How a 721 Exchange Actually Works: Real Numbers From a Minneapolis Warehouse
Most articles about 721 exchanges are written by people who have never done one. They explain the tax code and stop.
I would rather show you a building.
In February 2025 a long-time Minneapolis investor contributed a 91,430 square foot industrial building on 2nd Street North to AlphaDiv Real Estate Fund. Single tenant, national credit, a lease with years left on it. He had owned it a long time and his basis was a fraction of what it was worth. He was ready to be done being a landlord, and he did not want to hand a third of his equity to the IRS and the State of Minnesota on the way out.
Here is how it went, step by step. The figures are rounded but they are real.
Step 1: The conversation
Thirty minutes. What is the building, what is the debt, what is your basis, and what do you want your life to look like afterward. That last question matters more than the other three. If the answer is "I want to buy a bigger building," I send him to a 1031 intermediary. His answer was "I want the income and I do not want the phone calls."
Step 2: Underwriting and appraisal
We underwrote it the way we underwrite everything: solved backward from a 20% project-level return. Then we ordered a third-party appraisal, because in a 721 the appraisal is not a formality. It is the number that becomes his capital account.
Appraised value: $6.0 million.
Step 3: Debt and closing costs
He had a mortgage. In a 721, existing debt is either paid off at closing from fund proceeds or assumed by the fund. His was paid off. Then closing costs: title, recording, legal.
Debt relief is the part your CPA needs to study. Under Section 752, when a partnership takes over your debt, you are treated as receiving a distribution, and if that exceeds your basis it can trigger gain. In a fund like ours, you are also allocated a share of the fund's debt, which usually offsets it. Every contribution we do gets a 752 analysis before closing. Do not skip it.
Net asset value credited as capital, after debt and costs: $4.04 million.
Step 4: Units
The fund issues Series A Units at the unit price in effect on the contribution date. Unit price is set from net asset value under the Operating Agreement and updated quarterly. At $1.39 a unit, $4.04 million is about 2.9 million units.
His tax basis in the building carries over into the units. The built-in gain, meaning the difference between the $6.0 million value and his old basis, is tracked and allocated to him under Section 704(c). That is the honest mechanic of deferral: the gain does not disappear, it follows him into the units and stays there until he sells the units or dies.
Step 5: Closing
Title moved to the fund through our affiliated title company. The lender was paid. The tenant got a letter with a new address for rent. Our maintenance team took over the building the same week.
No qualified intermediary. No 45-day identification letter. No 180-day countdown. The whole thing took about sixty days from handshake to closing, and most of that was the appraisal and his CPA's review.
Step 6: What he received afterward
- Quarterly distributions. The fund targets a 5% annual dividend paid in cash, or 6% if reinvested, on unreturned capital. On $4.04 million that is roughly $200,000 to $240,000 a year, paid quarterly. Targets, not guarantees; actual Series A distributions have averaged 4.4% since inception and 4.8% over the last four quarters.
- A K-1. With his share of the fund's depreciation, which shelters part of the distributions.
- Appreciation across 23 buildings. His units participate in the whole portfolio, not just the warehouse. The warehouse itself was valued at $8.0 million within six months of closing; his units share in that and in everything else.
- Divisible units. He has children. Units split cleanly. A single warehouse does not.
What he gave up
Control of the building. The ability to 1031 again. Easy liquidity. I said all of this to him before he signed, in writing, and I will say it to you. If any of those three is a deal-breaker, the 721 is not your tool.
Why it worked for him
He turned one building he had to manage into a diversified position he does not, deferred a seven-figure tax bill, kept his income, and set up his estate so his kids inherit units with a stepped-up basis under current law. He also liked it enough to invest in two other vehicles we sponsor.
That is the whole mechanic. If you own a building in the Twin Cities that has done its job, send me the address. You will have a written contribution offer in three business days and you can hand it to your CPA.
Sponsor-reported. Valuations are Managing Member determinations supported by appraisals. Tax treatment depends on your facts; consult your CPA and attorney.
Mike Sowers, CCIM founded Commercial Investors Group in 2005 and is the Managing Member of AlphaDiv Real Estate Fund. He is the author of the Amazon bestseller Commercial Real Estate Investing and host of the CREative Commercial Real Estate Show. mike@cre-fund.com