Yes. In many cases, a 1031 exchange can come before a 721 exchange. A common path is to complete a 1031 exchange into replacement real estate or a Delaware Statutory Trust, hold that investment for a period of time, and then, if the sponsor and structure allow, contribute it in a later 721 UPREIT transaction.
How the sequence works
A 1031 exchange and a 721 exchange are different transactions.
A 1031 exchange lets you defer taxes by exchanging one investment property for another like-kind real estate asset. A 721 exchange, often called an UPREIT transaction, involves contributing qualifying real estate to a REIT operating partnership in exchange for OP units.
Because REIT shares are not like-kind real estate for 1031 purposes, investors generally cannot go straight from a sale into a REIT using a standard 1031 exchange. That is why the order matters. In practice, the 1031 usually comes first, and the 721 may come later if the property and sponsor fit the structure.
Why investors use a 1031 first
Using a 1031 exchange first can help solve a practical problem: the property you want to sell may not fit a REIT’s acquisition criteria. In that case, the investor may first exchange into a replacement property that better aligns with a possible future UPREIT contribution.
A common variation is:
• Exchange out of a relinquished property through a 1031
• Acquire an interest in a DST that is designed to qualify as replacement property
• Hold the DST for the required period
• Move into a 721 transaction later, if the sponsor offers that option
This approach can help an investor defer gain, move from active management toward passive ownership, and potentially position for future liquidity through OP units or eventual share conversion.
Key limitations to understand
This sequence is not automatic, and it is not available in every offering.
Important considerations include:
• Holding period: After completing the 1031 exchange, investors commonly hold the replacement property or DST for a period before a later 721 transaction is considered. Many investors hold for 12 to 24 months, and some structures reference about two years.
• Sponsor discretion: A later 721 transaction may be available only if the REIT sponsor elects to offer it.
• End of 1031 eligibility: Once you receive OP units in a 721 exchange, you have exchanged into a security rather than direct real estate. That generally means you cannot later execute another 1031 exchange from those OP units into other real property.
• Taxable trigger later: Tax deferral does not mean tax elimination. Converting OP units into REIT shares or taking cash can trigger gain recognition.
When this sequence may make sense
A 1031-before-721 strategy may appeal to investors who want to stop managing property but are not ready to recognize taxable gain today. It can also help when a direct contribution to a REIT isn't feasible, but a DST or other replacement property can bridge the gap.
Still, the fit depends on the offering terms, your time horizon, and your liquidity needs. These transactions are complex, and investors should review the sponsor documents carefully and consult qualified tax and legal advisors before proceeding.
Frequently Asked Questions
Can I do a 721 exchange first and then a 1031 exchange later?
Generally, no. After a 721 exchange, you typically receive OP units, which are considered securities rather than like-kind real estate. Because of that, those units generally cannot be exchanged later into real property through a 1031 exchange. Investors should confirm the consequences with their tax advisor before proceeding.
Do I have to use a DST between a 1031 and a 721 exchange?
No. A DST is a common path, but it is not the only one. Some investors complete a 1031 exchange into other qualifying replacement real estate first. The key issue is whether the replacement property and the sponsor’s structure support a later 721 transaction.
How long do I need to hold the property before a 721 exchange?
There is no single universal timeline, but many investors hold the replacement property or DST for 12 to 24 months before a later 721 transaction is considered. The required timing can vary by structure, sponsor, and tax facts, so investors should review the offering documents and seek professional guidance.
