The 721 Exchange: How Accredited Investors Turn a 1031-DST Into Liquid REIT Shares

DST equity raised hit $8.41 billion in 2025, up 49% year-over-year from $5.66 billion in 2024, and Mountain Dell Consulting projects $10-11 billion for 2026 — a big chunk of that capital is chasing a specific exit ramp called the 721 exchange, which lets you convert a Delaware Statutory Trust interest into an operating partnership stake in a REIT, and eventually into freely tradable shares.

If you already own a 1031 DST, you have probably heard a sponsor rep mention a "721 exchange" or "UPREIT conversion" as the eventual off-ramp. That is not marketing filler. According to Mountain Dell Consulting's year-end 2025 report published via AltsWire, DST fundraising has grown for four consecutive years, and a meaningful share of that growth is coming from sponsors who structure their DSTs with a built-in path into a real estate investment trust's operating partnership. I have spent years helping accredited investors move out of active landlord duties and into passive income streams, and the 1031-to-721 combo is the single most misunderstood tool in that toolkit. People think it is one transaction. It is two, separated by years, with a tax bill lurking at the second step that nobody skips for free.

What a 721 Exchange Actually Is

Start with vocabulary, because sponsors blur these terms on purpose. A 1031 exchange, named for Section 1031 of the Internal Revenue Code, lets you sell investment real estate and defer capital gains tax by rolling the proceeds into "like-kind" replacement property within 180 days. A Delaware Statutory Trust, or DST, is a legal structure that lets you own a fractional, passive interest in institutional-grade real estate, such as an apartment complex, a distribution warehouse, or a net-lease pharmacy portfolio, without signing a mortgage or fielding a 2 a.m. call about a broken water heater. DSTs qualify as like-kind property under 1031, which is why they became the go-to landing spot for exchange proceeds.

A 721 exchange, named for Section 721 of the same code, is a different maneuver entirely. It lets the operating partnership of a REIT acquire property (or, in this case, a DST's underlying asset) in exchange for units of that partnership, called OP units, without triggering a taxable event for the person handing over the property. Chain the two together and you get a sequence that starts with a rental property, moves through a DST, and ends inside a REIT's capital structure as OP units that can later convert into REIT shares.

The Two-Step Path, In Order

Step one: you complete a standard 1031 exchange out of directly owned property and into a DST interest. You are now a passive beneficial owner of a trust that holds real estate, collecting your pro rata share of rental income and depreciation, with none of the operating hassle. This part of the process is well worn. Inland Investments, one of the longest-running DST sponsors in the country through its affiliates Inland Real Estate Investment Corporation and Inland Securities Corporation, has run this playbook since the 1960s in various forms and has closed thousands of DST transactions.

Step two happens later, and only if the sponsor built the DST for it and the REIT's operating partnership decides to pull the trigger. When that happens, the operating partnership acquires the DST's real estate in exchange for OP units, issued to you and the other DST beneficial owners in proportion to your ownership. You do not sell anything and you do not touch cash. The OP units you receive are contractually designed to track the value and distribution rate of the REIT's common shares, but they are not the shares themselves. They are a partnership interest in the entity that owns the REIT's properties, sitting one layer below the publicly or non-traded shares that appear on the REIT's own balance sheet.

Only in a third, optional step do you convert those OP units into REIT shares. That conversion is where the tax bill you deferred at step one, and again at step two, finally comes due. The IRS treats an OP-unit-to-share conversion as a sale of the partnership interest, which means capital gains tax and depreciation recapture get triggered at that point. You can hold OP units indefinitely and never convert, collecting distributions the whole time, but the moment you swap into shares you are back in a taxable world.

Who Controls the Second Step (Hint: Not You)

This is the part sponsors gloss over in glossy PDFs. When you buy into a "721-eligible" or "UPREIT-ready" DST, you are buying an option, not a promise. The REIT's operating partnership decides whether, and when, it wants to absorb that specific property into its portfolio. If the asset underperforms, if the REIT's capital needs shift, or if the sponsor's fund closes to new acquisitions, the contribution simply does not happen and you remain a DST holder until the DST itself is sold or refinanced through some other exit.

According to Ares Management's overview of its Ares Real Estate Exchange (AREX) program, the firm structures its DSTs with the explicit intent of eventual contribution into an Ares-managed REIT, but the timing and the decision to proceed sit with Ares as the REIT sponsor, not with the individual DST investor. Per Mountain Dell Consulting data reported by AltsWire and Bisnow, AREX led the DST market with roughly 22% share of the $3.75 billion raised through May 2026, more than double the runner-up, Hines. That scale matters because a large, well-capitalized sponsor is more likely to actually complete the 721 contribution it advertised at the outset. A thinly capitalized sponsor promising the same feature carries more execution risk simply because it may not have a REIT vehicle healthy enough to absorb the asset when the time comes.

Industry data from Inland Investments and a 1031 DST-versus-721-exchange guide published by the accounting and advisory firm EisnerAmper puts typical 721-structured DST hold periods at two to three years before a REIT conversion opportunity arises, compared with five to ten years for a standard DST with no UPREIT feature. If you do convert OP units into shares afterward, plan on an additional one to two year hold before that decision even becomes relevant, since most sponsors build in a minimum seasoning period for the OP units themselves.

The Numbers Behind the Trend

Metric	Figure	Source Period
Total DST equity raised, full year 2025	$8.41 billion	Mountain Dell Consulting, year-end 2025
DST equity raised, full year 2024	$5.66 billion	Mountain Dell Consulting
Year-over-year growth, 2025 vs. 2024	49%	Mountain Dell Consulting
Mountain Dell 2026 full-year projection	$10-11 billion	Mountain Dell Consulting
DST fundraising through May 2026	$3.75 billion	Mountain Dell Consulting via Bisnow, June 2026
Year-over-year growth, Jan-May 2026	24%	Mountain Dell Consulting
Ares Real Estate Exchange market share	~22%, over 2x runner-up Hines	Mountain Dell Consulting
DST investable inventory, May 2026	$3.9 billion across ~100 offerings	Mountain Dell Consulting (Seth Anderson)
First American Exchange Company DST volume growth	55% (2025 to 2026)	Bisnow via Yahoo Finance, June 2026

Read that table as a demand signal, not a guarantee of outcomes. The record inventory figure of $3.9 billion in investable DST equity across roughly 100 offerings in May 2026, according to Mountain Dell's Seth Anderson, up from the prior 2023 high of $3.2 billion, tells you sponsors are racing to originate new deals to meet investor appetite for 1031 replacement property. First American Exchange Company, one of the country's largest qualified intermediaries handling the mechanics of 1031 exchanges, reported DST transaction volume up 55% from 2025 to 2026, which confirms the growth is showing up in actual closed transactions, not just marketing pipeline.

A Named Case Study: Comparing Sponsor Approaches

Not every DST sponsor runs the same 721 playbook, and the differences matter more than the marketing suggests. Ares built AREX specifically to feed its own REIT platform, giving investors a fairly direct line of sight into which vehicle will eventually absorb the asset. Inland Investments, through Inland Real Estate Investment Corporation, has decades of DST sponsorship history and has completed 721 contributions into affiliated Inland REITs in past cycles, though not every Inland DST carries a 721 feature.

ExchangeRight, which sponsors the Essential Income REIT, markets a similar structure aimed at net-lease and grocery-anchored retail assets, with the stated goal of eventually contributing qualifying DST properties into that REIT. Bonaventure Multifamily Income Trust (BMIT) runs a comparable model focused on apartment assets, and Origin Investments offers its IncomePlus Fund as a vehicle that some DST sponsors point toward as a landing spot, though Origin's fund is not itself a public REIT. Brookfield Private Wealth and Kay Properties round out the field of firms active in this space, either as direct sponsors or as distribution platforms connecting investors to multiple DST offerings with varying 721 features.

The lesson from comparing these five or six names is not that one sponsor is better than another in the abstract. It is that the strength of the REIT sitting behind the DST determines whether the 721 promise is real. A DST tied to a REIT with a track record of completed contributions, audited financials, and a diversified property base is a fundamentally different risk than a DST tied to a newly formed REIT with no contribution history. Ask every sponsor for a list of 721 contributions they have actually completed, not ones they say they intend to complete.

Why Investors Choose This Path Anyway

The appeal is straightforward once you see the endpoint. Direct real estate ownership means concentration risk in one property, one market, one tenant base, and full operational responsibility. A DST fixes the operational burden but keeps you concentrated in a single asset or small portfolio. OP units, once you get there, sit inside a REIT that typically owns dozens or hundreds of properties across multiple markets and property types, so the 721 exchange functions as a diversification event as much as a liquidity event. Distributions on OP units generally mirror the REIT's common share distribution rate, so income continuity does not have to break during the transition.

The liquidity upgrade is real but overstated in some sales pitches. Non-traded REIT shares are not the same as shares of a publicly traded company you can sell in seconds on an exchange. Even after conversion, most non-traded REITs offer liquidity through periodic share repurchase programs, often capped at a percentage of outstanding shares per quarter, and those programs can be suspended. If the REIT eventually lists publicly or gets acquired, liquidity improves further, but that is a separate corporate event outside your control as an OP unit holder.

The Honest Risk List

Every deferral has a bill attached, and every added step adds a new way for the plan to not work exactly as pitched.

• The REIT's operating partnership may never contribute your specific DST property, leaving you as a long-term DST holder with no 721 event at all.
• Converting OP units to REIT shares is a taxable event, triggering deferred capital gains and depreciation recapture at whatever your marginal rate is when you convert, not when you originally sold your property.
• Non-traded REIT shares carry limited liquidity even after conversion, governed by repurchase programs the REIT can amend or suspend.
• DST fees stack: acquisition fees, asset management fees, and disposition fees layer on top of whatever fee structure the REIT itself charges after contribution.
• DST investors have no vote on whether or when a 721 contribution occurs. That decision belongs entirely to the REIT sponsor's operating partnership.
• DSTs are illiquid investments suitable only for accredited investors under Regulation D, and sponsor-provided projections on contribution timing are not guarantees.

What To Do Before You Sign

Get the sponsor's actual track record of completed 721 contributions in writing, not a verbal assurance from a wholesaler. Ask how many DSTs that specific sponsor has originated with a 721 feature, how many have actually converted, and what the average hold period was for the ones that did. Run the tax math with your CPA on what a full OP-unit-to-share conversion would cost at today's rates, so the eventual bill is not a surprise. If diversification is your real goal, compare the REIT's actual property portfolio, not just its marketing deck, against the concentration risk you are trying to escape. And confirm with your qualified intermediary early in the 1031 process that the specific DST you are considering is structured to support the 721 feature at all, since not every DST is built that way even when a sponsor mentions UPREIT conversion as a future possibility.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.