Loren Smith & Brad Johnson From Evergreen Capital
Most real estate investors are familiar with the 1031 exchange & the ability to defer tax on real estate sales by transferring that equity to a “like kind” property. It has provided investors with a simple way to defer, not dodge, capital gains tax since its inception in 1928.
A lesser known but increasingly popular option is the Delaware Statutory Trust 1031 Exchange or DST 1031. This structure allows investors to sell their property & invest in a fractional ownership of a real estate portfolio instead of individual property (for our primer on the DST 1031 click here).
There are significant benefits to transferring real estate equity into a portfolio including access to class A properties, stellar management teams, monthly income, & diversified risk. Similarly, investors allow have access to another great option – the 721 exchange.
What is the 721 Exchange?
While the DST allows investors to own a fraction of a private portfolio, a 721 exchange or “UPREIT” allows investors to transfer their real estate equity into shares of an operating partnership (OP) that can ultimately be converted into shares of a REIT. Contrasting the DST, which invests in a private portfolio (with a limit of 499 fractional owners) an UPREIT is an avenue to acquire shares of well known & high performing REITs.
What are advantages of a 721 Exchange?
1. Increased Liquidity
Traditional real estate is a very illiquid asset class. Investors using a 721 exchange can convert their operating partnership shares in shares of a REIT, which can be sold like other public securities (triggering a taxable event).
2. Access to 5-star Assets & Management Teams
REITs allow investors to tap into some of the world’s greatest assets along with stellar property management. Many 721 exchange customers are landlords ready cease self-management or having to monitor 3rd party management. True passive real estate!
3. Tax Advantages
Capital gains can be deferred until an investor converts the OP shares or the partnership’s assets are sold.
4. Reliable Income
Real Estate’s consistent income is a primary reason it’s popular among investors. A REIT is required to pay out at least 90% of it’s net income to shareholders as dividends, providing an ideal stream of revenue like traditional private real estate.
5. Easier exchange process
Much of the anxiety investors face in the 1031 exchange process is the task of identifying a like property to transfer equity into within the required timeframe. With unpredictable real estate markets, changing interest rates, & competition with other buyers’ investors are able to breath easy as their capital is seamlessly transferred from escrow to a selected operating partnership.
