721 / UpREIT Transaction
A typical 721 transaction starts off as a DST, but once an initial holding period has been satisfied the investment is exchanged into a more diversified portfolio that has liquidity. Your fractional ownership is exchanged for REIT shares. Once your investment has been exchanged into the liquid REIT, the decision to sell is restored to the investor. The investor can continue to hold and defer taxes or can choose to sell all or a portion of the original investment and recognize the gain at a time of their own choosing.
721 transactions are ideal for estate transfer. As such, a 721 transaction should be your last 1031 exchange. Unlike the “swap till you drop” nature of DST transactions, the 721 transaction is “hold till you fold.” Typically, the entity you are exchanged into has liquidity options on a monthly or quarterly basis. This liquidity makes it much easier to receive as an inheritance; Not only will the security be available to sell following death, but the step-up in cost basis will be the most recent market valuation.
- Timing of selling shares restored to investor (Partial or Full)
- Upon death, it is more liquid than Real Estate or DSTs
- After the upREIT exchange, investor is typically more diversified
- Higher income than DSTs
Of course, as with any investment, there are limitations to consider, and a few for the DST are:
- Cannot do a subsequent 1031 exchange
- Not generally in growth assets, focus more on income
- Must first satisfy a 2-year holding requirement before upREIT transaction