What If I Want to Exit a DST Investment Early? Exploring the 721 UPREIT Option

Delaware Statutory Trusts (DSTs) are often touted as ideal long-term solutions for 1031 exchange investors. They offer the benefit of passive real estate ownership with professional management and income potential. But what happens if your circumstances change and you want out—before the DST lifecycle ends?

Let’s talk about a smart, lesser-known option: the 721 UPREIT.

Why DSTs Are Designed for Long-Term Holding

The Trade-Off of Passive Income and Liquidity

By design, DSTs are illiquid investments, typically locking in capital for 5–10 years. They aren’t traded on public markets, and exiting early can be challenging without a buyer or sponsor-approved secondary market.

For some investors, especially those who experience life changes, market shifts, or simply want more flexibility, this can become a hurdle.

Enter the 721 UPREIT: A Strategic Exit Strategy

What is a 721 Exchange?

The 721 UPREIT, short for “Umbrella Partnership Real Estate Investment Trust,” is an advanced strategy that allows DST investors to transition their ownership into a REIT (Real Estate Investment Trust). In simple terms, it offers a potential exit ramp from your DST—without triggering a taxable event.

How the 721 Exchange Process Works

Once a DST property is sold and the holding period requirement (typically 2–5 years) is met, the sponsor may offer the opportunity to roll your interest into an operating partnership of a REIT. Instead of receiving cash—which would trigger capital gains—you exchange your interest for Operating Partnership (OP) units in the REIT.

These OP units can often be converted to REIT shares, offering liquidity and diversification, usually within a year of conversion.

Key Benefits of a 721 UPREIT Strategy

Why Investors Are Taking This Route

• Tax Deferral Continues
  Just like a 1031 Exchange, the 721 strategy allows investors to defer capital gains taxes.
• Liquidity Within Reach
  While DSTs are illiquid, REIT shares—especially public non-traded REITs—may provide access to liquidity in 3–4 years.
• Diversification
  Transitioning into a REIT can expose your investment to a wider portfolio of real estate assets across sectors and regions.
• Estate Planning Flexibility
  REIT shares or OP units are often easier to pass on to heirs, sometimes with a step-up in basis.

What to Consider Before Choosing a 721 UPREIT

While it offers flexibility, the 721 option isn’t for everyone:

• Once you convert your DST interest, you can’t do another 1031 Exchange—you’re effectively ending your 1031 deferral chain.

• The REIT structure may involve different risks or fees compared to your original DST investment.

• Not all DST sponsors offer a 721 exit strategy—due diligence is key.

Plan Your Exit with Confidence

Know Your Options Before You Commit

If liquidity or flexibility is important to you, the 721 UPREIT strategy is worth exploring. It’s especially attractive for investors nearing retirement or planning wealth transfers. Having options matters—and knowing your exit strategies is part of smart real estate investing.

Let’s Talk About Your Investment Goals

At The Lynch Group, we specialize in strategic investment planning, including DSTs, 1031 Exchanges, and alternative real estate strategies. We’re here to guide you through every stage of your investment journey.