721 Exchange Vs. 1031 Exchanges
In a 1031 exchange, the investor can defer capital gains taxes by selling investment property and reinvesting the proceeds into a “like-kind” asset. (If you’re interested in selling a property, use our tax calculator to find out how much money you could save through an exchange versus paying taxes.) However, among other requirements, this type of exchange must be completed within a strict 180-day timeframe.
This approach may not appeal to some investors who no longer wish to “swap till they drop,” or actively exchange properties. Others may prefer to diversify their holdings. For both types of investors, a 721 UPREIT exchange offers a permanent alternative.
A 721 exchange offers many benefits, including:
Tax deferral. A 721 exchange allows the investor to defer taxes upon receiving OP units. This can be significant when factoring in federal and state capital gains taxes, depreciation recapture tax and net investment income tax.
Portfolio, not property. Investors may expand their investment from one property to a portfolio of institutional-quality assets. This eliminates the idiosyncratic risks of owning a single asset.
Greater flexibility. An UPREIT exchange doesn’t have the stringent deadlines of 1031 exchanges.
Passive ownership. A 721 exchange allows investors to convert from day-to-day, active real estate management to a passive investment that is professionally managed.
Potential for passive income. Assets are typically stabilized and cash-flowing, generating monthly distributions to investors that can be shielded from current income with depreciation.
Simplified estate planning. Investors who have amassed a real estate portfolio often wonder how to divide the assets after they’re gone. A 721 exchange is easily divisible to beneficiaries, who receive a stepped-up cost basis and can typically liquidate holdings with little to no taxes due.