What Is a 721 Exchange? 

A Permanent Tax-Deferred Real Estate Strategy for Retiring Landlords

Discover the Benefits of a 721 Exchange for Real Estate Investors


If you’re a real estate investor (landlord who owns rental properties) approaching retirement, you’re likely looking for a smarter way to defer capital gains taxes, reduce your management responsibilities, and transition into passive income. One powerful solution is the 721 exchange, also known as an UPREIT exchange.

In this article, we explain how a 721 exchange works, how it compares to a 1031 exchange, and why it may be a valuable strategy in your retirement and estate planning toolkit.


What Is a 721 Exchange?


A 721 exchange is a real estate tax strategy under IRS Code Section 721 that allows property owners to contribute investment real estate into a Real Estate Investment Trust (REIT) in exchange for Operating Partnership Units (OP Units). This transaction allows you to defer capital gains taxes while transitioning from active property ownership into a diversified, income-generating REIT.


How Does a 721 Exchange Work?


Consider Step 1: Start with a 1031 Exchange

Sell your investment property using a 1031 exchange and reinvest the proceeds into a Delaware Statutory Trust (DST) that qualifies for 721 conversion.


Step 2: Exchange into a REIT

In about two years, the REIT sponsoring the DST will later offer to “roll up” the property. You exchange your DST interests for OP Units in the REIT’s operating partnership via a 721 exchange.


Step 3: Defer Capital Gains Taxes

This transaction is non-taxable at the time of the exchange. You defer taxes until you eventually sell your REIT shares after converting OP Units


Top Benefits of a 721 Exchange

  • Tax Deferral – Defer capital gains taxes just like with a 1031 exchange
  • Passive Income – Receive distributions from REIT holdings without landlord duties
  • Diversification – Get exposure to institutional-quality real estate across multiple sectors
  • Estate Planning Advantages – REIT shares can be more easily transferred to heirs
  • Liquidity Options – After a holding period, OP units can convert into publicly traded REIT shares



Is a 721 Exchange Right for You?

You may benefit from a 721 exchange if:

  • You’re approaching retirement and want passive income
  • You own highly appreciated real estate
  • You want to avoid capital gains taxes
  • You’re ready to stop managing tenants and properties
  • You want diversified real estate exposure in your portfolio
  • And never want to worry about a future 1031 exchange again.


Book a free consultation today to explore whether you qualify for a 721 exchange and would like to see what will help you the most in your specific situation.

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>>What are the benefits of owning a DST, read about it here

Disclosures:

Information provided is for informational and/or educational purposes only and is not, in any way, to be considered investment advice nor a recommendation of any investment product.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of the Advisor’s investment services are disclosed in the publicly available Form ADV Part 2A.

Some investments are illiquid and may require a hold period beyond ten years; reach out for further details.

Although this material is based upon Information the Advisor considers reliable and endeavors to keep current, the Advisor does not assure that this material is accurate, current, or complete, and it should not be relied upon as such.