A 721 exchange exercises a tax provision that allows for the non-recognition of gains when assets are contributed to a partnership in exchange for partnership interests. Leveraging an UPREIT, income-producing property owners may defer taxation of capital gain until partnership interests are redeemed for REIT shares or cash.

Shares of the REIT can typically be liquidated at designed times, in accordance with the terms of the REIT.

What is a REIT?

REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet a number of requirements to qualify as REITs. Some REITs trade on major stock exchanges, and they offer a number of potential benefits to investors.

What is an UPREIT?

To complete a successful 721 exchange transaction, the REIT must be structured as an umbrella partnership real estate investment trust, or UPREIT.

What is a 721 Exchange?

Internal Revenue Code (IRC) section 721 refers to a provision of the U.S. tax code that allows for tax-free transfers of income-producing real property to a real estate investment trust’s (REIT’s) operating partnership in exchange for ownership interest in the partnership.

Steps To Execute a 721 Exchange


Investor contributes property to REIT’s operating partnership in exchange for units in operating partnership


No gain or loss recognized to a partnership or any of its partners in the case of a contribution of property to the partnership


Partnership interests are then redeemed for REIT shares or cash – either is a taxable event


REIT shares can be liquidated by investors via the REIT’s redemption plan

Potential benefits of a 721 exchange/UPREIT transaction



Access to indirect ownership of larger portfolio of properties


Estate Planning

Operating partnership units can be split equally and either held or liquidated by the holder’s heirs or estate, receiving a step-up in basis, paying no capital gains and depreciation recapture taxes



Owners of OP Units may be able to convert their units for shares of common stock of the REIT, which may provide access to liquidity options or cash


Passive Investing

Owners of income-producing properties contributed to the REIT no longer have to worry about management responsibilities

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Section 721 of the Internal Revenue Code also allows for the deferral of capital gains by contributing real property for interests in an operating partnership of a REIT.


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This communication is not intended as tax advice.