The 721 exchange, akin to the 1031 exchange, presents an avenue for investors to postpone capital gains taxes while relinquishing 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 Operating Partnership in exchange for ownership in that partnership. They can also take some of the proceeds in cash if they desire. 

What are the primary benefits of a 721 exchange? 

Passive Income: REIT shareholders enjoy passive income as managers oversee the REIT's operations and assets, relieving investors of day-to-day decision-making responsibilities.

 

1. 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 REIT shares without facing significant tax burdens.
    

2. Diversification: Investing in REIT shares through a 721 exchange offers diversification benefits, with properties spread across various geographic locations, tenant profiles, industries, and asset classes.
    

3. 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.

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Watch the video on the right to learn more about how these work.