Best 1031 Exchange Alternatives for Real Estate Investors
Providing Better 1031 I DST I 721 UPREIT Solutions I $550M Co-invest
After more than a decade in real estate and finance, we've watched countless investors struggle with the limitations of traditional 1031 exchanges. Sometimes you need to reduce management responsibilities, increase liquidity, or diversify beyond owning single assets - and a standard exchange just doesn't fit.
At Bonaventure, we help property owners navigate these exact situations. With $2.7B in assets under management and over $550M co-invested alongside our clients, we've helped develop multiple alternatives that can help defer taxes while achieving your actual investment goals.
The Two-Step Tax-Deferral Strategy: 1031 → DST → 721
Sophisticated investors increasingly use a two-step path to move from active property ownership into fully passive, tax-efficient institutional real estate — without triggering capital gains.
Step 1: 1031 Exchange into a DST
Investors sell their property and, within 45/180-day IRS deadlines, reinvest through a Qualified Intermediary into a Delaware Statutory Trust (DST)—a fractional interest in institutional-quality real estate that qualifies as "like-kind" under IRS Rev. Rul. 2004-86.
Result: Taxes deferred, income maintained, and management eliminated.
Step 2: DST Roll-Up into a 721 UPREIT
After the DST's hold period (typically 2–5 years), the sponsor may contribute the underlying assets into an affiliated REIT via an IRC §721 exchange. Investors swap their DST interests for Operating Partnership (OP) Units, deferring taxes again while gaining diversification, potential liquidity, and estate-planning benefits.
Result: Continuous tax deferral, exposure to a broader institutional portfolio, and optional liquidity over time.
In short:
Sell → 1031 into a DST → 721 into a REIT.
The investor keeps deferral, gains scale, and transitions from property owner to institutional partner.
Understanding Your Options Beyond Traditional 1031 Exchanges
Delaware Statutory Trusts (DSTs): Fractional Ownership Without the Headaches
Delaware Statutory Trusts qualify as replacement properties in a 1031 exchange, which means you can transition from directly-owned property to DST ownership and vice-versa. A DST is a legal entity created under Delaware law that allows multiple investors to hold beneficial interests in a property. You own an undivided beneficial interest in professionally managed real estate.
DSTs provide access to institutional-quality properties like this modern apartment complex without direct management responsibilities.
Key Benefits:
- Complete elimination of property management responsibilities
- Access to institutional-quality properties that would be unattainable individually
- Professional asset management and maintenance
- Regular distributions (though not guaranteed)
Important Considerations:
- You relinquish control over property decisions
- Limited ability to leverage additional financing
- Fees for professional management services
- Reduced potential for value-add improvements
DSTs have become increasingly popular for executing 1031 exchanges, particularly for investors seeking passive income, tax deferral, and diversification. This option significantly alleviates stress associated with direct property management.
Since DST investments involve fractional ownership of a property that already exists and has been vetted, the sales process moves quickly. Unlike other purchases that could include inspections, repairs, and other delays, a DST could close in a matter of days.
721 Exchanges: REIT Share Alternative
A 721 Exchange, also known as an UpREIT, enables institutional property owners to contribute their investment property to a Real Estate Investment Trust (REIT), deferring capital gains taxes while gaining access to REIT benefits. Unlike a 1031 Exchange, which involves swapping one property for another "like-kind" property, a 721 Exchange allows property owners to exchange real estate for Operating Partnership (OP) units.
The term "721 exchange" refers to Section 721 of the Internal Revenue Code, which permits tax-deferred contributions of property to a partnership. A 721 exchange is a tax-advantaged investment strategy that allows you to contribute real estate to a partnership in exchange for ownership interests—typically in the form of operating partnership (OP) units. This process is facilitated through an UPREIT (Umbrella Partnership Real Estate Investment Trust) structure.
How 721 Exchanges Work:
- You contribute appreciated property directly to a REIT
- Receive operating partnership units in exchange
- Like a 1031 Exchange, the 721 Exchange allows you to defer capital gains taxes associated with selling property
- Diversification into a professionally managed portfolio
- Potential for liquidity through conversion options
When 721 Exchanges May Be Appropriate:
- Direct property management has become burdensome
- Major capital improvements are needed that you prefer not to fund
- Greater liquidity than direct real estate is desired
- Diversification across multiple properties is a priority
An UPREIT exchange doesn't have the stringent deadlines of 1031 exchanges. However, once ownership is converted into REIT shares, future 1031 Exchange eligibility is lost. Additionally, the OP units themselves are not eligible for 1031 exchange treatment.
Opportunity Zone Investments: Tax Benefits with Community Impact
The 2017 Tax Cuts and Jobs Act created the Opportunity Zones program, designed to encourage investment in economically distressed communities. According to the IRS Opportunity Zones FAQ, the program provides several tax benefits for investing unrealized capital gains in designated Opportunity Zones:
Opportunity Zone Benefits:
- Deferral of capital gains until the earlier of the date on which the investment in the Qualified Opportunity Fund (QOF) is sold or exchanged, or December 31, 2026
- If the QOF investment is held for at least 5 years, there is a 10% exclusion of the deferred gain. If held for at least 7 years, the 10% exclusion increases to 15%
- If you hold the investment in the QOF for at least 10 years, you're eligible for a basis adjustment of the QOF investment to its fair market value on the date that the QOF investment is sold or exchanged. As a result of this basis adjustment, the appreciation in the QOF investment may not be subject to tax
The Tax Policy Center notes that despite some misconceptions, Opportunity Zones remain an active program with meaningful tax benefits. The key is identifying quality sponsors with proven track records in development and community revitalization.
Evaluating the Right Alternative
The most appropriate 1031 exchange alternative depends on your specific circumstances:
Modern multifamily properties offer various investment structures to match different investor goals and risk tolerances.
DSTs may be appropriate if:
- Maintaining real estate exposure without management is desired
- Passive income is the primary goal
- Modest, steady returns align with your expectations
721 Exchanges may be suitable if:
- Liquidity alongside tax deferral is valued
- Professional portfolio management is appealing
- REIT-like investment structures are acceptable
The Two-Step Strategy (1031 → DST → 721) may be ideal if:
- You want to transition from active to passive ownership
- Tax deferral at each step is a priority
- Long-term diversification and potential liquidity are goals
- Estate planning benefits are important
The Importance of Experienced Guidance
At Bonaventure, the team has invested over $550M of capital across the platform, demonstrating alignment with client interests. This alignment matters when making decisions about long-term wealth preservation and growth.
We work to provide flexible solutions and customized tax strategies designed to align with different investor goals, whether preservation-focused or growth-oriented. We work closely with investors to understand their unique circumstances and objectives.
Key Considerations
Traditional 1031 exchanges remain valuable tools, but they're not always the optimal solution for every situation. Understanding available alternatives can help you make better decisions about your real estate portfolio while still achieving tax efficiency and wealth preservation goals.
The most important consideration is matching the strategy to your specific circumstances, timeline, and goals. Tax strategies should align with broader investment objectives rather than driving those objectives.
Whether you're seeking to reduce management responsibilities, diversify holdings, or optimize tax efficiency, several proven alternatives can help preserve and grow wealth for future generations.
Frequently Asked Questions
What makes Bonaventure different for 1031 exchange alternatives?
Bonaventure brings 25 years of multifamily real estate experience and a track record of facilitating tax-deferred exchanges. The firm has achieved a 20.5% IRR across 31 completed deals and serves over 500 families. Our experience and the team's capital commitment position us as a trusted partner for investors considering various alternatives.
How does Bonaventure's approach support investor goals?
We function as a true partner with significant capital invested alongside clients. Our approach focuses on understanding each investor's unique situation and providing guidance tailored to their specific objectives.
Can Bonaventure assist with complex, customized strategies?
Yes, our experience across various assets and funds provides flexibility for customized tax strategies that align with different investor goals, from preservation to growth objectives.
What is the two-step tax-deferral strategy?
The two-step strategy allows investors to first exchange into a DST (1031), maintain tax deferral while eliminating management responsibilities, and then later convert to REIT operating partnership units (721), providing continued tax deferral with enhanced diversification and potential liquidity.
Connect With Our Team
At Bonaventure, we work with real estate investors evaluating alternatives to traditional 1031 exchanges. Each investor's situation is unique, and we take time to understand your specific objectives, timeline, and risk tolerance.
Whether you're considering DSTs, 721 exchanges, the two-step tax-deferral strategy, or other approaches, we invite you to schedule a consultation with our team. We provide personalized guidance designed to help you make informed decisions about your real estate investment strategy and tax planning.
Contact us to discuss how we can support you in evaluating 1031 exchange alternatives and developing a strategy tailored to your specific needs and goals.
This article is for informational purposes only and does not constitute tax or legal advice. Every investor's situation is different. Before making any decisions about 1031 exchanges, consult with your CPA, tax advisor, or attorney to understand how these rules apply to your specific circumstances.
