The 721 Exchange UPREIT Exit Strategy for Delaware Statutory Trust Investors Explained

 

One of the most important questions Delaware Statutory Trust real estate investors need to ask themselves is, “What is my long-term, exit strategy?” Most Delaware Statutory Trust (DST) investments are typically held for approximately 5-10 years (although it could be shorter or longer). After that, the DST investment will typically go “Full-Cycle”, a term used to describe a DST property that is purchased on behalf of investors and then after a period of time is sold on behalf of investors. While the two most common exit strategies for DST investors include cashing-out and paying taxes or continuing with another 1031 Exchange, a third optiion exists for investors in the form of a 721 UPREIT. 

What is a 721 UPREIT Exchange?

The term “UPREIT” is short for Umbrella Partnership Real Estate Investment Trust, which is an operating partnership subsidiary of a REIT that holds and operates real property. Section 721 of the Internal Revenue Code allows owners of real estate property to contribute, on a tax deferred basis, their physical property to a partnership, in exchange for interests in the partnership ( a 721 Transaction). This structure allows holders of real estate to exchange real property for economic interest in the REIT in the form of operating partnership units by contributing that property to the partnership in a 721 Transaction. The operating partnership units have economic rights that are identical to the rights of the shares of the REIT, and after a designated holding period can be, if the investor chooses to, converted into shares of the REIT (in a taxable transaction) for liquidity purposes. Investors seeking to defer capital gains taxes while increasing diversification in real estate should consider using a 721 Exchange to realize the several potentail benefits that are explained in this informative podcast episode by Kay Properties.