You cannot 1031-exchange directly into shares of a real estate investment trust. REIT stock is a security, not real property, and Section 1031 only defers gain on real property exchanged for other real property. Investors who ask about exchanging into a REIT are usually really asking whether there is any path from a property sale to REIT-style diversified ownership without paying tax along the way, and there is one, but it takes two separate steps rather than a single exchange.

The path runs through a Delaware statutory trust or other real property interest first, held for a period, then contributed to a REIT's operating partnership under Section 721 in exchange for operating partnership units, which can later convert toward REIT shares. Each step has its own rules and its own tax consequences.

Prior to 2018, some non-real-property assets could still qualify for like-kind treatment, but current law limits Section 1031 to real property only. REIT common or preferred stock is a corporate or trust security representing an ownership interest in an entity that holds real estate, not direct ownership of real estate itself, so it fails the like-kind test regardless of how real-estate-focused the REIT's underlying portfolio is.

This is a firm line, not a gray area open to structuring around: no qualified intermediary arrangement, no identification technique, and no holding period changes a REIT share into like-kind property for 1031 purposes.

Step one is a standard or DST-based 1031 exchange into real property that is like-kind to what you sold. Step two, available later and only if the specific vehicle is structured for it, is contributing that DST or direct property interest to a REIT's operating partnership under Section 721, receiving operating partnership units in return. Some DST sponsors disclose in their offering documents that their affiliated operating partnership may make this contribution available at the end of the DST's hold period; not all DSTs offer this option, so confirm it exists before assuming it will.

The 721 contribution is its own non-recognition event under partnership tax rules, separate from the 1031 exchange that got you to real property ownership in the first place.

Operating partnership units are a partnership interest in the REIT's operating partnership, not REIT shares themselves. Depending on the specific REIT's structure, units may be convertible to publicly traded shares after a holding period, or redeemable for cash under a program with its own caps and pricing formula. Converting or redeeming is generally the point where the deferred gain, compounded through however many prior exchanges got you there, becomes taxable.

Distributions on operating partnership units typically track the REIT's own dividend, giving you REIT-like income during the holding period even before any conversion decision.

Confirm, in writing from the sponsor, whether the specific DST offering you are considering has an actual, not hypothetical, path to a future UPREIT contribution, and under what conditions the sponsor's operating partnership would exercise that option rather than simply selling the property on the open market. Ask what happens if the operating partnership declines to make the offer at the end of the DST's hold — you would then face a standard sale and a new exchange decision instead.

Review the REIT's own portfolio quality, leverage, and distribution history the same way you would diligence any real estate investment, since the eventual UPREIT contribution only makes sense if the REIT you are converting into is one you actually want to own.

This two-step path fits an investor with a long time horizon who is comfortable holding a DST first, is not counting on liquidity within the DST's hold period, and ultimately wants diversified REIT exposure and liquidity more than continued active exchanging. It does not fit an investor who wants REIT-style diversification today, since there is no direct route that avoids the DST holding period first, nor does it fit someone unwilling to give up 1031 deferral permanently once the units convert.

Treat the UPREIT step as a distinct decision made later, not a guaranteed outcome baked into the initial DST purchase, and revisit whether it still makes sense once you actually reach that point in the hold.