Category: 1031 Exchange General

Both a 1031 exchange and a 721 exchange allow Exchangers to defer capital gains and other taxes on the sale of business or investment use real estate when proper procedures are followed, however they do have differences and they cannot be used interchangeably as each has specific considerations.
What is a 1031 exchange?
1031 exchange is one of the most popular tax strategies available when selling and buying real estate “held for productive use in a trade or business or investment”. Property owners of real estate used for business or investment use can utilize a 1031 exchange on the sale of the property to defer capital gains, depreciation recapture, state, and net investment income tax when they reinvest the proceeds from the sale into the purchase of qualifying property. It does not have to be the same kind of property. All types of real estate are considered like kind to all other types.
In a 1031 exchange, the Exchanger is not permitted to receive nor control and is not allowed to “benefit” from the funds from the sale of their sold property, the relinquished property. An example of benefitting would be to pledge the account as collateral for a loan. The funds are held with a Qualified Intermediary until the time the Exchanger is ready to close on the sale of their new property, the Replacement Property. The funds are then directly used to purchase the replacement property. Because the Exchanger never actually had any access or benefit from the funds and since the Exchanger traded the relinquished property for the replacement property through the Qualified Intermediary, they may defer the taxes they would normally pay if they had sold the property outright and retained the money.
What is a 721 exchange?
A 721 exchange, formally referred to as a 721 Umbrella Partnership Real Estate Investment (UpREIT), is similar to a 1031 exchange in that a real estate investor can sell a property used for business or investment use and defer taxes on the sale if they reinvest the funds by following specific criteria.
In a 721 exchange, the investor either (1) transfers ownership of the relinquished property to the REIT and receives an equivalent value in the form of operating partnership units or (2) or sells to a third party of choice using a 1031 exchange and investing the funds into a DST, often made available by the REIT. When sufficient time passes, usually two years, the DST interest can be traded for Real Estate Investment Trust (REIT) shares.
Similarities and Differences of a 1031 Exchange and 721 Exchange
Similarities
There are a handful of similarities between a 1031 exchange and a 721 exchange, which include:

Property being sold must be held for business or investment use
 
When properly executed, both defer capital gain tax, depreciation recapture, state and net investment income tax
 
Both allow for investment diversification
 
Both allow heirs of the Taxpayer to get a “step-up” in basis if they pass away still vested with the REIT interest or Replacement Property interest in the case of a 1031 exchange

Differences
The differences between a 1031 exchange and a 721 exchange are notable and include:

A Qualified Intermediary facilitates a 1031 Exchange, while a 721 exchange is facilitated by the REIT sponsor
 
721 exchanges do not have the same timelines, 45-day Identification and 180-day Exchange period, as a 1031 Exchange 1031 exchange Replacement Property Identification Rules do not apply to 721 exchanges
 
In a 721 exchange a REIT must be willing to either acquire your Relinquished Property, or go through the process described above with a 1031 exchange and later trade for the REIT shares.
 
In a 721 exchange, once an investor sells the property to the REIT, they cannot do another exchange upon sale of the shares held. Once the REIT shares are sold, all the deferred taxes become payable regardless of entering into a new REIT investment. However, under 1031 exchange a Taxpayer can do consecutive exchanges indefinitely to continue deferral.

Both 1031 and 721 exchanges provide real estate investors the opportunity exit out of existing real estate investment and reinvest without tax consequences. However, based on the details above they are unique and advanced planning and a thorough understanding should be in place prior to embarking on either. It is always recommended to talk with your CPA, Tax Advisor, or Financial Advisor prior to implementing any tax deferral strategies.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Both a 1031 exchange and a 721 exchange allow Exchangers to defer capital gains and other taxes on the sale of business or investment use real estate when proper procedures are followed, however they do have differences and they cannot be used interchangeably as each has specific considerations.
What is a 1031 exchange?
1031 exchange is one of the most popular tax strategies available when selling and buying real estate “held for productive use in a trade or business or investment”. Property owners of real estate used for business or investment use can utilize a 1031 exchange on the sale of the property to defer capital gains, depreciation recapture, state, and net investment income tax when they reinvest the proceeds from the sale into the purchase of qualifying property. It does not have to be the same kind of property. All types of real estate are considered like kind to all other types.
In a 1031 exchange, the Exchanger is not permitted to receive nor control and is not allowed to “benefit” from the funds from the sale of their sold property, the relinquished property. An example of benefitting would be to pledge the account as collateral for a loan. The funds are held with a Qualified Intermediary until the time the Exchanger is ready to close on the sale of their new property, the Replacement Property. The funds are then directly used to purchase the replacement property. Because the Exchanger never actually had any access or benefit from the funds and since the Exchanger traded the relinquished property for the replacement property through the Qualified Intermediary, they may defer the taxes they would normally pay if they had sold the property outright and retained the money.
What is a 721 exchange?
A 721 exchange, formally referred to as a 721 Umbrella Partnership Real Estate Investment (UpREIT), is similar to a 1031 exchange in that a real estate investor can sell a property used for business or investment use and defer taxes on the sale if they reinvest the funds by following specific criteria.
In a 721 exchange, the investor either (1) transfers ownership of the relinquished property to the REIT and receives an equivalent value in the form of operating partnership units or (2) or sells to a third party of choice using a 1031 exchange and investing the funds into a DST, often made available by the REIT. When sufficient time passes, usually two years, the DST interest can be traded for Real Estate Investment Trust (REIT) shares.
Similarities and Differences of a 1031 Exchange and 721 Exchange
Similarities
There are a handful of similarities between a 1031 exchange and a 721 exchange, which include:

Property being sold must be held for business or investment use
 
When properly executed, both defer capital gain tax, depreciation recapture, state and net investment income tax
 
Both allow for investment diversification
 
Both allow heirs of the Taxpayer to get a “step-up” in basis if they pass away still vested with the REIT interest or Replacement Property interest in the case of a 1031 exchange

Differences
The differences between a 1031 exchange and a 721 exchange are notable and include:

A Qualified Intermediary facilitates a 1031 Exchange, while a 721 exchange is facilitated by the REIT sponsor
 
721 exchanges do not have the same timelines, 45-day Identification and 180-day Exchange period, as a 1031 Exchange 1031 exchange Replacement Property Identification Rules do not apply to 721 exchanges
 
In a 721 exchange a REIT must be willing to either acquire your Relinquished Property, or go through the process described above with a 1031 exchange and later trade for the REIT shares.
 
In a 721 exchange, once an investor sells the property to the REIT, they cannot do another exchange upon sale of the shares held. Once the REIT shares are sold, all the deferred taxes become payable regardless of entering into a new REIT investment. However, under 1031 exchange a Taxpayer can do consecutive exchanges indefinitely to continue deferral.

Both 1031 and 721 exchanges provide real estate investors the opportunity exit out of existing real estate investment and reinvest without tax consequences. However, based on the details above they are unique and advanced planning and a thorough understanding should be in place prior to embarking on either. It is always recommended to talk with your CPA, Tax Advisor, or Financial Advisor prior to implementing any tax deferral strategies.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Both a 1031 exchange and a 721 exchange allow Exchangers to defer capital gains and other taxes on the sale of business or investment use real estate when proper procedures are followed, however they do have differences and they cannot be used interchangeably as each has specific considerations.
What is a 1031 exchange?
1031 exchange is one of the most popular tax strategies available when selling and buying real estate “held for productive use in a trade or business or investment”. Property owners of real estate used for business or investment use can utilize a 1031 exchange on the sale of the property to defer capital gains, depreciation recapture, state, and net investment income tax when they reinvest the proceeds from the sale into the purchase of qualifying property. It does not have to be the same kind of property. All types of real estate are considered like kind to all other types.
In a 1031 exchange, the Exchanger is not permitted to receive nor control and is not allowed to “benefit” from the funds from the sale of their sold property, the relinquished property. An example of benefitting would be to pledge the account as collateral for a loan. The funds are held with a Qualified Intermediary until the time the Exchanger is ready to close on the sale of their new property, the Replacement Property. The funds are then directly used to purchase the replacement property. Because the Exchanger never actually had any access or benefit from the funds and since the Exchanger traded the relinquished property for the replacement property through the Qualified Intermediary, they may defer the taxes they would normally pay if they had sold the property outright and retained the money.
What is a 721 exchange?
A 721 exchange, formally referred to as a 721 Umbrella Partnership Real Estate Investment (UpREIT), is similar to a 1031 exchange in that a real estate investor can sell a property used for business or investment use and defer taxes on the sale if they reinvest the funds by following specific criteria.
In a 721 exchange, the investor either (1) transfers ownership of the relinquished property to the REIT and receives an equivalent value in the form of operating partnership units or (2) or sells to a third party of choice using a 1031 exchange and investing the funds into a DST, often made available by the REIT. When sufficient time passes, usually two years, the DST interest can be traded for Real Estate Investment Trust (REIT) shares.
Similarities and Differences of a 1031 Exchange and 721 Exchange
Similarities
There are a handful of similarities between a 1031 exchange and a 721 exchange, which include:

Property being sold must be held for business or investment use
 
When properly executed, both defer capital gain tax, depreciation recapture, state and net investment income tax
 
Both allow for investment diversification
 
Both allow heirs of the Taxpayer to get a “step-up” in basis if they pass away still vested with the REIT interest or Replacement Property interest in the case of a 1031 exchange

Differences
The differences between a 1031 exchange and a 721 exchange are notable and include:

A Qualified Intermediary facilitates a 1031 Exchange, while a 721 exchange is facilitated by the REIT sponsor
 
721 exchanges do not have the same timelines, 45-day Identification and 180-day Exchange period, as a 1031 Exchange 1031 exchange Replacement Property Identification Rules do not apply to 721 exchanges
 
In a 721 exchange a REIT must be willing to either acquire your Relinquished Property, or go through the process described above with a 1031 exchange and later trade for the REIT shares.
 
In a 721 exchange, once an investor sells the property to the REIT, they cannot do another exchange upon sale of the shares held. Once the REIT shares are sold, all the deferred taxes become payable regardless of entering into a new REIT investment. However, under 1031 exchange a Taxpayer can do consecutive exchanges indefinitely to continue deferral.

Both 1031 and 721 exchanges provide real estate investors the opportunity exit out of existing real estate investment and reinvest without tax consequences. However, based on the details above they are unique and advanced planning and a thorough understanding should be in place prior to embarking on either. It is always recommended to talk with your CPA, Tax Advisor, or Financial Advisor prior to implementing any tax deferral strategies.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

As most people acquainted with 1031 exchange transactions know, a 1031 exchange can be used to defer capital gains taxes on the sale of virtually any “like-kind” real property interest. “Like-kind” real property is any property the taxpayer owns or intends to acquire for investment or productive use in a trade or business. Many times, the focus is on commercial, light industrial, office or residential properties, but a significant number of 1031 exchanges involve farm, ranch, and other agricultural properties.
Ag-Related 1031 Exchanges
In the past 40+ years in the transactional real estate and 1031 exchange arenas, we have witnessed Ag sector taxpayers increasingly use 1031 exchanges for a variety of reasons. The typical example is the sale of unproductive property or property not suited to an existing Ag operation and use of the exchange funds to acquire another more productive property or property that otherwise improves operational efficiencies.
Another expansion of opportunities afforded by a 1031 exchange is the sale of agricultural land or water rights, timber rights, oil and gas and mineral rights not necessary for farm or ranch operations and exchanges into other real property interests. Sometimes this type of transaction affords a farmer or rancher the opportunity to develop an in¬come stream not dependent on commodity prices or not subject to the vagaries of the agricultural economy.
Many agricultural landowners have sold perpetual easements or long-term leasehold interests (30+ years in duration) for the installation of wind power and solar power generation facilities on portions of their farms or ranches that are not integral to crop or livestock production. There are also increasing opportunities for farmers and ranchers to sell conservation easements to private conservation organizations or government entities such as the U.S. Department of Agriculture and use the cash proceeds to exchange into other real property interests.
We have also witnessed many situations in which the current generation of owners who have succeeded to multi-generational farms and ranches are faced with the reality that there is no next generation to work the land and livestock 24/7/365 days a year while facing fluctuations in the economy, disease, predators, drought, fires and other natural disasters. Fortunately for those folks, there are always buyers interested in agricultural land and the aging sellers can exchange out of a sale into other types of income-producing property. For the first time in their lives, those diverse income streams support the retirees independently of the agriculture markets.
Investors Targeting Agricultural Properties
On the other side of the equation, there are many investors who have begun to realize the benefits of investing in agri¬cultural property. Though the return on investment is not as high as certain types of commercial, office or residential rental property, pastureland, which is in short supply for livestock producers, provides a steady cash return and an upside in appreciation in value. Some Ag property buyers are developers who see another higher and best use for property that has historically been used in agribusiness.
Many agricultural investors are also investing in farmland which has heretofore been in dry land crop production or pastureland but has the capacity for increased production and profitability. Those producers can marshal underutilized water resources and, with enhanced irrigation systems and farming practices, convert dry land farms into other production such as row crops, vineyards, etc. The profitability of the land can also be changed with the introduction of organic crops which bring higher prices at the marketplace. With each of these modifications there is a corresponding appreciation in value of the land.
Don’t overlook the possibilities available to taxpayers in exchange transactions involving agricultural real estate. If you have any questions about these types of transactions, Accruit has a robust team which specializes in agribusiness real estate transactions, and we are happy to provide you with the expertise to successfully complete these types of exchange transactions.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.

As most people acquainted with 1031 exchange transactions know, a 1031 exchange can be used to defer capital gains taxes on the sale of virtually any “like-kind” real property interest. “Like-kind” real property is any property the taxpayer owns or intends to acquire for investment or productive use in a trade or business. Many times, the focus is on commercial, light industrial, office or residential properties, but a significant number of 1031 exchanges involve farm, ranch, and other agricultural properties.
Ag-Related 1031 Exchanges
In the past 40+ years in the transactional real estate and 1031 exchange arenas, we have witnessed Ag sector taxpayers increasingly use 1031 exchanges for a variety of reasons. The typical example is the sale of unproductive property or property not suited to an existing Ag operation and use of the exchange funds to acquire another more productive property or property that otherwise improves operational efficiencies.
Another expansion of opportunities afforded by a 1031 exchange is the sale of agricultural land or water rights, timber rights, oil and gas and mineral rights not necessary for farm or ranch operations and exchanges into other real property interests. Sometimes this type of transaction affords a farmer or rancher the opportunity to develop an in¬come stream not dependent on commodity prices or not subject to the vagaries of the agricultural economy.
Many agricultural landowners have sold perpetual easements or long-term leasehold interests (30+ years in duration) for the installation of wind power and solar power generation facilities on portions of their farms or ranches that are not integral to crop or livestock production. There are also increasing opportunities for farmers and ranchers to sell conservation easements to private conservation organizations or government entities such as the U.S. Department of Agriculture and use the cash proceeds to exchange into other real property interests.
We have also witnessed many situations in which the current generation of owners who have succeeded to multi-generational farms and ranches are faced with the reality that there is no next generation to work the land and livestock 24/7/365 days a year while facing fluctuations in the economy, disease, predators, drought, fires and other natural disasters. Fortunately for those folks, there are always buyers interested in agricultural land and the aging sellers can exchange out of a sale into other types of income-producing property. For the first time in their lives, those diverse income streams support the retirees independently of the agriculture markets.
Investors Targeting Agricultural Properties
On the other side of the equation, there are many investors who have begun to realize the benefits of investing in agri¬cultural property. Though the return on investment is not as high as certain types of commercial, office or residential rental property, pastureland, which is in short supply for livestock producers, provides a steady cash return and an upside in appreciation in value. Some Ag property buyers are developers who see another higher and best use for property that has historically been used in agribusiness.
Many agricultural investors are also investing in farmland which has heretofore been in dry land crop production or pastureland but has the capacity for increased production and profitability. Those producers can marshal underutilized water resources and, with enhanced irrigation systems and farming practices, convert dry land farms into other production such as row crops, vineyards, etc. The profitability of the land can also be changed with the introduction of organic crops which bring higher prices at the marketplace. With each of these modifications there is a corresponding appreciation in value of the land.
Don’t overlook the possibilities available to taxpayers in exchange transactions involving agricultural real estate. If you have any questions about these types of transactions, Accruit has a robust team which specializes in agribusiness real estate transactions, and we are happy to provide you with the expertise to successfully complete these types of exchange transactions.
 
The material in this blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Accruit performs the duties of a Qualified Intermediary, and as such does not offer or sell investments or provide investment, legal, or tax advice.