Has anyone done a 721 exchange instead of a 1031

Question

Please let me know your experience on these kind of exchanges and what type of funds you invested in.

Dave Foster · Answer

@John McKee, that's right.  That is the nasty gram from the IRS at the end of a 721.  You have changed the asset from real estate (1031 eligible) to a security (not 1031 eligible).  So you need to either make sure you're not going to sell the REIT ever.  Or be willing to pay the tax when you sell.  Or keep the asset as real estate.  And 1031 into something like a DST which can be passive but still retains the 1031 option whenever it sells.

I have securities and syndications etc.  And I own real estate.  I don't let these two asset classes mix.  I keep securities/syndications separate.  And I keep real estate separate.  That maximizes my tax savings for my real estate through the 1031 exchange.

John M. · Answer

@Dave Foster

So are you saying that if the REIT sells then I have to pay the tax?  Couldn't I just roll it into another reit?

Dave Foster · Answer

@John McKee, A 721 into a reit can be a good option at certain points in a real estate cycle or at certain times in an investor's life cycle.  The only issue I have with them is that they permanently convert a real estate asset with gain into an equities asset with gain.  When you do that you lose the opportunity to further defer tax ongoing.  You will pay the tax if you ever sell the REIT shares.  They do get a step up in basis.  But REITS are not usually thought of as forever investments.  So make sure you'll be able to hold yours forever till death.  Or you'll have a nasty tax consequence.

Denver McClure · Answer

Hey @John McKee, feel free to PM me if you'd like to chat about it. We focus on 1031/DSTs and 721 exchanges for our clients. If you do go the 721 route, focus on AFFO and Debt-Service Ratios of the REIT to evaluate it's quality. Those metrics are more important than the actual distribution rate. Also, I'd recommend working with an Investment Advisor instead of a BD, as Advisors can provide either discounted share prices or equity bonuses depending on the REIT or DST to find.

Has anyone done a 721 exchange instead of a 1031

Most Popular Reply