Planning What Happens After the DST Hold Period Ends
Every DST has an end date. When the sponsor sells the property, investors receive their share of proceeds and face the same question they faced at the start: exchange again, or pay the tax.
This case study looks at what that means for an investor in their eighties, and at how a 721 UPREIT structure changes the long-term picture — including the significant flexibility it gives up.
Investor Snapshot
- Investor profile
- Richard and Elaine B., in their early 80s.
- Current position
- Exchanged into several DST interests a number of years earlier.
- Approaching event
- Two of the underlying properties were nearing the end of their projected hold periods.
- Primary concern
- They did not want their children navigating 45-day identification deadlines every several years.
- Goal
- A structure that would not require repeated exchange decisions to remain tax-deferred.
The Challenge: Every DST Has an End Date
The original exchange had done what it was meant to do. Management was gone, the portfolio was diversified, and gain remained deferred. But the structure had a recurring requirement built into it.
When a DST property sells, the investor must complete another exchange to continue deferral — with the same 45-day identification window and the same 180-day closing deadline. For an investor in their eighties, that meant either handling the process repeatedly for the rest of their life, or leaving it to a spouse or children who had never done one.
What a 721 UPREIT Strategy Is
Some DST offerings are structured with a potential path into a real estate investment trust. After a required holding period, the property may be acquired by a REIT’s operating partnership, and investors may contribute their interests in exchange for operating partnership units under Section 721 rather than receiving cash.
The contribution itself is generally not a taxable event when the requirements are satisfied. What the investor holds afterward is an interest in a diversified REIT portfolio rather than a fractional interest in specific buildings.
What Changes After a 721 Exchange
This is the part of the strategy that deserves the most attention, because it is a one-way door.
- Future 1031 exchanges generally end. Operating partnership units are not real property, and are generally not eligible for 1031 treatment. The investor gives up the ability to keep exchanging.
- Redemption is governed by the REIT’s program, not by the investor. Redemption terms, timing, limits, and suspension rights are set by the REIT and can change. It is not liquidity in the sense of a publicly traded security.
- Redeeming or converting units is generally a taxable event, which can trigger the gain deferred across every prior exchange going back to the original property.
- Exposure shifts from specific properties to a whole portfolio. The investor no longer owns an interest in identified buildings they evaluated, but a share of a portfolio the REIT manages and changes over time.
- The transaction may not happen at all. A stated potential 721 path is an option available to the sponsor and REIT, not a commitment. Whether it occurs, and on what terms, is outside the investor’s control.
Distributions from REIT operating partnership units are not guaranteed and may be reduced or suspended.
Why This Strategy Could Fit
- Ends the cycle of repeated identification deadlines for an investor who does not want to keep managing exchanges.
- Units may be divisible among heirs more readily than fractional interests in specific properties.
- Provides exposure to a larger, professionally managed portfolio rather than a small number of individual assets.
- Offers a defined redemption program — subject to its terms — where a DST offers essentially none during the hold period.
The Outcome
The investors move toward a structure intended to hold for the remainder of their lives rather than one requiring a decision every several years. The tradeoff is real and permanent: they exchange the flexibility to keep doing 1031 exchanges for a structure that does not require them to.
For investors who expect to keep exchanging, or who want to preserve the option, that tradeoff will not be attractive. For investors planning a final position, it may be worth evaluating carefully with their tax and legal professionals.
Investor Takeaway
Ask what happens at the end of the hold period before you make the investment, not after. If a long-term structure matters to you, that requirement affects which offerings are worth evaluating at the outset — and a 721 path, where available, closes off future 1031 exchanges permanently.
This is a hypothetical case study — the investor described is not an actual client.
Case Study Disclosure
Illustrative example only. This case study does not represent an actual client and is not a guarantee of future results. It is a hypothetical composite informed by situations commonly encountered by real estate investors; the individuals described are not actual clients and the scenario is not an account of an actual transaction. Charts and diagrams are schematic illustrations of structure and do not depict actual amounts, offerings, or results. Photographs are stock imagery and do not depict actual clients, advisors, or properties. The appropriate 1031 exchange or DST strategy depends on an investor’s individual facts, objectives, tax situation, liquidity needs, and risk tolerance. DST and other private placement investments involve material risks, including illiquidity and the potential loss of principal. Nothing on this page is tax or legal advice. Investors should review the applicable offering documents and consult their tax and legal professionals before making an investment decision.