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What Is a 721 Exchange?
The best kept secret in real estate!
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This 15 minute video is a must watch. It explores the four primary ways to exit out of the active management of your real estate holdings to plan for retirement. It does a deep dive into each method, shares testimonials of several people who have done 721 exchanges, and even shows a real financial comparison model.
The 721 exchange, akin to the 1031 exchange, presents an avenue for investors to postpone capital gains taxes while relinquishing the risk and control of a property used for business or investment purposes. These tax deferral methods offer investors alternatives to traditional sales, so they can maximize the sale proceeds from a sale while also simplifying their estate and generating passive income in retirement.
How does a 721 exchange function?
In a 721 exchange, also known as an "UPREIT," an investor transfers property to a fund in exchange for ownership in that fund. They can also take some of the proceeds in cash if they desire.
What are the primary benefits of a 721 exchange?
Passive Income: Fund shareholders enjoy passive income as managers oversee the Fund's operations and assets, relieving investors of day-to-day decision-making responsibilities.
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Tax Advantages: Through a 721 exchange, gains from property sales are deferred, unlike in typical sales where gains are subject to immediate taxation. This allows investors to utilize 100% of sale gains to purchase Fund shares without facing significant tax burdens.
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Diversification: Investing in Fund shares through a 721 exchange offers diversification benefits, with properties spread across various geographic locations, tenant profiles, industries, and asset classes.
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Estate Planning: The 721 exchange is a beneficial strategy for estate planning, as it simplifies asset transfer to heirs through shares held in a trust, enabling them to avoid capital gains and depreciation recapture taxes upon inheritance.
Can an investor perform a 1031 exchange after a 721 exchange?
Once a 721 exchange is completed, capital gains taxes cannot be deferred further through a 1031 exchange, as partnership shares are ineligible. If partnership shares are sold or capital is returned to investors, capital gains or losses must be recognized upon tax filing. The secret to the strategy is to transfer into an open ended fund so you are never forced into a capital gains recognition event, then pass the shares through your estate to your heirs where they get a stepped up basis and avoid capital gains alltogether. We call this the defer, defer, defer, die strategy. It sounds bleak - but its the best way to maximize the value of the estate.
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