Private and Non-Traded REITs: How the 721 Exchange Fits

By Jerry Baker

Private and public non-traded REITs let you invest in real estate, with rules that can limit access to your money. A Section 721 contribution is a separate way to move property into a partnership for units, with possible tax deferral. This guide explains what you may own, how you can leave, and which tax steps need review.

Start by naming what you will own

A picture of an apartment building does not tell you what appears on your ownership records. You might own REIT shares, units in a REIT's operating partnership, or an interest in a Delaware statutory trust. These interests can be connected to the same business group and still have different rights.

I would put the exact legal name and security type at the top of the review. Below it, write who controls the assets, who makes distributions, and who can approve an exit. This simple step can prevent a long conversation in which everyone uses “the REIT” to mean something different.

A REIT is a company that owns or finances real estate. Public non-traded REITs can register their offerings with the SEC without listing their shares on an exchange. Public reporting does not create ordinary stock-market liquidity. [1]

A private offering instead relies on an exemption from registration. Investor eligibility depends on that exemption and the offering's terms; do not assume every private offering has identical rules. Private securities can carry transfer restrictions and limited disclosures. [2]

Buying shares and contributing property are separate paths

A cash investor may subscribe for REIT shares under an offering's terms. A property owner considering a 721 transaction instead needs an agreement for the contribution of property to a partnership. Who receives the property, what you get back, and the tax rules all matter.

Section 721 generally lets an owner contribute property to a partnership for units without current gain or loss. The statute includes an investment-company exception, and other tax rules can affect the transaction. It is a starting rule, not a promise that every transaction labeled “721” is fully tax-deferred. [3]

In an UPREIT arrangement, the REIT holds an interest in an operating partnership, often called the OP. A contributing owner can receive OP units. Those units are not already REIT shares, even if documents connect their economics or provide a possible later exchange.

Buying shares after a taxable property sale does not undo that sale's tax consequences. Nor does a direct qualifying 721 contribution require a prior 1031 exchange or a DST. Review the actual path proposed for your property and your tax position.

Review the destination before the tax route

Tax deferral can be valuable. It does not make the destination investment suitable. I want to understand what I may own later just as well as the property I own now.

Look at property types, locations, major tenants, debt, and planned capital spending. Ask whether growth depends on buying more assets, improving existing assets, or both. A portfolio with many properties may still rely on one economic driver.

Then examine management and incentives. Who makes acquisitions? Who approves transactions with related companies? How are fees calculated? What rights do outside investors have if the business changes direction?

I would compare the current property with the proposed investment on the same page. Include income, debt, control, exit options, costs, and concentration. The point is not to declare one structure better. It is to understand what you gain and what you give up.

NAV is a valuation process, not cash in hand

Net asset value, or NAV, generally starts with asset values and subtracts liabilities under the program's valuation policy. The policy explains who estimates value and when it changes. It also explains which other items count. Read it alongside the financial statements.

A current issuer example shows why details matter. BREIT's July 2026 NAV supplement includes valuation assumptions and a reconciliation from accounting equity to NAV. Those are different measures built for different purposes. The filing does not turn either measure into a guaranteed exit price. [4]

For a simple hypothetical, assume properties worth $150 million, other assets of $10 million, and liabilities of $70 million. Net value is $90 million. With 9 million equal units, the figure is $10 per unit. If property estimates fall by $15 million, net value falls to $75 million, or about $8.33 per unit, before other changes.

The property-value decline is 10%, while the net-value decline is about 16.7%. Debt changes the effect on owners. A statement may show that change later than a stock price would. A delay in reporting does not remove the loss.

Read repurchase terms as conditions

A repurchase plan gives you a process for asking for cash. It may not obligate the company to provide the cash when requested. Review the limits, exceptions, pricing date, notice rules, and the board's ability to change the plan.

For a dated example, BREIT's June 30, 2026 filing describes limits based on the whole company's NAV. They are 2% monthly and 5% quarterly, using stated measurement periods. It also allows fewer or no repurchases and possible modification or suspension. Unfilled requests must be resubmitted under the stated terms. These are one issuer's rules, not legal limits shared by all REITs. [5]

A limit based on the whole company's NAV is not your personal right to withdraw that percentage each month. Your result can depend on other investors' requests, program capacity, priority rules, and decisions made under the documents.

Ask for the terms that apply to your actual interest. OP units can have different restrictions from REIT shares. A share repurchase brochure cannot answer every question about an OP holder's exit.

A partial payout example

Suppose a fictional fund has $1 billion of NAV and allows up to $20 million of repurchases during a period. Investors submit $80 million of eligible requests. Assume the fund uses the full capacity and treats all requests equally. With no priorities or deductions, it would pay 25% of each request.

An investor requesting $100,000 would receive $25,000. The remaining $75,000 would still be invested. That result is an illustration, not a prediction about any named program.

Do not build a schedule by assuming the same fill rate will repeat. Next period's requests, capacity, prices, and policy could change. Even if all requests were met last month, that does not establish what will happen next month.

For household planning, I would test a period with no exit cash at all. Could you still pay taxes, medical bills, and planned family costs? If not, commit less money or rethink the choice. An investment should not require your life to cooperate with its repurchase calendar.

Follow the fees through every stage

The SEC's fee guidance explains that both ongoing and transaction costs reduce investor returns. Review the complete schedule rather than only the management fee. Share classes can also carry different costs. [6]

For a proposed DST-to-OP path, I would make a separate column for each stage. List acquisition and offering expenses, ongoing property and asset management costs, any contribution expenses, and the destination's fees. Check whether the return illustration already includes each cost before subtracting it again.

Consider a purely hypothetical $500,000 investment with a 2% entry cost. That uses $10,000, leaving $490,000 before other costs. A 1% annual charge on that amount would be $4,900 if the balance stayed constant. Actual fee bases may differ, which is why the definition matters as much as the percentage.

I also want to know who benefits from moving the asset into the destination. Related-party fees do not automatically make a transaction improper. They do make it important to understand approval procedures and the investor's alternatives.

Where a DST can enter the picture

Revenue Ruling 2004-86 addresses a DST with specific limits on trustee powers. Under the stated facts, owners are treated as owning portions of the real property for federal tax purposes. An exchange can qualify if the other 1031 rules are met. It does not approve every Delaware trust or every later transaction. [7]

Some offerings describe a possible later contribution to an operating partnership. That possibility belongs in the original investment review. Read whether the move is optional for the investor, controlled by another party, or required if specified conditions occur.

I would ask what happens if the expected contribution never occurs. Does the property investment still make sense on its own? What are the other possible outcomes? An attractive destination should not distract from the asset and terms you own first.

There is no universal date on which a DST becomes a REIT investment. Any lockup, option period, or target date comes from the relevant documents and facts. A target is not a guarantee.

The 1031 boundary changes after contribution

The 1031 regulations generally exclude ordinary corporate shares and partnership interests from qualifying replacement real property. That includes ordinary REIT shares and OP units. A partnership's real estate does not become your directly owned replacement property merely because you own units. [8]

This changes future flexibility. An investor who wants to choose another property exchange later should understand the effect before entering an OP structure. A later sale of the partnership's property and a sale of your units are also different events.

Tax counsel should review the whole planned sequence before it begins. A valid direct 721 contribution is not inherently taxable. But a 721 label at the end of a plan does not validate the earlier 1031 exchange. That exchange must meet its own rules.

That distinction is worth slowing down for. The question is not merely whether the next step has a tax-code number. It is whether each step, and the arrangement as a whole, works under the applicable rules.

Deferral preserves a tax history

Section 722 generally bases a contributor's partnership interest on contributed cash and adjusted property basis, increased by specified recognized gain. It does not simply reset tax basis to the property's current market value. Liability adjustments and other rules also matter. [9]

Section 704(c) requires allocations that account for the difference between contributed property's tax basis and fair market value. The built-in gain does not vanish because the owner receives units in a larger pool. [10]

Take a simplified debt-free example. An owner contributes property worth $900,000 with a $300,000 adjusted basis, receiving only partnership units in a qualifying transaction. Ignoring all other adjustments, the initial outside basis is $300,000, not $900,000. The $600,000 difference remains relevant to future tax calculations.

I would want the CPA to preserve the basis records, depreciation history, contribution values, and allocation method. These records may matter years later, when everyone has forgotten the numbers in the original presentation.

Debt and cash can create current tax

Under Section 752, a decrease in a partner's share of liabilities is generally treated as a distribution of money. An increase is generally treated as a contribution of money. The actual liability allocation requires its own analysis; it is not necessarily your ownership percentage multiplied by every loan. [11]

Section 731 generally recognizes gain when money distributed exceeds the partner's adjusted outside basis immediately before the distribution. Read together, these rules explain why a tax bill can arise even when no cash arrives in the investor's bank account. [12]

Suppose a CPA finds that a net debt reduction creates a $150,000 deemed cash distribution. The investor has $120,000 of adjusted outside basis just before that step. Assuming the general rule applies and no other adjustment changes the result, the excess is $30,000. That is the illustrative gain, not the investor's tax bill.

A real calculation must account for debt type, guarantees, cash, basis adjustments, and transaction structure. I would not use a portfolio's headline loan-to-value ratio as a shortcut for that work.

A waiting period is not a complete tax opinion

The disguised-sale regulations examine property transferred to a partnership and money or other consideration transferred back. Transfers within two years are generally presumed to be a sale unless the facts clearly show otherwise. Transfers more than two years apart have the opposite presumption, but facts can rebut it. [13]

This does not require every DST to be held for two years. Nor does it promise safety on the day after two years. Counsel must review the actual transfers, obligations, business risks, and applicable exceptions.

I would be cautious about a sales explanation that reduces the whole analysis to a calendar. A lockup may serve a business purpose, a securities-law purpose, or a tax-planning purpose. Ask which one the document addresses and what it does not resolve.

Plan the tax cost of leaving

Selling or exchanging partnership units generally creates gain or loss under Section 741. Section 751 has separate rules for certain assets. In a typical UPREIT, swapping OP units for REIT shares is generally taxable. The exact steps and type of gain still need review. [14]

Getting shares instead of cash does not necessarily provide cash to pay the tax. If the shares are not freely marketable, that mismatch can be especially important. Ask the CPA to model the tax and the investment team to explain the actual liquidity.

A tax protection agreement may limit certain actions or provide a remedy. Read what it covers, how long it lasts, and who must pay. Do not translate a limited contract into a promise that no tax can ever arise.

Before choosing the route, write down the intended exit, an earlier exit caused by family needs, and a delayed exit. Review all three. The best-case schedule is only one part of the decision.

Cash payments and tax reporting can diverge

Partners generally report their distributive share of partnership income whether or not it is distributed. Schedule K-1 provides information needed for the partner's return. Taxable income and cash received can therefore differ. [15]

REIT shareholders instead may receive distributions with ordinary-dividend, capital-gain, or nondividend components. Nondividend distributions generally reduce basis, with gain once basis is exhausted. This tax label alone does not prove whether operating cash covered the payment. [16]

For example, a household might receive $20,000 in cash while its tax reports show a different taxable amount. I would set aside taxes based on the CPA's estimate. Spending the full payment and hoping the tax works out is a poor plan.

Ask in advance which reports to expect, when they are expected, and whether state filings may be needed. These details affect the cost and workload of owning the investment, even when the property management is passive.

Test the plan against an ordinary family year

Start with the bills you know, not the return you hope for. Suppose a couple expects to spend $72,000 over the next year. They have $48,000 from other reliable sources and plan to use $24,000 from a property investment. That last amount is the part to test.

If the investment pays 25% less than expected, cash falls to $18,000. The family has a $6,000 gap. If it pays nothing for six months and then resumes the original pace, the year's cash would be $12,000. The gap would be $12,000, before any tax changes.

Neither outcome is a forecast. They show what a payment change could mean at home. Would the family use a separate reserve, cut spending, or try to sell something? Which choice is actually available?

Now assume a car must be replaced while a repurchase request remains unfilled. A paper value on a statement cannot pay the dealer. The family needs money it can reach without relying on a new approval.

I would keep this cash test next to the tax estimate. A plan that saves tax but leaves the family short of usable cash needs more work. It may mean investing less, keeping more reserves, or choosing another route. Those are sensible adjustments, not failures.

Bring the documents to one decision meeting

A useful review brings together the investment documents, the tax analysis, and your household plan. I would rather resolve inconsistencies before closing than discover them after the money has moved.

The investment review should identify what you own now and later, the fees, risks, control rights, and exit rules. Your CPA should review basis, debt changes, allocations, current tax, and future reporting. Your attorney should explain the contribution agreement, options, voting rights, and any tax protection contract.

Finish with a short written comparison of the proposed route and realistic alternatives. Include keeping the property, a taxable sale, or a different qualifying exchange when relevant. Deferring tax is one result to weigh. It should not crowd out income needs, liquidity, flexibility, and the quality of the investment.

Frequently asked questions

Can I buy non-traded REIT shares directly in my 1031 exchange?

Ordinary REIT shares generally do not qualify as replacement real property. A Section 721 property contribution to a partnership is a different transaction. It is not a direct purchase of replacement REIT shares under 1031.

Are OP units the same as REIT shares?

No. OP units are partnership interests. Their rights, reporting, transfer rules, and possible exchange terms can differ from the REIT's shares. Read the agreement for the units you would receive.

Does every non-traded REIT have a 2% monthly withdrawal limit?

No. That figure appears in some programs, including the dated issuer example above. It is not a universal rule or a personal withdrawal guarantee. The actual program can have different terms or no repurchase plan.

Does a 721 contribution erase my old gain?

Generally, qualifying nonrecognition defers gain rather than erasing its tax history. Basis, built-in gain allocations, debt changes, and later transactions still matter. Have your CPA keep the contribution records.

Does waiting two years make the whole plan safe?

No. The disguised-sale rules contain rebuttable presumptions, not blanket approval of a DST-to-OP sequence. Other tax and investment questions remain. Counsel should review the full facts.

What if I need cash sooner than expected?

The available exit may be limited, delayed, or taxable, and the investment's value may have fallen. Review early-exit terms before investing and keep essential near-term spending outside a plan that depends on uncertain repurchases.

Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.