Can You 1031 Into a REIT? Understanding the Path via a DST-to-721 UPREIT

A REIT share fails the like-kind test because it is stock; a DST interest passes because you own the dirt

Since 2018 §1031(a)(1) applies only to 'real property held for productive use in a trade or business or for investment' exchanged for real property, and Reg. §1.1031(a)-3 names the only stock that counts as real property: shares in a cooperative housing corporation and in a mutual ditch, reservoir or irrigation company. A REIT is defined in §856(a) as a corporation, trust or association with transferable shares that 'would be taxable as a domestic corporation' but for the REIT rules, so its shares are stock and the Form 8824 instructions exclude them.

A DST interest is different because of the grantor-trust rules. Rev. Rul. 2004-86 treats each beneficial owner as owning 'an undivided fractional interest' in the trust's real estate, so the transaction is 'the exchange of real property for an interest in Blackacre, and not the exchange of real property for a certificate of trust or beneficial interest'.

Operating-partnership units are excluded for the same reason as shares: they are interests in a partnership, which the regulation and the instructions both keep off the real-property list.

The two-step timeline: exchange into the DST, hold, then contribute under §721

The path is two separate tax events under two different statutes, and only the first one has a deadline.

• Day 0: you sell, and the proceeds go to a qualified intermediary under Reg. §1.1031(k)-1(g)(4).
• By day 45 you identify the DST interest in writing; by day 180, or your return due date if earlier, you close into the trust and the §1031 deferral is complete.
• Years one to three, typically: you hold the DST interest, receive its distributions and report its income as an owner of real estate.
• Contribution: the DST's property, or the interests in it, goes into the REIT's operating partnership in exchange for OP units; §721(a) says 'no gain or loss shall be recognized to a partnership or to any of its partners' on the contribution, and there is no intermediary, identification period or 180-day clock.
• Later, on the partnership agreement's terms: you may redeem units for cash or convert them into REIT shares, which is a taxable sale or exchange of a partnership interest under §741.

Which DSTs are built for a 721: the sponsor's REIT and its operating partnership must already exist

A 721 needs a partnership on the other side, so only DSTs sponsored by or for an UPREIT are candidates. JLL Income Property Trust's 2025 Form 10-K describes the model: a DST program run 'through our operating partnership' that sells beneficial interests in specific Delaware statutory trusts to accredited investors in Regulation D private placements, with classes of OP units issued in exchange for the DST interests.

Sponsors label these programs plainly. ExchangeRight markets 'REIT Fast-Track DSTs' intended to give investors 'accelerated access' to its REIT 'via a tax-deferred 721 exchange after a targeted two-year hold period', and Inland says 721-designated DSTs 'typically have a shorter hold period than traditional 1031 DSTs, averaging two to three years'.

Before you subscribe, find in the trust agreement whether the contribution is the sponsor's option or its obligation, whether you can decline it and what you receive if you do, how the OP units will be valued on the day, and what fees are charged at the DST closing, at the contribution and inside the REIT.

Two documents govern the outcome: the DST trust agreement, which controls whether and when the contribution happens, and the operating-partnership agreement, which controls redemption rights, unit valuation and the exchange of units for shares. Read both before the first closing, not the second.

Why the hold in the DST matters: 'held for investment' cannot be borrowed from the next owner

Nothing in the Code sets a minimum DST hold before a 721, but §1031(a)(1) requires the replacement property to be 'held either for productive use in a trade or business or for investment', and the IRS reads a prearranged onward transfer as evidence that it was not. In Rev. Rul. 77-337 the Service restated Rev. Rul. 75-292, where a taxpayer exchanged and 'immediately thereafter' put the replacement into a new corporation, and held that the exchange failed because the property was not exchanged for property the taxpayer would hold for investment.

That is why sponsors build in a multi-year DST hold, and why a 721 written into a subscription as a certainty on a fixed date is a warning sign. The two-year presumptions in Reg. §1.707-3 add a second reason for patience: consideration flowing to you within two years of the contribution is presumed to be a disguised sale.

What changes when you hold OP units instead of a DST interest

Your income now comes from the whole REIT portfolio rather than one trust, your interest can be redeemed in pieces if the partnership's redemption program allows it (Inland: 'redeem interests in whole or in part'), and diversification arrives without another exchange. Your deferred gain survives the contribution because §722 gives the units the basis of what you contributed.

What you give up is the exchange itself. Units are partnership interests, so a future §1031 is unavailable, redemption programs can be capped or suspended, and cash or REIT shares taken for units trigger the deferred gain at that moment.

Reporting changes too. A DST owner reports a share of the trust's rents, expenses and depreciation as a direct owner of real estate, an OP unit holder receives a Schedule K-1 as a partner, and after a conversion into shares the income becomes REIT dividends.

Who the REIT-exit path fits, and who should stop at the DST

The path fits investors who are finished exchanging, want liquidity in installments rather than one sale, prefer a diversified portfolio's distribution to a single trust's, and plan to hold units until death so heirs receive a stepped-up basis. It does not fit anyone who wants to exchange again, needs all the cash within a few years, or is uneasy with a sponsor-set unit valuation.

Ask your CPA or attorney to review the trust agreement and the operating-partnership agreement together before you subscribe, because the 721 terms are written years before they are used.