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What is the difference between a 1031 Exchange and a 721 Exchange?

We get a fair amount of questions on if we do 721 exchanges or if Accruit facilitates UPREITs. Let us dive into what a 721 exchange is and take a look at the differences and similarities between a 1031 exchange and 721 exchange.
What is the difference between a 1031 exchange and 721 exchange?

Both a 1031 exchange and a 721 exchange allow (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger s to defer capital gains and other taxes on the sale of business or investment use real estate when proper procedures are followed, however they do have differences and they cannot be used interchangeably as each has specific considerations.

What is a 1031 exchange?

1031 exchange is one of the most popular tax strategies available when selling and buying real estate “held for productive use in a trade or business or investment”. Property owners of real estate used for business or investment use can utilize a 1031 exchange on the sale of the property to defer capital gains, depreciation recapture, state, and net investment income tax when they reinvest the proceeds from the sale into the purchase of qualifying property. It does not have to be the same kind of property. All types of real estate are considered like kind to all other types.

In a 1031 exchange, the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger is not permitted to receive nor control and is not allowed to “benefit” from the funds from the sale of their sold property, the relinquished property. An example of benefitting would be to pledge the account as collateral for a loan. The funds are held with a Qualified Intermediary until the time the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger is ready to close on the sale of their new property, the Replacement Property. The funds are then directly used to purchase the replacement property. Because the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger never actually had any access or benefit from the funds and since the (“Exchangor” or “Taxpayer”) Person intending to conduct a 1031 tax deferred exchange, who transfers a relinquished property and thereafter receives a replacement property. Exchanger traded the relinquished property for the replacement property through the Qualified Intermediary, they may defer the taxes they would normally pay if they had sold the property outright and retained the money.

What is a 721 exchange?

A 721 exchange, formally referred to as a 721 Umbrella Partnership Real Estate Investment (UpREIT), is similar to a 1031 exchange in that a real estate investor can sell a property used for business or investment use and defer taxes on the sale if they reinvest the funds by following specific criteria.

In a 721 exchange, the investor either (1) transfers ownership of the relinquished property to the REIT and receives an equivalent value in the form of operating partnership units or (2) or sells to a third party of choice using a 1031 exchange and investing the funds into a DST, often made available by the REIT. When sufficient time passes, usually two years, the DST interest can be traded for A trust that invests primarily in real estate, and passes the income, losses, and other tax items to its investors. Investments in REITs are classified as securities, and as such do not qualify for Section 1031 exchange treatment. Real Estate Investment Trust (REIT) shares.

Similarities and Differences of a 1031 Exchange and 721 Exchange

Similarities

There are a handful of similarities between a 1031 exchange and a 721 exchange, which include:

Differences

The differences between a 1031 exchange and a 721 exchange are notable and include:

Both 1031 and 721 exchanges provide real estate investors the opportunity exit out of existing real estate investment and reinvest without tax consequences. However, based on the details above they are unique and advanced planning and a thorough understanding should be in place prior to embarking on either. It is always recommended to talk with your CPA, Tax Advisor, or Financial Advisor prior to implementing any tax deferral strategies.

 

The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified  A person acting to facilitate an exchange under section 1031 and the regulations. This person may not be the taxpayer or a disqualified person. Section 1.1031(k)-1(g)(4)(iii) requires that, for an intermediary to be a qualified intermediary, the intermediary must enter into a written "exchange" agreement with the taxpayer and, as required by the exchange agreement, acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer. Intermediary , and as such does not offer or sell investments or provide investment, legal, or tax advice.