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By Monique Walker

Monique Walker has 21 years of experience successfully buying and selling homes in the Phoenix market. She knows the neighborhoods, schools, and the local economy. Monique and her team do all the leg work, keeping you up-to-date with new listings and conditions as they impact the market.

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How a 721 Exchange Can Help You Save Big on Taxes

When it comes to real estate investing, one of the biggest challenges successful investors face is how to handle taxes when it’s time to sell. After years of appreciation, you may be sitting on significant capital gains—and the IRS is ready to take its share. Fortunately, there’s a powerful tool that can help you defer those taxes: the 721 exchange.

Also known as an “UPREIT” exchange (short for Umbrella Partnership Real Estate Investment Trust), a 721 exchange allows you to contribute your investment property into a real estate investment trust (REIT) in exchange for operating partnership units. This move effectively lets you defer capital gains taxes, much like the more familiar 1031 exchange—but with some unique advantages.

Here’s what you need to know:

Tax Deferral Without the Hassle of Property Management

Let’s say you own an apartment building or commercial property that has appreciated substantially. If you sell it outright, you’ll likely owe a hefty capital gains tax. A 721 exchange gives you the opportunity to transfer that property into a REIT, receive shares (called operating partnership units), and postpone paying those taxes.

But it’s not just about deferral—it’s also about freedom. Once the exchange is done, you’re no longer responsible for managing the property. Instead, you’re invested in a diversified portfolio of income-generating real estate through the REIT. This can be a game-changer for investors looking to step back from hands-on management while continuing to build wealth.

Key Benefits of a 721 Exchange

  • No immediate capital gains tax: You defer taxes until you sell your REIT shares down the road.
  • Diversification: You gain exposure to a wider range of real estate assets across multiple markets.
  • Passive income: REITs typically distribute a portion of their income to shareholders, providing potential steady cash flow.
  • Estate planning flexibility: Heirs may receive a step-up in basis upon your death, potentially eliminating the deferred taxes altogether.

Consider the Trade-Offs

While the benefits are compelling, a 721 exchange isn’t for everyone. For one, once you exchange your property for REIT shares, you can’t use a 1031 exchange on those shares later. The ability to “swap until you drop” ends with the 721.

Also, liquidity is limited at first. Many REITs require you to hold the operating partnership units for a set period before you can convert them to tradable shares. And while REITs are professionally managed, you give up control over your specific asset.

Is a 721 Exchange Right for You?

This strategy works best for investors who are ready to transition out of active management and into a more passive, diversified position. If you’re holding appreciated real estate, don’t want the headaches of being a landlord, and are looking for tax efficiency, it may be worth exploring.

As with any investment decision, it’s smart to consult with a tax advisor or financial planner who understands the nuances of 721 exchanges. But if used correctly, it can be a savvy move to preserve wealth, generate passive income, and simplify your life—without giving up a big chunk of your gains to the IRS.

If you’re holding appreciated real estate and thinking about your next move, a 721 exchange could be your ticket to a tax-efficient transition into passive income and diversified holdings—without the burden of being a landlord.

Every investor’s situation is different, and navigating the rules takes insight. If you’re curious whether a 721 exchange is the right fit for your goals, we’re here to help.

Reach out today to get your questions answered and explore how this strategy can work for you. Let’s run the numbers, walk through your options, and map out a smart plan for what’s next

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