721 EXCHANGE & UPREIT STRATEGIES
A Long Term Real Estate Strategy Beyond Direct Property Ownership
For some real estate investors, the next step after years of owning and managing property is not simply buying another building. The priority may be reducing management responsibilities, changing how real estate is held, or considering a longer term transition away from direct property ownership.
A Section 721 transaction can provide a different path for qualifying real estate owners, particularly when an investor is evaluating alternatives to continuing direct ownership or repeatedly acquiring replacement properties through traditional 1031 exchanges.
Customized 1031 helps accredited investors understand how 721 Exchange and UPREIT strategies may fit into that broader transition, how they can connect with 1031 exchanges and Delaware Statutory Trusts, and what should be evaluated before making a long term decision.
721 EXCHANGES
Understanding the 721 Exchange & UPREIT Structure
A 721 Exchange is different from a traditional 1031 exchange. While a 1031 exchange generally involves exchanging qualifying real property for other qualifying real property, Section 721 addresses contributions of property to a partnership in exchange for an interest in that partnership.
In an UPREIT, or Umbrella Partnership Real Estate Investment Trust, the REIT typically holds real estate through an operating partnership. A qualifying property owner may contribute property to that operating partnership and receive operating partnership units, often called OP units, rather than receiving cash from a conventional sale.
There are different ways investors may encounter this structure. Some owners may be able to contribute qualifying real estate directly, while others may first complete a 1031 exchange into a Delaware Statutory Trust that contemplates a possible future contribution to a REIT operating partnership.
Not every property, DST, sponsor, or REIT provides a 721 opportunity, which makes understanding the specific transaction important.
721 EXCHANGE GUIDANCE
How a 721 Exchange Advisor Can Help Real Estate Investors
A 721 strategy involves more than understanding a section of the tax code. Investors are also making a significant decision about how their real estate will be owned, managed, and potentially accessed in the future.
Doug helps investors work through those considerations before deciding whether a particular 721 or UPREIT opportunity fits their objectives.
01
Define Your Long Term Priorities
Start with what you want your real estate portfolio to accomplish next.
You may be thinking about reducing active property management, changing your real estate exposure, planning for retirement, simplifying ownership, or evaluating how a property fits into a broader investment strategy.
02
Understand the Structure
Review how the proposed transaction works, what you would contribute, what you would receive in exchange, and the relationship between the REIT and its operating partnership.
A 721 transaction can look very different from owning property directly, so understanding the ownership structure is an important part of the decision.
03
Evaluate the Investment
Tax treatment is only one consideration.
The underlying real estate portfolio, management team, leverage, fees, distributions, investment strategy, valuation methodology, redemption provisions, and other risks should also be evaluated when considering an UPREIT opportunity.
04
Consider Liquidity and Control
Moving from direct real estate ownership to operating partnership units changes the investor's relationship with the underlying property.
Depending on the particular structure, investors may have less control over individual properties and different options for accessing their investment in the future. Any potential redemption, conversion, or liquidity provisions should be understood before proceeding.
05
Coordinate With Your Professional Team
721 transactions can involve investment, tax, legal, real estate, and estate planning considerations.
Doug can work alongside your CPA, attorney, real estate broker, tax professional, and other advisors so that each professional can address the part of the transaction that falls within their expertise.
UPREIT STRATEGY
A Different Approach to Long Term Real Estate Ownership
Real estate investors do not all reach the same conclusion after selling or transitioning out of an appreciated property.
Some want to continue owning individual properties and making the major decisions themselves. Others reach a point where the responsibilities that once came with direct ownership no longer fit what they want from their portfolio.
A 721 or UPREIT strategy may be worth exploring when your priorities include:
Reducing direct property management responsibilities
Moving from ownership of an individual property toward exposure to a larger real estate portfolio
Having professional management responsible for the underlying properties
Exploring a different long term ownership structure for appreciated real estate
Understanding whether future redemption or liquidity provisions are available under a particular UPREIT structure
Simplifying the number of individual real estate assets you are responsible for overseeing
Considering how your real estate holdings fit into broader retirement, investment, or estate planning discussions
Customized 1031 helps investors compare these considerations with the alternatives available to them. A 721 strategy should be evaluated based on the investment itself and the investor's objectives, not solely because of its potential tax treatment.
1031, DST & 721 STRATEGIES
How 1031 Exchanges, DSTs and 721 Exchanges Can Connect
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Sell and Complete a Qualifying 1031 Exchange
A property owner may begin by selling appreciated investment real estate and completing a qualifying 1031 exchange into replacement real estate. For accredited investors, one potential replacement property structure may be a Delaware Statutory Trust.
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Consider a DST as Replacement Property
A DST allows investors to acquire a beneficial interest in professionally managed real estate. Certain properly structured DST interests may qualify as replacement property for purposes of a 1031 exchange. Some DST programs may also contemplate a potential future transaction involving an UPREIT, although this feature is not available with every DST and should not be assumed.
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A Potential Section 721 Contribution
If a qualifying opportunity is ultimately offered, a DST interest or other qualifying real estate interest may potentially be contributed to a REIT's operating partnership in exchange for operating partnership units under Section 721. The timing, terms, valuation, eligibility requirements, and availability of any such transaction depend on the specific program and circumstances.
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Holding Operating Partnership Units
Once an investor holds operating partnership units, the investment is fundamentally different from directly holding replacement real estate in a traditional 1031 strategy. Partnership interests and REIT shares are not treated as qualifying real property for purposes of another Section 1031 exchange. Any future redemption, conversion, sale, or other disposition can also have tax consequences that should be reviewed with the investor's tax professionals. Understanding that long term transition before entering the strategy is critical.
721 EXCHANGE PLANNING
When Might an Investor Explore a 721 Exchange?
A 721 Exchange is not automatically the next step for someone selling appreciated real estate. It tends to become relevant when an investor is thinking beyond the immediate transaction and reconsidering how much direct property ownership they want going forward.
Consider starting the conversation if:
- 01 You own appreciated investment real estate and are considering a future sale or transition
- 02 You want to reduce the responsibilities associated with directly managing property
- 03 You do not necessarily want to purchase and manage another individual replacement property
- 04 You are exploring professionally managed real estate investments
- 05 You own or are considering a DST that includes a potential future UPREIT strategy
- 06 You want to understand the differences between continuing a 1031 strategy and transitioning through Section 721
- 07 You are reviewing how real estate fits into your longer term retirement or estate planning discussions
- 08 You want to understand liquidity, control, taxation, and investment considerations before making a decision
The earlier these questions are considered, the easier it is to compare alternatives without allowing a pending sale, exchange deadline, or future transaction to dictate the strategy.
Work Directly With Doug Zator
Doug Zator is the Founder and Managing Director of Customized 1031.
Before founding Customized 1031, Doug served as Director of Business Development for 1031 Exchanges at an alternative investment firm. He has also worked with a Delaware Statutory Trust sponsor, helping educate investors and financial professionals about DSTs and other alternative investments.
That background gives Doug experience with the different decisions investors may face as they move from directly owned real estate into 1031 replacement properties, DSTs, and other real estate investment structures.
His approach begins with understanding what the investor is trying to accomplish rather than starting with a particular product or transaction.
Your 721 Exchange Team Has Different Roles
A 721 or UPREIT transaction may involve several professionals, each responsible for a different part of the decision.
Your CPA or tax professional can evaluate the federal and state tax consequences of the proposed transaction. Your attorney can provide legal guidance and review applicable agreements. Your real estate broker may assist with the disposition of directly owned property, while the sponsor and other transaction parties are responsible for their respective roles within the investment structure.
Customized 1031 focuses on the investment side of the conversation, helping investors understand potential strategies, review available investment options, and consider how those choices fit their broader objectives.
The objective is to complement the professionals already advising you, not replace the tax, legal, or other specialized guidance they provide.