A 721 exchange shares similarities with 1031 exchanges. They permit investors to exchange highly appreciated real estate properties for investment or business purposes. Furthermore, operating partnerships convert into shares of a real estate investment trust (REIT).
If a property allows 721 exchanges within a REIT, it can also operate as an umbrella partnership real estate investment trust (UPREIT). However, should you move forward with a 721 exchange? Here’s what you need to know about 721 exchanges and if it’s right for you.
How 721 Exchanges Operate
A 721 exchange occurs through like-kind properties, where investors can sell properties and defer capital gains taxes upon the sale. The exchange occurs when the selling property swaps for another investment property of equal or greater value. They’re accommodating for residential and commercial properties, such as rental properties and parking lots.
1031 vs. 721 Exchanges
A 1031 exchange permits investors to sell properties, then reinvest proceeds into another property, but they must deal with strict requirements. These exchanges must occur through like-kind properties that share similar characteristics. Furthermore, 1031 exchanges have shorter timelines than 721 exchanges, needing to identify the replacement properties within 25 days, then closing on said property within 180 days.
While 1031 exchanges only apply towards investment properties, 721 exchanges work for investment and personal properties. Many investors choose 721 exchanges due to their significantly longer timeline and flexibility.
Benefits of 721 Exchanges
Some benefits of a 721 exchange to know about include portfolio diversification, estate planning, and tax benefits. A 721 UPREIT exchange permits investors to buy shares of a REIT, in which REIT shareholders don’t have interests intertwined in a particular asset. Instead, REITs have properties in differing locations via tenant, industry, and asset class diversification, managing potential risks.
Furthermore, upon death, investors use 721 exchanges to pass their assets onto their heirs. Heirs can then equally split and hold or liquidate by trust beneficiaries. Lastly, 721 exchanges allow investors to defer capital gains taxes of an appreciated real estate for operating partnership shares known as operating partnership (OP) units.
Rules for 721 Exchanges
Qualifying for 721 exchanges requires following a few rules. Firstly, sold properties must exchange for equal or greater value properties, while investors must complete exchanges via qualified intermediaries. Furthermore, investors should notify the IRS of their intent for 721 exchange completion, along with the purchase and sale of properties must get completed within a specified time frame.
Owning real estate properties can seem complicated. However, 721 exchanges can help defer capital gains taxes and create investment versatility and steady cash flow.