What Are the 5 Benefits of a 721 Exchange?
Carl E. Sera, CMT
March 29, 2023
A 721 exchange can be an optimal choice for deferring capital gains taxes without the hindrance of a strict time frame. Additionally, 721 exchanges offer many benefits and provide solutions that 1031 exchanges can’t fulfill. Let’s discuss what a 721 exchange is and the benefits that come with it.
What Is a 721 Exchange?
Like a 1031 exchange, 721 exchanges allow the deferment of capital gains taxes for investors, relinquishing property control held for investment or business purposes. Known as an UPREIT, investors contribute property to a REIT for an operating partnership unit in an exchange, which converts into a REIT share.
What Are the Benefits?
721 exchanges offer numerous benefits for investors. Benefits such as tax advantages and increased liquidity are just a few examples that can make a 721 exchange worth the investment.
One significant benefit of 721 exchanges is diversification. REIT shareholders don’t have interests attached to a singular asset because 721 UPREIT exchanges permit investors to purchase REIT shares.
Alternatively, a REIT contains properties in various locations, including potential industry, tenant class, and asset diversification. Investors can manage potential risks through diversification.
In a 721 exchange, primary investors can choose to pass their assets onto chosen heirs. When the investor passes away, shares are split equally, remaining held or passed through trusts. Beneficiary depreciation recaptures taxes that become deferred through the state and defer capital gains taxes when receiving a step-up in bases.
Passive Income Opportunities
Many aspects of the economy can impact property investments, such as market fluctuations resulting in cash flow changes in rental properties, thus producing less rental income than previously predicted. With a REIT, 721 exchanges pay dividends to shareholders, creating passive income.
Managers control asset management and REIT operation. Investors have a significantly smaller role as managers handle the everyday decision-making for the asset portfolio. While investors don’t have an active decision-making role, they receive information regarding distribution, acquisitions, and dispositions.
Assets can get tied up for a considerable amount of time, even when categorized as illiquid assets. Thankfully, investors can have increased liquidity through 721 exchange transactions. The process involves some or all OP Units getting converted into REIT shares and sold.
Another benefit of 721 exchanges is their tax advantages. 721 exchanges allow investors to defer taxes via tax-deferred exchanges of appreciated real estate for operating partnership shares. The shares, known as OP Units, convert into REIT shares to be sold to acquired operating partnerships.
Sera Capital is a fee-only fiduciary focused on tax-efficient exit planning for highly appreciated investments. We offer our services to real estate investors and entrepreneurs, helping clients manage money while providing investment education, advice, and management. In addition, our Section 721 C Partnership professionals allow investors to increase their portfolio diversification and investment liquidity while deferring capital gains taxes. To know more about our 721 and 1031 exchange services, schedule a free 30-minute phone call with us today.