Why the direct route fails
A 1031 requires like-kind real estate on both ends. Shares of a REIT — even one that owns nothing but apartment buildings — are personal property (securities). Wire your exchange funds into REIT stock and the exchange fails on the spot.
The two-step 721 UPREIT route
- Step one — 1031 into a feeder property. Exchange your rental into real estate the REIT's operating partnership wants — in practice, almost always a DST sponsored by the REIT itself.
- Step two — contribute under Section 721. After a seasoning period (commonly around two years), the property is contributed to the REIT's operating partnership in exchange for operating partnership (OP) units — a separate tax-deferred transaction under Section 721. OP units mirror the REIT's shares: same distributions, convertible into REIT stock (a taxable event) or redeemable over time.
Result: diversified, professionally managed, income-paying exposure — and your heirs can still receive a step-up on the units.
The one-way door
OP units are not real estate. Once you convert under 721, you can never 1031 exchange again — not out of the units, not out of the shares. Selling or converting units triggers the entire deferred gain. The 721 route is a terminal station: right for investors done with property forever, wrong for anyone who might want back in.
Who it suits
Investors permanently exiting active real estate who value diversification and income over flexibility — typically later in life, with the step-up as the planned endgame. Anyone who might want to buy property again should stop at the DST stage, where the 1031 option stays alive.
Start with the DST step →The feeder structure — and the last stop where you can still change your mind