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 the founder of Dental Wealth Partners and a fee-only financial planner dedicated to dentists. As an investment adviser representative (Series 63 and 65), he built the firm to give dentists coordinated, fiduciary advice across their practice, taxes, investments, retirement plans, and long-term goals — the whole picture in one strategy. A graduate of Belhaven University, Ian previously worked at Davis Private Wealth, MML Investors Services, and Northwestern Mutual, and is based in the Jackson, Mississippi area. He is the author of The Wealthy Dentist 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.