‑UPREIT route can reduce concentration risk and streamline passive real estate exposure, subject to sponsor election and terms.
- Origin Exchange provides access to DSTs and, in certain offerings, a potential UPREIT option via the operating partnership of the IncomePlus Fund (not guaranteed).
FAQs
What is a 721 exchange (UPREIT) and how does it work?
A 721 exchange contributes investment real estate to a REIT’s operating partnership in return for OP units, generally deferring gain at contribution. Most individuals access it via a DST‑to‑UPREIT path.
How is a 721 different from a 1031 exchange?
A 1031 requires like‑kind reinvestment within 45/180‑day deadlines; a 721 defers gain at contribution to an operating partnership and eliminates those timelines while shifting to portfolio‑level, passive exposure.
Can I go directly into a 721 exchange with Origin? Investors complete a 1031 into an Origin DST first. Then, if the IncomePlus Fund’s operating partnership later elects to acquire the DST, investors may exchange DST interests for OP units (timing and eligibility not guaranteed).
Are OP units liquid?
Liquidity depends on the sponsor’s redemption program and can include holding periods, caps, gates, fees, and potential suspension. Redemptions are discretionary and not guaranteed.
Are there taxes when I receive or redeem OP units?
Receiving OP units in a 721 is generally tax‑deferred at contribution. Redemptions or conversions (e.g., into REIT shares or cash) are typically taxable. Basis, built‑in gain, and state sourcing affect outcomes.
What happens at death for estate planning?
Under current U.S. law, assets passing at death may receive a step‑up in basis. OP units are often easier to divide among heirs. Confirm treatment with your estate counsel.
What fees should I expect with Origin Exchange? Origin charges an acquisition fee and organizational and offering expenses and does not pay brokerage sales commissions.
