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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 your real estate 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. If you are short on time, you can just read below to learn about how 721 exchanges work and watch the shorter 3 minute video at the end.
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.
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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 REIT shares without facing significant tax burdens.
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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.
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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.
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Watch these two videos and book a call with us if you are interested in learning more.
