When was the 721 Exchange Created?

Posted Mar 26, 2023

realestate-deal-transaction-is1398230313

The 721 exchange, also known as a contribution or an Umbrella Real Estate Investment Trust (UPREIT) exchange, is a tax-deferred transaction that allows investors to exchange their ownership in a property for ownership in a larger, more diversified real estate investment without incurring immediate taxes on the gains from the sale of the original property. 

History of the 721 Exchange

The 721 exchange was created in 1954 because of a private letter ruling by the Internal Revenue Service (IRS) in response to a request from a real estate investment trust (REIT) seeking to acquire a large portfolio of real estate assets without incurring immediate tax liabilities.

Prior to the creation of the 721 exchange, investors who wanted to exchange ownership in a property for ownership in a REIT had to sell their property, pay capital gains taxes on any profits, and then use the proceeds to purchase shares in the REIT. This process could be costly and time-consuming, and it discouraged many investors from taking advantage of the benefits of investing in a REIT.

With the introduction of the 721 exchange, investors could contribute their ownership in a property directly to a REIT in exchange for operating partnership units (OP units) in the REIT. They could convert these OP units into shares of the REIT over time, giving investors a tax-efficient way to diversify their real estate holdings and benefit from the income and growth potential of a professionally managed portfolio of properties.

How a 721 Exchange Works 

Since the 721 was created, it has become an increasingly popular strategy for real estate investors who want to defer taxes on the sale of their properties and gain access to a wider range of real estate assets. Here's an example of how a real estate investor might use a 721 exchange: 

You own a commercial property worth $10 million that has appreciated significantly since you bought it. Now let’s say you want to sell the property and reinvest the proceeds into other real estate assets, but you don't want to pay capital gains taxes on the sale.

Instead, you decide to do a 721 exchange. You contribute your property into a REIT partnership, which issues you shares of the REIT in exchange for your property. You now own equity in the REIT, which owns the commercial property. 

By doing a 721 exchange, you can potentially defer paying taxes on the sale of your property, while still accessing the liquidity and diversification benefits of a REIT. Additionally, if the REIT performs well, you might earn a return on your investment through dividends and share price appreciation.

Conclusion

The 721 exchange, UPREIT, was created as a tax-efficient way for real estate investors to diversify their holdings and gain exposure to a professionally managed portfolio of properties. Since its inception, the 721 exchange has become an increasingly popular strategy for deferring taxes on the sale of real estate assets and gaining access to a wider range of investment opportunities. As the real estate market continues to evolve, it is likely that the 721 exchange will continue to play an important role in helping investors achieve their financial goals.

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.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

A Guide to UPREIT Transactions

A Guide to UPREIT Transactions
Download eBook

 


A Guide to UPREIT Transactions

A Guide to UPREIT Transactions

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.