Many real estate investors reach a point where they want to simplify ownership. Managing tenants, repairs, and day-to-day operations can lose its appeal over time. When that happens, passive replacement options often become part of the conversation during a 1031 Exchange.
Two structures tend to appear frequently in that search: the Delaware Statutory Trust (DST) and the 721 UPREIT. At first glance they can seem similar. In some cases, they even begin the same way.
Tina Colson, Director of Business Development at Equity Advantage, often sees investors assume they are entering a Delaware Statutory Trust without realizing the long-term structure may actually lead somewhere else.
Understanding that difference can shape how an investor plans the next stage of their portfolio.
Why DSTs and 721 UPREITs Get Confused
The confusion often starts with how these investments are introduced.
A Delaware Statutory Trust allows investors to place Exchange proceeds into a professionally managed real estate portfolio. Investors hold beneficial interests in the trust while the properties themselves are managed by experienced operators.
In some investment programs, however, the DST is only the starting point.
Tina has seen situations where investors believe they are entering a standard DST, while the long-term plan involves transitioning the investment into a 721 UPREIT. From the investor’s perspective, the early stages can look identical.
The difference shows up later in how the investment ultimately exits.
How a Delaware Statutory Trust Works
A Delaware Statutory Trust is designed for investors who want real estate exposure without the responsibility of managing property themselves.
Exchange proceeds are invested into a trust that owns income-producing real estate, where professional managers handle the property and investors receive income distributions. Tina explains that those distributions typically show up as a monthly check in the mail, along with a K1 or 1099 at the end of the year.
That structure does come with an important tradeoff. DST investments are not liquid. Most portfolios expect a hold period of about 6 to 10 years depending on the underlying assets, during which investors collect income generated by the properties.
When the portfolio eventually sells, investors can complete another 1031 Exchange and move their capital into new real estate. In practical terms, that means investors can exchange into the DST and exchange out of it when the properties are sold.
For many investors, that continued Exchange flexibility is the central advantage of the structure.
Where the 721 UPREIT Changes the Strategy
The 721 UPREIT follows a different path.
These investments often begin with a Delaware Statutory Trust structure. Over time, however, the investor’s interest converts into units of an operating partnership connected to a real estate investment trust.
At that point, the investor no longer holds a direct real estate interest in the same way.
Instead, the investment behaves more like stock.
Tina explains that this conversion marks a major shift. Once the investment becomes part of the 721 structure, the ability to complete another 1031 Exchange disappears. Instead, investors receive stock that can be sold when liquidity becomes available.
Comparing Liquidity and Exit Options
The timing and exit strategy also differ between these two structures.
With a Delaware Statutory Trust, investors generally commit their capital for six to ten years depending on the portfolio. During that time they receive income distributions, and when the properties sell they can complete another 1031 Exchange if they choose.
The 721 UPREIT introduces liquidity in a different way.
After conversion, investors hold operating partnership units tied to the larger real estate investment trust. Liquidity may arrive in roughly three to five years depending on the program. At that point investors can sell those units similar to selling stock.
Selling those units, however, does not allow another Exchange.
Aligning the Structure With Your Investment Goals
Both structures serve different roles depending on what an investor wants next.
A Delaware Statutory Trust can appeal to investors who want passive income while preserving the option to complete another 1031 Exchange later. The tradeoff is a longer hold period and limited liquidity during the life of the investment.
A 721 UPREIT offers a path toward liquidity through partnership units that function more like stock. That path can lead to earlier access to capital, but it also ends the ability to perform future Exchanges.
The most important step is understanding where the structure ultimately leads.
If you are considering a 1031 Exchange and exploring options such as DSTs or 721 UPREITs, contact Equity Advantage to speak with an Exchange expert about how these structures may fit your long-term investing strategy.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
FAQs About DSTs, 721 UPREITs, and 1031 Exchanges
What is the difference between a DST and a 721 UPREIT in a 1031 Exchange?
A Delaware Statutory Trust (DST) allows investors to complete a 1031 Exchange and remain invested in real estate held by a trust. When the property portfolio sells, investors may complete another 1031 Exchange. A 721 UPREIT structure eventually converts the investment into stock, which means investors can sell their shares when liquidity becomes available but can no longer complete another Exchange.
How long is money typically invested in a Delaware Statutory Trust?
DST investments are generally not liquid for about 6 to 10 years depending on the portfolio. During that time investors typically receive monthly income distributions and tax documents such as a K1 or 1099 at the end of the year.
Why do investors sometimes confuse DSTs and 721 UPREITs?
DSTs and 721 UPREITs can look similar at the beginning because some 721 UPREIT strategies start with a DST investment. Investors may believe they are entering a standard DST, but the structure may later convert into a 721 UPREIT, which ends the ability to complete future 1031 Exchanges.
