721 Exchange

A 721 exchange, named for Internal Revenue Code Section 721, lets a real estate owner contribute appreciated property to an operating partnership in exchange for partnership units without triggering an immediate taxable gain. In the real estate world it is most often used in the UPREIT (umbrella partnership real estate investment trust) structure, where the investor contributes property, or a Delaware Statutory Trust interest, to the operating partnership of a REIT and receives operating partnership (OP) units in return. Unlike a 1031 exchange, which moves an investor from one property into another like-kind property, a 721 exchange is generally a one-way, terminal transaction: once an investor converts into OP units, those units are not eligible to be 1031-exchanged again. The appeal is that the investor trades a single, illiquid, management-intensive property for an interest in a large, diversified, professionally managed REIT portfolio, continues to defer the original gain, and often gains a path to liquidity by converting OP units into REIT shares over time. Section 721 itself contains no fixed 45- or 180-day deadlines, but the contribution must reflect a genuine partnership transaction and be carefully structured to avoid being recharacterized as a disguised sale.