5 Things To Remember When Deciding To Do a 721 Exchange

Written By
Carl E. Sera, CMT
Published On
June 1, 2023

5 Things To Remember When Deciding To Do a 721 Exchange

721 exchanges can be the perfect alternative for real estate investors who want to defer capital gains taxes without following strict guidelines and rules. 721 exchanges have many advantages, including estate planning, diversification, and increased portfolios. So, here are five things to remember before deciding to do a 721 exchange.

721 Exchange Qualifications

Before pursuing a 721 exchange, investors must meet some qualifications. Firstly, most 721 exchanges, or REITs, require institutional-grade real estate investments because some investors own said properties. Furthermore, a 721 exchange doesn’t allow direct property contributions in a REIT.

721 Exchange Rules

Several rules come with 721 exchanges. First, the general rule of 721 exchanges states that no losses or gains can become recognized in any involved partners or partnerships. This specifically applies to partnership properties in exchange for a partnership interest.

Furthermore, special rules state that 721 exchanges cannot apply to realized gain through partnership property transfers. This is because if partnerships become incorporated, it becomes treated as an investment company. Additionally, investors cannot gain on property transfers from partnerships if gains become includable in an investor’s gross income.

721 vs. 1031 Exchanges

Before deciding on a 721 exchange, one must understand its differences from 1031 exchanges. Firstly, 1031 exchanges permit investors to sell properties and reinvest proceeds into another property. However, qualifying for 1031 exchanges involves “like-kind” properties, meaning the property must serve the same purpose and share similar characteristics.

Additionally, 1031 exchanges have shorter timelines than 721 exchanges; investors must find a replacement property within 45 days, then sell their original property within 180 days. Lastly, 1031 exchanges serve exclusively as investment properties, while 721 exchanges serve as investment and personal properties.

721 Exchange Advantages

721 exchange offers many benefits. One of the most well-recognized benefits is its tax deferral properties. Furthermore, 721 exchanges allow for portfolio diversification, estate planning, and liquidity. You can grow your finances and plan ahead for future generations in your family.

Things To Avoid

One consideration of the 721 exchange is its inflexibility. 721 exchange doesn’t have the capability for clients to perform other tax-deferred exchanges. Moreover, they do not allow use in other deferred tax exchanges, as investors must take considerable care in choosing a long-term REIT to prevent any regrets.

Sera Capital offers services to individuals with highly appreciated assets and guidance to clients making financial choices. We strive to help you with your financial goals and provide our expertise in financial planning, advice, and management. Our 721 exchange advisors utilize traditional Delaware Statutory Trusts throughout their consulting practice in cases of appropriate client situations. If you want to know more about our financial guidance services and specialists, contact us today with a free 30-minute phone call.

Carl E. Sera, CMT

Carl E. Sera, CMT

Managing Principal, Sera Capital
Carl Sera is a Chartered Market Technician and the Managing Principal at Sera Capital Management, LLC. He has over 14 years of experience in the financial services industry with a focus on investment management.

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