1031 Exchange vs. 721 Exchange

William O. Kessler, Edmonds Lawyer

In 2021, I wrote a post about 1031 exchanges into Delaware Statutory Trusts (DSTs) and presented a webinar on the subject.

By contrast to a 1031 exchange, a 721 exchange allows investors to defer capital gains taxes on the sale of appreciated real estate assets by contributing them to a partnership that owns real estate assets. The partnership then issues operating partnership (OP) units to the investor in exchange for their contribution. The investor can then exchange their OP units for shares in a real estate investment trust (REIT) without triggering any taxable events.

So while both exchanges are tax-deferred, they differ in terms of what is being exchanged and when taxes are paid. In a 1031 exchange, investors swap one real estate investment property for another and pay capital gains taxes when they sell the replacement property. In contrast, in a 721 exchange, investors contribute appreciated real estate assets to a partnership that owns real estate assets and pay capital gains taxes when they sell their operating partnership units or convert them to REIT shares.

Should you consider a 1031 or a 721? For these questions and any other questions about buying or selling investment real estate in Washington, please contact our firm at info@beresfordlaw.com or by phone at (425) 776-4100.

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