Short answer: a 721 exchange (from IRC Section 721) lets you contribute real estate to a REIT’s operating partnership in exchange for “OP units” without triggering tax — often as the final step after a [1031 into a DST](/insights/articles/dst-1031-exchange-for-dentists). You trade direct control for diversification across a large REIT portfolio and eventual liquidity, but once you’ve made the move, you generally can’t 1031 back out.
What is a 721 exchange?
Under Section 721, contributing property to a partnership in exchange for partnership interests is generally not a taxable event. In a real-estate context, you contribute your property (or DST interest) to a REIT’s operating partnership and receive “operating partnership units” (OP units) instead of cash — deferring the gain. Because the REIT sits above the operating partnership, the structure is called an UPREIT (umbrella partnership REIT).
How does the two-step DST-to-721 work?
- You sell an appreciated property and 1031-exchange into a DST, deferring the gain.
- Later, the sponsor’s REIT acquires the DST property and, via a 721 exchange, you receive OP units in the REIT’s operating partnership — still tax-deferred.
- You now hold OP units representing a share of a large, diversified REIT portfolio.
- OP units can typically be converted to REIT shares over time — though converting (or selling) is generally a taxable event.
What do you gain — and give up?
| You gain | You give up |
|---|---|
| Diversification across a REIT’s whole portfolio | Ownership of a specific property |
| Passive income without property management | Direct control over the asset |
| A path to liquidity (convert OP units to shares) | The ability to 1031 exchange out again |
| Potential estate-planning benefits | Simplicity — the structure is complex |
Who is a 721/UPREIT strategy for?
It tends to fit dentists nearing the end of an active real-estate journey who want to stop managing property, diversify a concentrated holding, and simplify their estate — while continuing to defer tax. It’s an advanced, illiquid strategy involving securities, so it belongs in a coordinated plan, not a quick decision.
Frequently asked questions
It’s a tax-deferred contribution of real estate to a REIT’s operating partnership in exchange for operating partnership (OP) units, under IRC Section 721. It’s often used as a final step after a 1031 into a DST, letting an investor trade a single property for a diversified REIT interest without triggering tax.
A 1031 exchange defers tax by swapping one like-kind property for another and preserves the ability to exchange again. A 721 exchange moves property into a REIT operating partnership for OP units — gaining diversification and liquidity, but generally ending the ability to 1031 out. Many strategies use a 1031 first, then a 721.
Generally no. Once you hold OP units from a 721 exchange, you typically can’t complete another 1031 exchange out of them. Converting OP units to REIT shares or selling them is usually a taxable event, so a 721 is often treated as an end-stage strategy.
Sources
Founder & Financial Planner · Investment Adviser Representative · Series 63 & 65
Ian McGinnis is a financial planner and founder of Dental Wealth Partners, a non-commission, fee-only financial planning firm for dentists. He is the author of The Wealthy Dentist: Smarter Money. Less Stress. More Life. and hosts the Smiles & Cents podcast.
Keep reading
- DST 1031 exchanges for dentists: passive real estate, explainedA Delaware Statutory Trust (DST) lets a dentist complete a 1031 exchange into passive, institutional real estate — no management, but illiquid and accredited-only.
- What is a 1031 exchange, and how can a dentist use one?A 1031 exchange lets a dentist defer capital-gains tax by reinvesting real-estate sale proceeds into like-kind property. The rules, deadlines, and pitfalls.
- How should a dentist invest in real estate?Dentists can invest in real estate actively (direct ownership) or passively (syndications, DSTs, REITs). How to weigh each — and avoid over-concentration.