--- title: "721 UPREIT Exchange: The 6 Things You Need to Know" description: Any property which allows for a 721 exchange within the REIT can also be considered an UPREIT. image: https://www.realized1031.com/hubfs/Images/photo/abstract/gray-glass-building-IS-695968212.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # 721 UPREIT Exchange: The 6 Things You Need to Know Posted Oct 11, 2023 ![721 UPREIT Exchange: The 6 Things You Need to Know](https://www.realized1031.com/hubfs/Images/photo/abstract/gray-glass-building-IS-695968212.jpg) The [721 umbrella partnership real estate investment trust (UPREIT) exchange](https://www.realized1031.com/glossary/721-upreit-exchange) is a great alternative for real estate investors who want to defer capital gains taxes without having to follow a strict time frame like the [1031 exchange](https://www.realized1031.com/1031-exchange). The investor may also be attracted to all the other benefits that a 721 UPREIT exchange offers that the 1031 exchange might not be able to fulfill.  Before participating in a 721 UPREIT exchange, here are a few things to consider.  ### What is a 721 UPREIT Exchange? Under the umbrella of IRC Section 721, we encounter what is known as a '721 exchange'. Similar to the 1031 exchange, this allows investors to swap appreciated real estate held for investment or business uses for operating partnership units, which can then be transformed into [real estate investment trust](https://www.realized1031.com/glossary/real-estate-investment-trust-reit) (REIT) shares. Properties facilitating a 721 exchange within the REIT are typically recognized as part of an umbrella partnership real estate investment trust (UPREIT).  Below are six top benefits of the 721 UPREIT exchange. 1. #### Tax Advantages When real estate is typically sold, the investor pays taxes on the capital gains realized and [depreciation recapture](https://www.realized1031.com/blog/how-is-depreciation-recapture-calculated). This leaves the investor with less capital for reinvestment. With the 721 exchange, the investor can avoid this hefty tax through a tax-deferred exchange of appreciated real estate for shares in an operating partnership (i.e., the UPREIT). These shares in an operating partnership are also known as OP Units. Capital gains are deferred until the investor sells the OP Units, converts the OP Units to REIT shares, or the contributed property is sold by the acquiring operating partnership. 1. #### Increased Liquidity [Real estate is typically a very illiquid asset](https://www.realized1031.com/blog/understanding-illiquidity-in-real-estate-investing), meaning your assets are tied up for a substantial amount of time and can’t be readily converted to cash. Transactions through a 721 exchange allow investors to potentially increase liquidity by converting some or all of the OP Units into shares of the REIT, which can then be sold. Although, this does create a taxable event and will likely be sold at a discount. 1. #### Diversification Because the 721 UPREIT exchange allows investors to purchase shares of a REIT, shareholders of a REIT don’t have their interests tied up in a single asset. A REIT generally has properties in different locations as well as possibly having industry, tenant, and asset class [diversification](https://www.realized1031.com/glossary/diversification). Diversifying among different asset classes can help investors manage potential risk. Investors will want to check with the REIT they are investing in to ensure it is diversified.  1. #### Potential Income Cash flow through a rental property can change due to fluctuations in the market. Additionally, the property may produce less rental income than anticipated. However, many REITs pay dividends to their shareholders. Some REIT dividends may be classified as [qualified](https://www.realized1031.com/blog/what-are-qualified-reit-dividends), providing tax benefits to investors. 1. #### Estate Planning Investors can use a 721 exchange to pass assets to their heirs. Upon death, shares can be equally split and either held or liquidated by the trust's beneficiaries. Because these shares are passed through a trust, the beneficiaries receive a [step-up in basis](https://www.realized1031.com/blog/what-is-a-step-up-in-basis) and can avoid capital gains taxes and depreciation recapture. 1. #### Passive Investing REIT shareholders don't need to worry about property management duties typically associated with owning real estate property. The REIT's management oversees operations and manages the portfolio of properties. Investors are not involved in any decisions but are kept informed about acquisitions, dispositions, and distributions.  With all of the potential benefits, it's no surprise that the 721 UPREIT exchange continues to grow in popularity. Because of the transaction structure, small individual investors can take advantage of everything the 721 UPREIT exchange offers. It's important to remember that IRC Section 721 is complex, and it's advised that investors consult with a tax professional before making investment decisions.  This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. A Guide to UPREIT Transactions [![A Guide to UPREIT Transactions](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/UPREIT-eBook-250b.png?width=250&height=250&name=UPREIT-eBook-250b.png "Learn more about the UPREIT ...") ](https://www.realized1031.com/blog/721-upreit-exchange-the-6-things-you-need-to-know#blogform) Download eBook ---   --- ### A Guide to UPREIT Transactions ![A Guide to UPREIT Transactions](https://www.realized1031.com/hs-fs/hubfs/Images/UI/graphics/composites/UPREIT-eBook-550b.jpg?width=550&height=600&name=UPREIT-eBook-550b.jpg) Learn more about the UPREIT process. By providing your email and phone number, you are opting to receive communications from Realized. If you receive a text message and choose to stop receiving further messages, reply STOP to immediately unsubscribe. Msg & Data rates may apply. To manage receiving emails from Realized visit the Manage Preferences link in any email received. 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For additional information, please contact the Realized Compliance department at 512-472-7171 or info@realized1031.com. - [Terms & Conditions](https://www.realized1031.com/terms-and-conditions) - [Privacy Policy](https://www.realized1031.com/privacy-policy) - [Form CRS](https://www.realized1031.com/hubfs/common-files/disclosures/FormCRS.pdf) - [ADV 2A](https://www.realized1031.com/hubfs/common-files/disclosures/ADV2A.pdf) - [Reg BI Disclosures](https://www.realized1031.com/hubfs/common-files/disclosures/RegBI.pdf) -   © 2026 Realized Holdings, Inc. ```json { "@context" : "http://schema.org/", "@type" : "BlogPosting", "articleBody" : "The 721 umbrella partnership real estate investment trust (UPREIT) exchange is a great alternative for real estate investors who want to defer capital gains taxes without having to follow a strict time frame like the 1031 exchange. The investor may also be attracted to all the other benefits that a 721 UPREIT exchange offers that the 1031 exchange might not be able to fulfill. Before participating in a 721 UPREIT exchange, here are a few things to consider. What is a 721 UPREIT Exchange? Under the umbrella of IRC Section 721, we encounter what is known as a '721 exchange'. Similar to the 1031 exchange, this allows investors to swap appreciated real estate held for investment or business uses for operating partnership units, which can then be transformed into real estate investment trust (REIT) shares. Properties facilitating a 721 exchange within the REIT are typically recognized as part of an umbrella partnership real estate investment trust (UPREIT). Below are six top benefits of the 721 UPREIT exchange. Tax Advantages When real estate is typically sold, the investor pays taxes on the capital gains realized and depreciation recapture. This leaves the investor with less capital for reinvestment. With the 721 exchange, the investor can avoid this hefty tax through a tax-deferred exchange of appreciated real estate for shares in an operating partnership (i.e., the UPREIT). These shares in an operating partnership are also known as OP Units. Capital gains are deferred until the investor sells the OP Units, converts the OP Units to REIT shares, or the contributed property is sold by the acquiring operating partnership. Increased Liquidity Real estate is typically a very illiquid asset, meaning your assets are tied up for a substantial amount of time and can’t be readily converted to cash. Transactions through a 721 exchange allow investors to potentially increase liquidity by converting some or all of the OP Units into shares of the REIT, which can then be sold. Although, this does create a taxable event and will likely be sold at a discount. Diversification Because the 721 UPREIT exchange allows investors to purchase shares of a REIT, shareholders of a REIT don’t have their interests tied up in a single asset. A REIT generally has properties in different locations as well as possibly having industry, tenant, and asset class diversification. Diversifying among different asset classes can help investors manage potential risk. Investors will want to check with the REIT they are investing in to ensure it is diversified. Potential Income Cash flow through a rental property can change due to fluctuations in the market. Additionally, the property may produce less rental income than anticipated. However, many REITs pay dividends to their shareholders. Some REIT dividends may be classified as qualified, providing tax benefits to investors. Estate Planning Investors can use a 721 exchange to pass assets to their heirs. Upon death, shares can be equally split and either held or liquidated by the trust's beneficiaries. Because these shares are passed through a trust, the beneficiaries receive a step-up in basis and can avoid capital gains taxes and depreciation recapture. Passive Investing REIT shareholders don't need to worry about property management duties typically associated with owning real estate property. The REIT's management oversees operations and manages the portfolio of properties. Investors are not involved in any decisions but are kept informed about acquisitions, dispositions, and distributions. With all of the potential benefits, it's no surprise that the 721 UPREIT exchange continues to grow in popularity. Because of the transaction structure, small individual investors can take advantage of everything the 721 UPREIT exchange offers. It's important to remember that IRC Section 721 is complex, and it's advised that investors consult with a tax professional before making investment decisions.", "articleSection" : [ "UPREIT" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2023-10-11T16:22:01+0000", "datePublished" : "2023-10-11T16:22:01+0000", "description" : "Any property which allows for a 721 exchange within the REIT can also be considered an UPREIT.", "headline" : "721 UPREIT Exchange: The 6 Things You Need to Know", "image" : { "@type" : "ImageObject", "height" : 551, "url" : "https://f.hubspotusercontent10.net/hubfs/733513/Images/photo/abstract/gray-glass-building-IS-695968212.jpg", "width" : 750 }, "mainEntityOfPage" : "https://www.realized1031.com/blog/721-upreit-exchange-the-6-things-you-need-to-know", "name" : "721 UPREIT Exchange: The 6 Things You Need to Know", "publisher" : { "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "USA", "addressLocality" : "Austin", "addressRegion" : "TX", "postalCode" : "78701", "streetAddress" : "500 W 13th Street " }, "logo" : { "@type" : "ImageObject", "height" : 60, "url" : "http://www.realized1031.com/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black-No-Margin-296x60-AMP.png", "width" : 296 }, "name" : "Realized" }, "thumbnailUrl" : "https://f.hubspotusercontent10.net/hubfs/733513/Images/photo/abstract/gray-glass-building-IS-695968212.jpg" } ```