Both a 1031 exchange and a 721 transaction, commonly referred to as a “721 Exchange”, allow Exchangers to defer capital gains and other taxes on the sale of business or investment use real estate when proper procedures are followed, however they do have differences and they cannot be used interchangeably as each has specific considerations.
What is a 1031 exchange?
1031 exchange is one of the most popular tax strategies available when selling and buying real estate “held for productive use in a trade or business or investment”. Property owners of real estate used for business or investment use can utilize a 1031 exchange on the sale of the property to defer capital gains, depreciation recapture, state, and net investment income tax when they reinvest the proceeds from the sale into the purchase of qualifying property. It does not have to be the same kind of property. All types of real estate are considered like kind to all other types.
In a 1031 exchange, the Exchanger is not permitted to receive nor control and is not allowed to “benefit” from the funds from the sale of their sold property, the relinquished property. An example of benefitting would be to pledge the account as collateral for a loan. The funds are held with a Qualified Intermediary until the time the Exchanger is ready to close on the sale of their new property, the Replacement Property. The funds are then directly used to purchase the replacement property. Because the Exchanger never actually had any access or benefit from the funds and since the Exchanger traded the relinquished property for the replacement property through the Qualified Intermediary, they may defer the taxes they would normally pay if they had sold the property outright and retained the money.
What is a “721 exchange”?
A 721 exchange, formally referred to as a 721 Umbrella Partnership Real Estate Investment (UpREIT), is similar to a 1031 exchange in that a real estate investor can sell a property used for business or investment use and defer taxes on the sale if they reinvest the funds by following specific criteria.
In a 721 exchange, the investor either (1) transfers ownership of the relinquished property to the REIT and receives an equivalent value in the form of operating partnership units or (2) or sells to a third party of choice using a 1031 exchange and investing the funds into a DST, often made available by the REIT. When sufficient time passes, usually two years, the DST interest can be traded for Real Estate Investment Trust (REIT) shares.
Similarities and Differences of a 1031 Exchange and 721 Exchange
Similarities
There are a handful of similarities between a 1031 exchange and a 721 exchange, which include:
- Property being sold must be held for business or investment use
- When properly executed, both defer capital gain tax, depreciation recapture, state and net investment income tax
- Both allow for investment diversification
- Both allow heirs of the Taxpayer to get a “step-up” in basis if they pass away still vested with the REIT interest or Replacement Property interest in the case of a 1031 exchange
Differences
The differences between a 1031 exchange and a 721 exchange are notable and include:
- A Qualified Intermediary facilitates a 1031 Exchange, while a 721 exchange is facilitated by the REIT sponsor
- 721 exchanges do not have the same timelines, 45-day Identification and 180-day Exchange period, as a 1031 Exchange 1031 exchange Replacement Property Identification Rules do not apply to 721 exchanges
- In a 721 exchange a REIT must be willing to either acquire your Relinquished Property, or go through the process described above with a 1031 exchange and later trade for the REIT shares.
- In a 721 exchange, once an investor sells the property to the REIT, they cannot do another exchange upon sale of the shares held. Once the REIT shares are sold, all the deferred taxes become payable regardless of entering into a new REIT investment. However, under 1031 exchange a Taxpayer can do consecutive exchanges indefinitely to continue deferral.
Both 1031 and 721 exchanges provide real estate investors the opportunity exit out of existing real estate investment and reinvest without tax consequences. However, based on the details above they are unique and advanced planning and a thorough understanding should be in place prior to embarking on either. It is always recommended to talk with your CPA, Tax Advisor, or Financial Advisor prior to implementing any tax deferral strategies.
721 Transaction Trends in 2025
In 2025, the tax-deferred real estate landscape surrounding 1031 Exchanges and 721 UPREIT transactions, commonly referred to as “721 Exchanges”, continued to expand. Platforms such as JLL Income Property Trust have executed multiple full-cycle 721 UPREIT transactions totaling approximately $1.2 billion since 2019, with nearly 30% occurring between 2023 and 2025, signaling increased activity in recent years. As this information highlights investors are increasingly recognizing that 1031 Exchanges with DST as Replacement Property and UPREIT strategies play a vital role in long-term wealth preservation and portfolio evolution. Below, we highlight the key 2025 trends driving this shift.
721: A Strategic Next Step After A 1031 Exchange
More investors are discovering the flexibility of combining a 1031 Exchange with a Section 721 UPREIT contribution as part of their long-term strategy.
Here’s how it works:
- Start with a 1031 Exchange into a Delaware Statutory Trust (DST) for tax deferral and diversified real estate exposure.
- Years later, consider contributing those DST interests into a REIT through a 721 UPREIT transaction, unlocking liquidity and portfolio growth potential.
Important Compliance Notes:
- A 721 contribution should generally occur at least two years after acquiring DST interests in a 1031 Exchange.
- There can be no promise or guarantee at the time of DST purchase (using 1031 proceeds) that a 721 transaction will happen.
- Investors must acquire DST interests for qualified use, not with the intent of immediate resale into a REIT.
- This approach offers a pathway from direct real estate ownership to institutional-quality REIT investment, while maintaining tax efficiency.
Optionality Beats Mandatory Conversions
As DST offerings mature, sponsors increasingly include optional UPREIT conversion paths.
Investors Focus on Long-Term Tax Deferral and Estate Planning
721 transactions aren’t just for tax deferral — they’re part of smarter long-term planning. When paired with a 1031 strategy, UPREIT contributions can help investors transition into diversified REIT ownership while maintaining tax deferral and positioning assets for heirs to receive a step-up in basis.
Education and Due Diligence Are More Important Than Ever
With new structures and optional strategies emerging, understanding the differences between 1031 and 721 transactions — including timing rules, facilitator roles, and deferral mechanics — is critical.
Updated 12.18.2025