Taking the 721 Exit Off the 1031 Investment Treadmill

For decades, the 1031 exchange has been one of the most powerful tools available to real estate investors. It has allowed generations of families to sell appreciated property, reinvest the full amount of equity along with replacement debt, and continue deferring capital gains and depreciation recapture. For many high-net-worth investors, it has served as the backbone of their wealth-building strategy.

Yet, as valuable as the 1031 has been, it also creates a lifestyle that many investors eventually outgrow, reaching a stage where they still want the benefits of real estate ownership but no longer want to shoulder the management obligations, financing stress or time-sensitive reinvestment decisions. Even the most successful property owners eventually begin asking a simple but unavoidable question: Is there a way to exit the 1031 treadmill without triggering taxes, and how do you position the property strategically for the next generation?

Enter the 721 exchange. Often referred to as an UPREIT transaction, it allows an investor to contribute appreciated property to a real estate investment trust’s operating partnership in exchange for operating partnership units. Instead of owning a single property, the investor becomes an owner in a diversified, professionally managed real estate portfolio. The tax deferral remains fully intact, while the experience of ownership becomes far simpler and more aligned with long-term objectives.

For many high-net-worth families, this structure feels like a natural evolution. It preserves decades of tax planning while eliminating the daily responsibilities of property oversight. It transitions wealth from a concentrated asset into a broader, balanced portfolio. And it aligns the investor with institutional managers whose incentives are tied to long-term performance rather than transactional activity. The result is a more stable, predictable and strategic way to remain invested in real estate as life circumstances change.

Even the most passive forms of 1031 investing eventually reach their structural limits. Delaware Statutory Trusts (DSTs) have become a popular solution for investors seeking passive ownership while maintaining tax deferral. Yet every DST must eventually go full cycle. When it does, the investor is forced back into the same exchange pressure they sought to relieve.

The DST becomes a bridge rather than an endpoint. It helps preserve the tax deferral today but maintains the structural limitations of the 1031 system. The 721 exchange provides the permanent solution.

There are two primary pathways into a 721 exchange. Investors contribute appreciated property directly to a REIT’s operating partnership, or they complete a 1031 exchange into a DST and later participate in a contribution when that DST becomes part of the operating partnership. In both cases, investors receive operating partnership units, maintain tax deferral, and transition into a more stable form of ownership that no longer requires navigating the rigid next-step rules of the 1031 system.

The transition into a 721 structure carries meaningful long-term advantages. Instead of relying on the performance of one or two properties concentrated in a single market, the investor’s wealth becomes part of a diversified portfolio covering multiple regions and sectors. This naturally reduces concentration risk and supports more consistent income through varying market conditions.

Liquidity is another significant benefit. While operating partnership units are not immediately liquid, they can often be redeemed for REIT shares or cash after a defined holding period, allowing investors to access liquidity on their own timeline without affecting tax deferral.

Estate planning becomes far more elegant. Heirs inherit units rather than physical property, removing operational responsibilities and the pressure to make rapid 1031 decisions. The units are simpler to divide and administer and generally receive a full step-up in basis at death. For families thinking in terms of generational wealth, this creates clarity, efficiency and peace of mind. 

As investors mature financially and personally, their priorities evolve. Early on, they may have sought aggressive returns, heavier leverage, and active management strategies. But as wealth compounds and life grows more complex, goals shift toward preservation, stability and alignment with experienced operators.

A well-structured private REIT is designed with these three goals at its core: performance across cycles rather than short-term transactions; thoughtful leverage; and alignment through incentive structures tied to long-term results. It also enables investors to benefit from scale, professional management, and institutional-grade diversification. 

In uncertain or volatile environments, diversified 721 structures often provide a smoother, more resilient experience than single-property ownership. In an environment where certainty and efficiency matter, the 721 exchange provides long-term real estate owners a thoughtful, tax-efficient transition from hands-on ownership to long-term preservation.

Mike Auerbach is head of tax-deferral solutions at multifamily investment firm Bonaventure.