A 721 exchange can take you from direct ownership to a nationwide REIT portfolio, keeping your money in real estate without the burden of property management.
Are you tired of trading your time and energy for rental income? If you have built equity in real estate, you already know that property management can drain your schedule and patience. Selling might seem like the way out, but a large capital gains tax bill can take a significant share of your profit. There is a strategy that can let you exit day-to-day management, keep your money in real estate, and control when you pay taxes. It is called a 721 exchange.
The process begins with a Delaware statutory trust (DST). Many investors use a 1031 exchange to move from a property they own into a DST within 180 days of selling. A DST allows you to purchase a fractional interest in large, institutional-quality real estate. This can include multifamily apartment complexes, office buildings, or retail centers in prime markets. These assets are managed by professional operators and are often part of portfolios that individual investors would not otherwise be able to access. By investing through a DST, you can defer capital gains taxes while gaining exposure to higher-grade properties.
From the DST, certain sponsors provide the option to enter a 721 exchange, also called a REIT transaction. This converts your DST interest into shares of a real estate investment trust (REIT). Owning REIT shares offers broad diversification across dozens or even hundreds of properties, stable income distributions, and continued tax deferral as long as you hold the shares.
"A 721 exchange can help you transition from one property to a diversified portfolio while protecting your capital gains tax deferral."
A key advantage is flexibility. Unlike a 1031 exchange, where you must sell and reinvest entire properties, a 721 exchange allows you to sell portions of your REIT shares over time. You might sell 1 percent, 10 percent, or any amount that meets your income or liquidity needs. Taxes are only due on the portion you sell, giving you control over when the tax liability is triggered.
This strategy can also be valuable for estate planning. If you pass away before selling your REIT shares, current tax laws allow your heirs to receive a step-up in basis. This removes the capital gains tax on those shares, preserving more wealth for your beneficiaries.
To explore this option, work with advisors who have access to DST sponsors that offer a 721 exchange. Examples include Blue Rock, Capital Square, Inland Investments, JLL, Hines, and Starwood. The terms and eligibility will be outlined in the DST investment documents.
A 721 exchange can be an effective way to transition from active landlord to passive investor while maintaining income, protecting your tax position, and gaining long-term flexibility. If you want to know whether this strategy is right for you, call or text me at (562) 316-2915 or email me at [email protected]. I can connect you with the right professionals and walk you through the process step-by-step.
