You’ve spent years building equity in your investment property. Now you’re thinking about selling — but the moment you do, the IRS wants a significant cut of your gains. What if there were a legal way to defer that tax bill, diversify your holdings, and never deal with a tenant call at midnight again?
That’s precisely what a 1031 exchange, combined with a Delaware Statutory Trust (DST) or a 721 UPREIT, can accomplish. These strategies aren’t exotic tax shelters — they’re well-established tools that many real estate investors are using to transition out of active management while preserving and growing their wealth.
What Is a 1031 Exchange?
Under Section 1031 of the Internal Revenue Code, when you sell an investment property and reinvest the proceeds into a “like-kind” property, you can defer paying capital gains taxes. The tax doesn’t disappear — it’s deferred until you eventually sell the replacement property without reinvesting. It is also deferred until the owner of the property passes, then it can provide a step up in basis to the estate. Swap until you drop!
You must identify a replacement property within 45 days of closing your sale, and you must close on that replacement within 180 days. The money must flow through a qualified intermediary (QI) — you can never take direct possession of it.
For decades, investors used this strategy to simply trade one rental property for another. But that still left them as landlords. DSTs and 721 UPREITs changed the game.
The Delaware Statutory Trust (DST): Institutional Real Estate, Fractional Ownership
A DST is a legal entity that holds real estate — often institutional-quality properties like apartment complexes, medical office buildings, or net-lease retail centers — and allows multiple investors to own fractional interests. The IRS ruled in 2004 that these fractional interests qualify as like-kind property for 1031 purposes.
What does that mean for you? You can sell your investment property, complete a 1031 exchange, and invest the proceeds into a DST. You receive a passive ownership interest in professionally managed real estate. No more property management headaches. No more vacancy risk on a single asset. And your capital gains tax is still deferred.
DST investments are typically illiquid — they’re designed to be held for five to ten years — and they’re structured as securities, so they’re available only to accredited investors. But for someone looking to simplify their financial life without sacrificing real estate exposure, a DST can be an elegant solution.
The 721 UPREIT: Converting to REIT Operating Partnership Units
A 721 UPREIT (Umbrella Partnership Real Estate Investment Trust) takes the concept one step further. Here, instead of exchanging into a fractional property interest, you’re eventually exchanging your DST interest — or in some cases, a direct property contribution — into operating partnership (OP) units of a REIT.
This is typically a two-step process. First, you do a 1031 exchange into a DST sponsored by a REIT. After a holding period (usually one to two years), the REIT merges the DST into its operating partnership. At that point, your DST interest converts into OP units — a transaction that can itself be structured as a tax-deferred event under Section 721 of the IRC.
Once you hold OP units, you’re inside a large, diversified REIT structure. You receive regular distributions, and when you’re ready, you can convert OP units to publicly traded REIT shares, which offer liquidity that neither raw real estate nor a DST provides. This path also makes estate planning more flexible — heirs may receive a stepped-up cost basis, potentially eliminating deferred gains entirely.
The Fiduciary Question: Who Is Actually on Your Side?
Here’s something most investors don’t realize until it’s too late: DSTs and 721 UPREITs are sold as securities, which means they are typically distributed through broker-dealers — and the commissions can be steep. Industry standard selling commissions on DST offerings often run between 5% and 7% of the invested amount, and when you factor in dealer manager fees, due diligence costs, and ongoing management fees, total load can approach 10% or more before your money does a single day of work.
That’s a significant drag on a strategy whose primary appeal is preserving your equity.
This is why the question of who you’re working with matters enormously. A broker operating under a suitability standard is only required to recommend products that are “suitable” for you — a low bar that still permits them to steer you toward higher-commission offerings. A fiduciary, by contrast, is legally required to act in your best interest at all times. That distinction is not just philosophical; it has direct implications for your wallet.
A fee-only Registered Investment Advisor (RIA) acting as a fiduciary has no financial incentive to recommend one DST sponsor over another. They’re not earning a commission on the transaction. Their compensation is tied to your outcomes, not the product being sold. When a fiduciary walks you through DST options, you can be reasonably confident the recommendation reflects the quality of the investment — not the size of the payout.
If someone is pitching you a DST or UPREIT strategy without disclosing how they’re being compensated, that’s a red flag. Always ask: “Are you a fiduciary? How are you paid for this recommendation?” The answers will tell you a great deal about whose interests are really being served.
Is This Right for You?
These strategies are not for everyone. DSTs and 721 UPREITs are complex securities with risks including illiquidity, limited investor control, and dependence on the sponsor’s management quality. They are only available to accredited investors, and the tax treatment depends on your individual circumstances.
That said, for investors in the right position — typically those looking to exit active management, diversify concentrated real estate holdings, or begin transitioning wealth to heirs — these tools deserve a serious look.
This is also where working with an advisor who genuinely understands your broader financial plan pays dividends. The choice between a DST and a 721 UPREIT isn’t made in isolation — it’s shaped by your income needs in retirement, your estate planning goals, your tax situation, your timeline, and how this asset fits alongside everything else you own. An advisor who knows that full picture can meaningfully evaluate which path is likely to produce your preferred outcome, rather than defaulting to a one-size-fits-all recommendation.
The key is to work with both a qualified tax advisor and a fiduciary investment advisor who understands the full picture and has no conflicting financial incentive. The 1031 exchange clock starts ticking the moment you close. Planning needs to happen well before that.
Done right, you don’t have to choose between cashing out and staying stuck. There’s a middle path — and with the right advisor in your corner, it’s one worth exploring.
This article is for educational purposes only and does not constitute tax or investment advice. Please consult a qualified tax professional and registered investment advisor before making any decisions.