Personal Finance & Estate › Income, gift, estate & real-estate taxes › 1031 like-kind exchange
DSTs & 721 UPREIT exchanges (passive 1031 exits)
DST ruling 2004· Tax rule
Depends on youExperts differ; the right answer depends on your situation.
Ways to 1031 a hands-on building into passive shares of large properties, or later into REIT operating-partnership units.
See it on the Personal Finance & Estate map →How it works
A Delaware Statutory Trust (DST) owns institutional property, such as apartments or warehouses; investors buy fractional interests that the IRS treats as real property for 1031 purposes. DSTs are prepackaged and close fast, so they also serve as backup identifications. Many later roll into a REIT's operating partnership under Section 721 (an 'UPREIT'), swapping property for units. Trade-offs: upfront costs often 5–10%, no control, years of illiquidity, and no more 1031s after a 721. Sold only to accredited investors.
Why it matters for you
Depends on you: a way to retire from management while deferring tax; experts differ on whether fees and lost control are worth it. Have a fee-only advisor review offerings.
Think of it like
Like going from owner-operator to a limited partner in a syndication: no headaches, no control, hard to sell.
Rules, limits and sources (2026)
IRS Revenue Ruling 2004-86 approved DSTs for 1031s; Section 721 dates from the 1954 code; Taubman's 1992 IPO pioneered the UPREIT; offerings are SEC Regulation D private placements.
Watch out for
Independent performance data are scarce, and how DSTs held up through the 2022–24 interest-rate spike is still being sorted out.
Connections (3)
▸DSTs & 721 UPREIT exchanges (passive 1031 exits) are hands-off exits built on 1031 like-kind exchangeDepends on you
How they connect
DST interests count as real property, so 1031 proceeds can buy them, deferring gain while trading management for passive income. Many DSTs later roll into a REIT's operating partnership under Section 721, continuing deferral. Trade-off: once in UPREIT units, further 1031s are impossible, and converting units to REIT shares is taxable.
When it applies
The IRS approved DSTs in Revenue Ruling 2004-86; DST-to-UPREIT programs grew through the 2010s and 2020s.
How sure?
Rev. Rul. 2004-86 and IRC Secs. 1031 and 721; sponsor offering documents disclose fees, risks and exit terms.
Watch out for
Whether DST-to-721 roll-ups are fairly priced for investors, and how fees affect returns, is debated; independent performance data are thin.
▸DSTs & 721 UPREIT exchanges (passive 1031 exits) can spread out Concentration risk (one asset dominates)Depends on you
How they connect
A 1031 exchange into several Delaware statutory trusts (DSTs) lets an owner split one building's proceeds across properties, regions and sponsors without paying tax now. A 721 exchange goes further, swapping property for operating-partnership units in a diversified REIT. Both trade control and liquidity for spread.
When it applies
DSTs qualified as like-kind property under IRS Rev. Rul. 2004-86; UPREIT structures date from the early 1990s.
How sure?
IRC Secs. 1031 and 721; offering documents list each DST's properties, debt and fees.
Watch out for
Whether passive, illiquid DST interests reduce risk enough to justify their costs is debated; a 721 exchange ends future 1031 options.
▸DSTs & 721 UPREIT exchanges (passive 1031 exits) often carry heavy Investment fees (expense ratios, AUM fees, loads)Watch out
How they connect
DSTs are sold as private securities through broker-dealers, and much of the cost is up front: sales commissions, sponsor and offering fees, and markups on the property, by many estimates near 10% of equity combined. Ongoing management and disposition fees follow. Red flags: guaranteed-sounding yields and pressure from the 45-day 1031 deadline.
When it applies
Sold mainly to accredited investors since the mid-2000s, often to retirees exiting properties they managed themselves.
How sure?
Private placement memoranda disclose fees in a 'use of proceeds' table; FINRA rules and Regulation Best Interest govern sales.
Watch out for
Whether tax deferral and passive income justify the load, versus selling and paying tax, varies; brokers can be checked on FINRA BrokerCheck.