If you’re looking to defer taxes on your real estate investment, you’ve probably come across the 721 Exchange and the 1031 Exchange. But which one is better for you? These two strategies are powerful tools for real estate investors, but they have their own unique advantages.
In this post, we’ll dive into the main differences between the 721 and 1031 exchanges and help you figure out which one can help you meet your financial goals.
A 1031 Exchange may allow eligible real estate investors to defer capital gains taxes when they reinvest proceeds into a qualifying like-kind property, subject to IRS regulations and strict timelines. However, failure to meet these requirements could result in immediate tax liability.
Here’s how it works:
However, it’s important to note that this strategy requires you to keep your capital tied up in real estate. If you decide not to reinvest in property, you’ll be required to pay taxes.
A 721 Exchange is a strategy where you exchange your real estate for units in a UPREIT (Umbrella Partnership Real Estate Investment Trust). Instead of buying a new property, you give up your property in exchange for ownership in a REIT, which holds a large portfolio of properties.
Here’s how it works:
While this strategy offers great flexibility, it’s important to understand that you give up control of your property. The REIT handles all decision-making, and your income will come from the REIT’s distribution rather than direct rent.
A 1031 Exchange lets you swap one investment property for another while keeping full control. When you complete the exchange, you own the new property outright. That means you decide everything—who rents it, how much to charge, when to sell, and how to manage it.
A 721 Exchange works differently. Instead of trading one property for another, you contribute your property to a Real Estate Investment Trust (REIT) or a partnership. In return, you receive shares or Operating Partnership (OP) units. You no longer own the property itself—the trust or partnership does. The REIT’s management team handles all decisions, from tenant selection to rent pricing and maintenance.
In short, a 1031 Exchange keeps you in the driver’s seat, while a 721 Exchange shifts control to the REIT, offering a more hands-off approach to real estate investing.
A 1031 Exchange lets you diversify your portfolio by swapping one property for another. If you already own different types of real estate—like residential, commercial, or industrial properties—you can use a 1031 exchange to adjust your holdings. But you still own and manage each property directly, limiting how much you can diversify based on your budget and management capacity.
A 721 Exchange takes diversification even further. Instead of owning a single property, you exchange it for shares in a Real Estate Investment Trust (REIT) or a partnership. This gives you instant access to a broad portfolio of properties across different sectors—like office buildings, apartment complexes, retail centers, and industrial parks. These properties are spread across multiple locations, reducing the risk of having all your money tied to one market.
With a 1031, you choose each new property yourself. With a 721, you gain exposure to a professionally managed, highly diversified real estate portfolio—without the responsibility of managing it yourself.
Owning real estate comes with big responsibilities. If your property sits empty, you’re the one covering the costs. If the roof leaks or the HVAC breaks, the repair bill comes straight from your pocket. Managing a property means dealing with tenants, maintenance, and unexpected expenses.
With a 1031 Exchange, you remain the active owner. You get full control, but you also take on all the risks and daily responsibilities of managing the property.
A 721 Exchange changes that. When you transfer your property into a Real Estate Investment Trust (REIT) or a partnership, you’re no longer responsible for maintenance, repairs, or tenant issues. The REIT’s professional management team handles everything. You still have an investment in real estate but without the headaches of being a landlord.
For investors seeking a passive approach to real estate, a 721 Exchange may be an option to consider. However, potential investors should evaluate the risks and tax implications before making a decision and consult with their financial and tax advisors.
When you invest in real estate, liquidity — or the ability to turn your investment into cash quickly — is usually limited. If you own physical property, selling it can take time. You need to find a buyer, negotiate a price, and wait for the deal to close.
With a 1031 Exchange, you’re required to reinvest the proceeds into more real estate. This means your money is tied up in physical property again, making it hard to access cash if you need it.
On the other hand, a 721 Exchange offers more liquidity. After exchanging a property, investors receive operating partnership (OP) units, which may later be converted into publicly traded REIT shares. If you need to access your cash, REIT shares may offer more liquidity compared to direct real estate holdings. However, these shares are subject to market risks, price fluctuations, and potential restrictions on sales. Consult with your financial advisor to understand liquidity limitations.
In short, if you want more control over your money and faster access to cash, a 721 Exchange may be a better option.
With a 1031 Exchange, your options are limited. If you ever want to cash out, you must either complete another 1031 exchange to defer taxes again or sell the property outright. If you sell, you’ll owe capital gains taxes on the profit.
A 721 Exchange provides an alternative exit strategy, allowing investors to exchange real estate for REIT shares. However, once REIT shares are sold, capital gains taxes become due, and investors lose the ability to defer taxes through future 1031 exchanges. Consult a tax professional to evaluate the tax consequences before selling REIT shares.
If you’re looking for an easier way to gradually exit real estate ownership while keeping access to your wealth, a 721 Exchange could be a smart move. However, investors should carefully evaluate tax implications and potential risks with the guidance of a qualified financial advisor.
A 1031 Exchange can be a great option for investors who want to stay involved with real estate directly. Here’s when it might make sense for you:
In short, if you’re focused on direct real estate ownership, tax deferral, and reinvesting in like-kind properties, the 1031 Exchange could be the right fit for you.
A 721 Exchange can be a great choice for investors looking to make a shift in how they manage their real estate. Here’s when you might want to consider it:
In short, if you’re ready for passive income, professional management, and greater liquidity, the 721 Exchange might be the right strategy to help you shift gears in your investment journey.
Now that you understand the key differences between the 1031 and 721 exchanges, it's time to decide which path fits your investment goals. If you’re looking for control and property ownership, the 1031 exchange may be your best option. But if you’re seeking ease, diversification, and liquidity, the 721 exchange could be a game-changer.
Ready to take the next step? Reach out now, and let’s talk about which option is best suited to your investment strategy.