721 Exchange

A 721 exchange, also known as an UPREIT exchange, allows real estate investors to defer capital gains taxes by contributing property into a Real Estate Investment Trust’s (REIT) operating partnership in exchange for Operating Partnership Units (OP Units).

A 721 exchange is a real estate transaction in which an investor contributes property to an Umbrella Partnership Real Estate Investment Trust (UPREIT) and, in return, receives operating partnership (OP) units representing an equity interest in the REIT structure. This can allow investors to defer, though not eliminate, the capital gains taxes that a sale would otherwise trigger, while potentially benefiting from ongoing distributions on those units.

In most cases, gains are not recognized until the investor redeems their OP units for cash or converts them into REIT shares. Depending on the REIT’s terms, redemptions may be made in a single transaction or phased over time, which can offer planning flexibility, such as timing redemptions to years with lower taxable income.

Investors should also understand that a 721 exchange is generally irreversible. Once units are held, the interest is typically no longer eligible for a future 1031 exchange. As with any investment, it’s important to evaluate whether the structure fits your goals, timeline, and broader strategy.

Under Internal Revenue Code Section 721, the contribution of property to a partnership in exchange for partnership interests is generally treated as a non-recognized transaction, meaning no immediate gain or loss is recorded at the time of transfer. As a result, a properly structured 721 exchange typically does not create an immediate taxable event, allowing investors to defer capital gains taxes that might otherwise be due upon the sale of the property.

Typically, DST to 721 properties are high quality Class A larger properties that appeal to traditional REIT investor pools. For example, you are likely to see Class A luxury multifamily apartment complexes, larger institutional grade tenant long term lease industrial properties or distribution facilities, or quality location grocery-anchored retail centers. Owners of smaller multifamily (for example 5 – 50 units) or local retail centers are best served starting in the DST structure vs going directly into an UPREIT.

One way that an investor could accomplish a 721 transaction is to sell their property directly to a large REIT that is acquiring that type of asset class. This is primarily done on assets that are $30M to $150M in value and rarely done on assets that are smaller in size unless the REIT may be purchasing smaller self-storage facilities or a bulk purchase of many net lease smaller assets (such as Taco Bells and Auto Zones).

Over the last 5 years, a much more common way to access a 721 transaction is to purchase a Delaware Statutory Trust (DST) property that is a target asset of that particular REIT and highly likely to be acquired by the REIT after approximately 2 years. Then the investor would receive Operating Partnership (OP) Units in exchange for their DST ownership, and these OP Units are generally a 1 to 1 value to REIT shares. Most DST to REIT programs are approximately 2 years in the DST phase and then 1 year in the Operating Partnership phase. Then the investors have the high likelihood, but not guaranteed, liquidity opportunity subject to the share repurchase plan of that particular REIT. If the investor has a desire for liquidity, it is important to check with your advisor on the history and success of the share repurchase program of each particular REIT. This is where Corcapa and 721 UPREIT Solution shines in that we have 18 years of experience in these programs and have executed many dozens of full circle transactions into the REITs.

It is highly advised that investors interested in the 721 UPREIT work with firms that have 15+ years of experience such as Corcapa and 721 UPREIT Solution because DST to REIT transactions are highly nuanced and require significant evaluation that we can help our clients discern the options and make the best choices that meet their investment goals.