721 Exchange (UPREIT)
721 Exchange Overview
A 721 Exchange can be an effective strategy for investors seeking to defer capital gains taxes while expanding portfolio diversification through institutional-quality real estate opportunities. Often considered a flexible alternative or an additional option to a 1031 Exchange, it may offer unique planning advantages depending on an investor’s objectives and timeline. While all investments involve risk, a 721 Exchange may provide meaningful liquidity benefits when aligned with the right strategy.
Our team brings the expertise required to guide clients through 721 Exchanges and other alternative investment solutions. Our professionals are available to answer questions, evaluate options, and help investors move forward with confidence.
Contact us for more information on 721 UPREITs and if they should be part of your 1031 exchange journey.
721 UPREIT Solution
Learn more about the benefits of 721 Exchanges, UPREIT FAQs, videos and 721 exchange resources on our site 721 UPREIT Solution.
18 Years
EXPERIENCE IN 721 UPREIT TRANSACTIONS
What is a 721 Exchange (UPREIT)?
A 721 Exchange allows investors to defer capital gains taxes, which can otherwise significantly reduce the profits of a real estate property sale.
A 721 exchange is a type of real estate transaction in which an investor contributes property to an Umbrella Partnership Real Estate Investment Trust (UPREIT) and, in return, receives operating partnership units that represent an equity interest in the REIT structure. This approach can allow investors to defer capital gains taxes that would otherwise be triggered by a sale, while also providing the potential to benefit from ongoing distributions generated by the UPREIT. Investors are encouraged to evaluate the transaction thoroughly to ensure it fits their goals and broader investment strategy.
In most cases, taxes are not recognized until the investor chooses to redeem their partnership units, which may be done either in a single transaction or gradually over time. A phased redemption approach can provide additional planning flexibility and may help investors manage their tax exposure, particularly if future redemptions occur during years with lower taxable income.
In the meantime, investors may receive ongoing distributions from their UPREIT units and potentially benefit from other strategic advantages associated with a 721 exchange.
How Does a 721 Exchange Work?
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.
The 721 exchange process typically follows these steps:
STEP 1
The investor contributes their relinquished property to the umbrella partnership, also called the operating partnership (OP), of an UPREIT.
STEP 2
The property contributor receives units of interest in the umbrella partnership and becomes a unitholder.
STEP 3
The OP maintains ownership of the properties and distributes the income to the unitholders.
STEP 4
OP unitholders may choose to exchange OP units for REIT shares, which could be more easily sold.
Qualifying Properties for a 721 Exchange
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.
How to Get Started in 721 Exchanges
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 DST / Delaware Statutory Trust 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 OP/Operating Partnership 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 is 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 1031 Advisors 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.
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UPREIT Guidance
Our qualified team will listen to your specific 1031 exchange details, investment goals, and family estate planning needs and make specific recommendations that best meet the desired criteria.