What Situations Would be Appropriate for Considering a 721 Exchange?
Investors in various situations could decide to complete a 721 exchange. Here are a few instances where an investor could consider a 721 exchange:
- They have surplus property generated by consolidations.
- They want to defer taxes when selling real estate.
- They prefer to avoid property management responsibilities.
- They want to diversify their assets by exchanging a single property for interest in a portfolio.
- They want to receive consistent passive investment income.
What Is a Good 721 Exchange Candidate Property?
In rare cases, UPREITs may identify properties they consider ideal for a 721 exchange. The following properties could be good choices for this type of exchange:
- A property with a third-party tenant.
- Properties that meet the REIT investment criteria, which can vary.
Can You Combine a 1031 Exchange With a 721 Exchange?
Investors can sometimes combine a 1031 exchange with a 721 exchange to ensure the property they want to contribute to the operating partnership meets the acquisition criteria of the REIT they want to invest in. This strategy can be used when the property an investor owns doesn’t align with the REIT’s requirements.
In some cases, the investor may decide to perform a 1031 exchange to acquire a property that does meet the REIT’s criteria. The investor must then demonstrate their intent to hold the property for business or investment use to IRS. There is no requirement for how long to hold the property, but many investors choose to hold it for 12 to 24 months. After that time, they can contribute the 1031 exchange property to the REIT in exchange for units in the operating partnership.
Investors can also complete a 721 exchange with a Delaware Statutory Trust (DST) property to acquire a fractional interest in property that meets the criteria of the REIT. This process begins with the investor investing in a DST that has a 721 option and acquiring fractional ownership in an institutional-grade property. After a sufficient holding period, the sponsor would contribute the property to the REIT in exchange for OP units. This is becoming a more common option with DST sponsors as an added benefit to investors.
Can You Perform a 1031 Exchange After a 721 Exchange?
Investors cannot use units in a UPREIT to complete a 1031 exchange. 1031 exchanges can be made indefinitely as long as the investor owns the property they want to exchange. If an investor has been performing continuous 1031 exchanges to defer capital gains taxes, completing a 721 exchange will end the cycle. By contributing a property to an UPREIT, the investor will still defer their taxes, but they will no longer own the property and can’t perform 1031 exchanges with it going forward.
How to Get Started in 721 Exchanges
There are a couple of ways to perform a 721 exchange. The first method involves the investor selling their relinquished property and structuring the sale as a 1031 exchange. However, instead of finding a replacement property, the investor identifies and acquires real estate the REIT has selected. After a holding period of between 12 and 24 months, the investor contributes their fractional interest to the operating partnership as part of the 721 exchange. In exchange for the contributed property, the investor receives an interest in the operating partnership.
Another potentially easier way to perform a 721 exchange is to perform one with a DST that has a preset 721 option. After a typical holding period for a DST, the sponsor arranges to contribute the DST property or properties to a REIT to perform a 721 exchange. The investor’s interest is then converted into units in the operating partnership.
Before an investor performs a 721 exchange, they should consult a tax advisor to determine whether the exchange is right for them. It’s also crucial to have the help of investment advisors who can walk through the details of the investment and ensure each step is performed correctly to meet the investor’s investment goals.
1031 Crowdfunding is a real estate investment platform for 1031 exchanges and alternative investments focused on tax deferral. The platform provides the information and documents needed for investors to perform their due diligence, and our expert representatives will walk you through investments with 721 exchange options. To view all our offerings, register for an investor account.
Invest With Confidence at 1031 Crowdfunding
721 exchanges can be an attractive investment option for investors, whether they want to defer capital gains tax or diversify their portfolio. These exchanges can also be an alternative to 1031 exchanges that enables greater timeline flexibility. Although every investment carries a degree of risk, 721 exchanges can offer several benefits for investors.
With a combined $2.2 billion in real estate transactions, the management team at 1031 Crowdfunding has the experience to help investors navigate 721 exchanges and other alternative investments. Our knowledgeable professionals are ready to answer any questions you have and help you invest with confidence.
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