Can a REIT refuse to redeem my operating partnership units after a 721 exchange?

The redemption right is a contract term, and in filed programs it opens after a year and leaves the form of payment to the REIT

The right to turn units back into money is not a tax rule. It is a clause in the limited partnership agreement of the REIT's operating partnership, summarized in the REIT's SEC filings. A quarterly report and prospectus supplement filed in August 2026 by a non-traded REIT that runs a DST program describes it this way: after a one-year holding period, investors who received units under the fair market value option 'generally have the right to cause the Operating Partnership to redeem all or a portion of their OP Units for, at our sole discretion, shares of common stock, cash, or a combination of both'.

The holder's right is to ask; the REIT's right is to decide what you get. A REIT conserving cash can satisfy a request in full by issuing shares and has done nothing wrong under the agreement. The word 'generally' matters too, because partnership agreements carry exceptions, such as ownership limits that protect REIT status, which sit in the full agreement rather than the summary.

The same filing describes the option that put you into units: the operating partnership holds 'the right, but not the obligation' to acquire DST interests any time after two years from the closing of the DST offering, for units or cash at the REIT's discretion. The decision to accept units should therefore assume a slow exit. Units are illiquid and can end up worth less than the trust interest that went in.

If the REIT hands you shares, you have swapped one unlisted holding for another that is bought back under a capped plan

Non-traded REIT shares are not listed, so the share repurchase plan is the only regular way out. The filed program says the REIT 'may choose, in our discretion, to repurchase all, some or none of the shares that have been requested to be repurchased at the end of any month', and limits total repurchases to 2% of aggregate NAV in any calendar month and 5% in any calendar quarter.

Two further terms bite. Shares not outstanding for at least one year are repurchased at 95% of the transaction price. And if the month's transaction price is not published by the tenth business day before month end, no requests are accepted that month and holders must resubmit.

So a redemption answered in shares is not a refusal, but a large request lands in a pool capped at 2% of NAV, shared with every stockholder who asked that month. DST illiquidity and exits compares that with the exit from a trust interest.

For tax, a redemption is a sale of a partnership interest, and the gain you deferred through the trust comes out with it

When the operating partnership redeems units for cash, section 731(a)(1) recognizes gain to the extent the money exceeds the adjusted basis of your interest. When anyone, the REIT included, buys the units, section 741 treats the gain as capital gain except where section 751 applies. Either way the gain carried from your rental into the trust and then into the units is recognized on the units you give up.

The depreciation layer survives. Section 751(c) counts section 1250 property as an unrealized receivable to the extent of ordinary recapture, and Reg. section 1.1(h)-1(b)(3)(ii) makes you take into account the unrecaptured section 1250 gain that would be allocated to you if the partnership sold all its section 1250 property immediately before the transfer. That is the 25% layer, and the partnership reports it on a statement with your K-1.

Taking shares instead of cash is also a taxable exchange of the units, not a continuation of the deferral; the mechanics are in 721 UPREIT roll-ups from a DST and the closed exchange door in after a 721, is it no more 1031 for good.

Hypothetical: 50,000 units, a request to redeem 10,000, and three answers the REIT is allowed to give

Round, hypothetical figures. You contributed a trust interest valued at $500,000 and received 50,000 units at a $10 NAV, with a carried basis of $150,000. Two years later you ask to redeem 10,000 units, worth $100,000 at the same NAV, to pay for a roof on the house you kept.

Answer one: cash. You receive $100,000 and recognize about $70,000 of gain, with the slice tied to past depreciation taxed at up to 25% under section 1(h)(1)(E). Answer two: 10,000 shares. The tax is the same, but the cash now depends on a repurchase request that may be filled in part, possibly at 95% in the first year. Answer three: a mix, which splits the same arithmetic.

In none of the three does the REIT owe you $100,000 on a date you pick. If NAV had fallen to $9, the units would fetch $90,000 and the gain would be about $60,000; deferral does not protect value. Check the figures against your own basis schedule with your CPA first.

Before you elect units, read four clauses and plan for the word no

First, the holding period before a redemption request: one year in the filed program, possibly longer in others. Second, the payment clause: whether the REIT may answer in shares, and whether any cash portion is promised. Third, the repurchase plan's monthly and quarterly caps and its early repurchase deduction. Fourth, the transfer clause of the partnership agreement, because there is no market to sell units into.

If you will need a specific sum on a specific date in the next few years, units are the wrong instrument; the cash election at the roll-up or a fresh exchange when the trust sells fits better, and opting out of a 721 roll-up explains what programs allow. If your estate plan ends in a step-up, the slow exit is tolerable.