Section 721 Exchange (UPREIT): The Ultimate Real Estate Exit
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Tax Tips / Real Estate Exit
Section 721 Exchange (UPREIT): The Ultimate Real Estate Exit
💡 Executive Summary
- Problem: DSTs and 1031 Exchanges keep your money illiquid. You can’t sell “just a little bit” if you need cash.
- Solution: A 721 Exchange allows you to contribute property to a REIT in exchange for “Operating Partnership (OP) Units.”
- Result: You get tax deferral, instant diversification, and the ability to liquidate shares incrementally (paying tax only on what you sell).
⚠️ ONE-WAY STREET
This is the “Hotel California” of tax strategies. Once you move assets into a 721 Exchange (UPREIT), you cannot go back to a 1031 Exchange. The only way out is to sell the shares and pay the tax (or die and get a Step-up).
This is the “Hotel California” of tax strategies. Once you move assets into a 721 Exchange (UPREIT), you cannot go back to a 1031 Exchange. The only way out is to sell the shares and pay the tax (or die and get a Step-up).
For aging real estate investors (Tier L2+), the goal often shifts from “Empire Building” to “Liquidity & Safety.” The 721 Exchange converts a concentrated, hard-to-sell building into a diversified, liquid portfolio without triggering a tax event.
🧐 Core Definition: OP Units
You don’t get REIT stock directly (that would be taxable). You get Operating Partnership (OP) Units. These mimic the value and dividends of the REIT stock but remain tax-deferred under IRC § 721.
You don’t get REIT stock directly (that would be taxable). You get Operating Partnership (OP) Units. These mimic the value and dividends of the REIT stock but remain tax-deferred under IRC § 721.
Performance Simulation
Risk & Liquidity Profile
1031 Exchange / DST
Single Asset Risk / 0% Liquidity
Locked
721 UPREIT Structure
Diversified / High Liquidity*
Liquid Option
Comparison: 1031 vs. 721
| Feature | 1031 Exchange (DST) | 721 Exchange (UPREIT) |
|---|---|---|
| Diversification | Single Property | Portfolio (100+ Properties) |
| Exit Route | Swap to another Property | Convert to Cash (Taxable) |
| Best For | Growing Wealth | Preserving & Spending Wealth |
“The 721 Exchange is the bridge between the private real estate world and the public stock market. It is the most sophisticated way to retire from being a landlord.”
🔗 Related BMT Playbooks (Internal)
🛡️ The Precursor: Using DSTs before a 721 Exit 📉 The Foundation: Basics of Tax-Deferred Exchanges ✅ The Goal: Holding OP Units until Step-up in Basis🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 721 (Nonrecognition of Gain) 📘 Industry Guide: NAREIT Explanation of UPREITs 🏛️ SEC Investor Bulletin: Real Estate Investment Trusts
BMT designs for tax reality, not theory.