Chapter 5
DSTs vs. 721 UPREITs
Delaware Statutory Trusts vs. 721 UPREIT structures.
Investors completing a 1031 exchange often encounter two primary passive replacement options: traditional Delaware Statutory Trusts (DSTs) and 721 UPREIT structures. While both can provide tax deferral and reduce management responsibilities, they serve different purposes and involve different tradeoffs.
Core Structural Difference
In a traditional DST, the investor owns a fractional interest in specific real estate assets held inside a trust. The investment has a defined (though not guaranteed) holding period, after which the sponsor typically sells the properties.
In a 721 UPREIT structure, the investor contributes their DST interest (or sometimes direct property) into a Real Estate Investment Trust’s Operating Partnership in exchange for Operating Partnership (OP) units. This converts the investment into an interest in a much larger, diversified REIT portfolio.
Liquidity Potential
This is one of the most significant differences. Traditional DSTs generally offer little to no liquidity until the underlying properties are sold. 721 UPREIT structures often provide a potential path to liquidity through eventual conversion of OP units into REIT shares (subject to the REIT’s share repurchase program and other limitations).
Diversification
A single DST typically owns one or a small number of properties. A 721 UPREIT generally provides exposure to a large, diversified portfolio of assets across multiple property types and geographies.
Future Exchange Flexibility
Traditional DST interests can often be exchanged again in a future 1031 exchange (subject to availability and timing). Once an investor converts into a 721 UPREIT, they generally lose the ability to perform another 1031 exchange with those proceeds.
Risk and Control
Both structures involve reliance on a sponsor or REIT management team. However, 721 UPREITs typically offer even less investor control than DSTs due to the scale and structure of the REIT.
Estate Planning Considerations
Both structures can offer estate planning benefits, including a potential step-up in basis at death. Some investors prefer the 721 UPREIT structure because it may provide heirs with more flexibility regarding liquidity.
Which Structure is More Appropriate?
Traditional DSTs are often better suited for investors who want to maintain the option for future 1031 exchanges and prefer defined, property-specific investments. 721 UPREIT structures tend to appeal more to investors who prioritize potential future liquidity and broader diversification, and who are comfortable with a longer-term, less flexible ownership model.
Which Structure Better Fits Your Investment Goals?
If you would like a side-by-side comparison of DSTs and 721 UPREIT structures based on your specific situation, schedule a consultation or a brief call today by calling (949) 722-1031.
This content is educational and is not tax or legal advice. Please consult your CPA and attorney.
This content is educational and is not tax or legal advice. Please consult your CPA and attorney.
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