How the transaction works.

The path below is the same in every exchange. The timing and the outcome turn on facts specific to the property and the owner.

Investment property

§1031 exchange. Proceeds go to a qualified intermediary, never to you. 45 days to identify, 180 days to close. Tax deferred

DST interest Institutional commercial property, held fractionally. Passive and illiquid.

§721 contribution. The sponsor contributes the property to a REIT’s operating partnership. The timing is the sponsor’s. Tax deferred

OP units Units in the REIT’s operating partnership. Economically equivalent to REIT shares: same distributions, same underlying portfolio.

Nothing further is required. From here it is your choice:

Hold. Distributions continue and so does the deferral.

Hold for life. Heirs may receive a stepped-up basis, and units can be split among them.

Convert a portion, if you want cash. Taxable only on what you convert, in the years you choose.

A Section 1031 exchange remains available while you hold the DST interest. From OP units onward it is not. The §721 contribution is the step that cannot be reversed.

Step one: the exchange. Section 1031 defers the gain when sale proceeds are reinvested into other like-kind real property. Three constraints drive everything:

You never touch the money. A qualified intermediary must hold the proceeds from closing. Taking receipt of the funds, even briefly, disqualifies the exchange.
45 days to identify. Replacement property must be formally identified within 45 days of closing on the property you sold.
180 days to close. The replacement purchase must complete within 180 days of that same closing.

To defer the full gain you generally must acquire property of equal or greater value and replace the debt on the property you sold. These deadlines are statutory. They do not extend for financing that falls through, a sponsor that closes its offering, or a slow decision.

Step two: the replacement property. A Delaware Statutory Trust holds real property and issues fractional beneficial interests. Revenue Ruling 2004-86 established that those interests can qualify as like-kind replacement property, which is what makes the structure work here. The trustee operates under real restrictions. The trust generally cannot renegotiate leases, refinance, or reinvest sale proceeds. That rigidity is what preserves the tax treatment, and why the structure cannot adapt if a property runs into trouble.

Interests are private placements available only to accredited investors. Most are offered under a Regulation D exemption that bars public advertising, and sponsors do not accept subscriptions directly: access is through a broker-dealer or a registered investment adviser. They are illiquid, with no secondary market, and capital is returned only when the trust’s property is sold or contributed under §721.

Step three: the 721 conversion. The property held by the DST may later be contributed to a REIT’s operating partnership under Section 721. Your interest becomes operating partnership units and the deferral continues. Two points are commonly understated. The timing is the sponsor’s, not yours: two to three years is a common expectation, not an obligation. And some programs make the conversion mandatory while others leave it optional. Which one you are buying is a question to settle before investing.

Step four: what you hold at the end. For most owners, the OP units are the end. They pay distributions like REIT shares, represent the same underlying portfolio, and require nothing further of you. Converting them into actual REIT shares is optional, generally available about a year after the contribution, and a taxable event that recognizes the deferred gain. So it is usually done only when cash is wanted, and only in the amount wanted. Held for life instead, the units may receive a stepped-up basis.

Why owners consider it →