A 721 UpREIT exchange offers investors a unique opportunity. It allows them to do a 1031 exchange into a Delaware Statutory Trust (DST) and then, at a later date (usually 3 or so years), exchange their beneficial interest for shares in a real estate investment trust (REIT). This flexibility empowers investors, giving them the freedom to make strategic decisions about their investments.
1. A DST investor who doesn’t want to do another 1031 exchange
1031 exchanges can be stressful and time-consuming. The holding period for many DSTs can range from 4 to 7 years or longer. This means that if you buy a DST, it will likely eventually be sold, and you may be faced with another 1031 exchange. Many investors don’t want to go through the 1031 process again. With a 721 UpREIT, a DST investor will not need to do another exchange. Once an investor receives shares of the REIT, they can be held indefinitely.
2. A DST investor who is looking for more liquidity
For a DST investor who values liquidity, the 721 UpREIT is an attractive option. With a DST, your equity is tied up for an average of 4 to 7 years. However, with a 721 UpREIT, your shares can become liquid (either monthly or quarterly) after only approximately 3 years. This increased liquidity can provide a sense of financial security and control. For many 1031 investors who have concerns about the longer DST hold periods, the 721 UpREIT option provides a possible solution, enhancing their financial peace of mind.
This UpREIT structure works particularly well for retirees whose net worth is tied to real estate. Before the UpREIT, these investors had limited options due to real estate’s illiquid nature.
With the upREIT structure, investors have the power to tap into their real estate equity on their own terms. They can cash out pieces of their position over time, giving them a sense of empowerment and control over their investments.
Additionally, the ability to cash out incrementally can be a prudent tax planning strategy. The flexibility to time liquidations allows investors to work with their CPAs to sell shares in years when they may be in a lower tax bracket.
3. A DST investor thinking about their heirs
Many retirees have a significant percentage of their net worth tied to their real estate portfolio. As they are crafting their estate plan, they may be left pondering:
Both DST interests and REIT shares can easily be divided among multiple heirs, and all management decisions are made by the asset and property managers.
4. A DST investor who is looking for greater diversification
There are both single-property and portfolio DSTs (usually 2-4 or more properties of the same asset class). While DSTs can help you diversify (minimum investment amounts start at $25,000), most REITs contain dozens and sometimes hundreds of individual properties that can vary by location, business plan, loan/leverage, and asset class. Investors seeking to mitigate investment risk through diversification may choose a DST with a 721 UpREIT option.
From a liquidity, diversification, estate, and tax planning perspective, the 721 UpREIT exchange can be a viable solution for many DST investors.