Investing Education

What is a 721 Exchange? How an UPREIT Works


How can owners of appreciated real estate defer tax liabilities on 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.  

How Does a 721 Exchange Work? 

Section 721 of the Internal Revenue Code allows investors to contribute property in exchange for interest in a partnership. REITs often hold their properties through an operating partnership or umbrella partnership REIT, or UPREIT. By contributing property, a 721 investor receives OP units. Sometimes referred to as an UPREIT transaction or an UPREIT 721 exchange, 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.  

721 Exchanges Vs. 1031 Exchanges 

In a 1031 exchange, the investor can defer capital gains taxes by selling investment property and reinvesting the proceeds into a “like-kind” asset. (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.) However, among other requirements, this type of exchange must be completed within a strict 180-day timeframe.  


This approach may not appeal to some investors who no longer wish to “swap till they drop,” or actively exchange properties. Others may prefer to diversify their holdings. For both types of investors, a 721 UPREIT exchange offers a permanent alternative.  

Investor Benefits of a 721 Exchange  

A 721 exchange offers many benefits, including: 

Tax deferral. A 721 exchange allows the investor to defer taxes upon receiving OP units. This can be significant when factoring in federal and state capital gains taxes, depreciation recapture tax and net investment income tax.  

Portfolio, not property. Investors may expand their investment from one property to a portfolio of institutional-quality assets. This eliminates the idiosyncratic risks of owning a single asset. 

Greater flexibility. An UPREIT exchange doesn’t have the stringent deadlines of 1031 exchanges.  

Passive ownership. A 721 exchange allows investors to convert from day-to-day, active real estate management to a passive investment that is professionally managed.  

Potential for passive income. Assets are typically stabilized and cash-flowing, generating monthly distributions to investors that can be shielded from current income with depreciation. 

Simplified estate planning. Investors who have amassed a real estate portfolio often wonder how to divide the assets after they’re gone. A 721 exchange is easily divisible to beneficiaries, who receive a stepped-up cost basis and can typically liquidate holdings with little to no taxes due.  

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.  

What to Know Before You Invest in a 721 Exchange  

While there are many advantages in utilizing a 721 exchange, it’s important for investors to understand the rules and regulations. Here’s what to know:  

  • No direct control. When exchanging property for UPREIT OP units, investors give up all direct control of their property (like a DST).   
  • No more exchanges. An investor may not use OP units in a subsequent 1031 exchange of property. 
  • Investment risk. 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. 

The Benefits of Investing with Origin Exchange  

Through Origin Investments’ platform, Origin Exchange, investors can exchange their properties for professionally managed, institutional-quality DST assets, receiving monthly distributions and the potential for capital appreciation.


Direct access: Investors don’t have to work through a broker but instead can access DSTs directly. A dedicated team can answer any questions.  

Each investor’s financial goals, portfolio structure and estate planning needs are unique, and there are many strategic issues to consider when making investment decisions. Real estate investors who enjoy direct ownership and active management of properties may not find UPREITs an optimal choice. But many investors no longer want the responsibilities of direct ownership. And if they hope to reduce risk, increase the tax efficiency and optimize the estate benefits of their investment, a 721 exchange can be an appealing and 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.

This article is intended for informational and educational purposes only and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The information is provided as of the date indicated and is subject to change without notice. Origin Investments does not have any obligation to update the information contained herein. Certain information presented or relied upon in this article may come from third-party sources. We do not guarantee the accuracy or completeness of the information and may receive incorrect information from third-party providers.