How a 721 Exchange Helps You Save on Taxes

By Rachael Richards

Rachael has been a top real estate agent in the Phoenix area for over 20 years. She and her team are consistently in the top 1% and have worked through all types of markets. Selling over 200 homes each year while maintaining a core value that clients come first, Rachael and her team have a wealth of experience and industry knowledge.

Selling an investment property can come with a hefty capital gains tax that takes a big chunk of your profits. If the thought of paying that tax is causing hesitation, the 721 exchange is a potential solution that could help you grow your wealth without that financial burden. This strategy allows you to defer paying capital gains tax and continue building your real estate portfolio with less hassle.

When you sell a property, you pay capital gains tax on the profit. This tax can eat into your earnings, leaving you with less to reinvest. By using a 721 exchange, you can defer those taxes and keep your money working for you. While we aren’t able to apply this to our personal residences, it is an effective strategy for anyone looking to sell an income-producing property, who wants to avoid paying taxes right away while still growing their wealth through real estate.

What is a 721 Exchange? A 721 exchange lets you trade your property for shares in a Real Estate Investment Trust (REIT), instead of selling it outright. In exchange, you receive operating partnership units, which are similar to shares. The best part is that you don’t need to pay capital gains tax when you make the exchange. This allows you to keep your money working for you while deferring taxes to a later date.

Is a 721 Exchange the right choice for you? A 721 exchange offers several advantages that make it an appealing strategy for growing your real estate portfolio. Whether you’re looking to avoid the immediate tax burden of selling your property, earn passive income, or streamline your investment management, this approach provides solutions that fit a variety of needs:

• No immediate capital gains tax: The most obvious benefit of a 721 exchange is the ability to defer paying capital gains tax. This means more money stays in your pocket, ready to be reinvested into new opportunities.
• Earn passive income: With a REIT, you can earn passive income from a diversified portfolio of real estate assets without dealing with the day-to-day management of properties. It’s a hands-off way to keep your real estate income flowing.
• Professional management of your assets: You won’t have to worry about maintenance, tenants, or property management. REITs handle all of that for you, giving you peace of mind and more time to focus on other things.
• Flexibility to convert shares into cash: When the time is right, you can convert your shares into cash. This gives you control over when you access your funds, unlike traditional property sales that can require you to sell when the market isn’t ideal.

Who should consider a 721 Exchange? A 721 exchange isn’t just for experienced investors—it’s a smart option for anyone looking to grow their wealth through real estate in a tax-efficient way. If you find yourself in any of these situations, a 721 exchange might be a great fit for you:

• You’re ready to simplify your investments: If you’re tired of the day-to-day responsibilities of property management, the 721 exchange lets you step away from managing tenants and maintenance while still earning income.
• You want to reduce risk and diversify: If you’re looking for a more diversified portfolio without the hassle of owning multiple properties, a REIT offers a way to spread your investments across different real estate assets, reducing your exposure to individual property risks.
• You’re planning for retirement: If you’re nearing retirement and want to ensure a steady income stream without the burden of property upkeep, a 721 exchange can help you transition to more passive investments.
• You’re in a 1031 exchange but facing challenges: If you’re having trouble identifying a replacement property for a 1031 exchange, a 721 exchange can be a great alternative to keep your tax-deferral strategy on track while avoiding the pressure of meeting strict timelines.

So, whether you’re looking to diversify, plan for retirement, or overcome challenges with a 1031 exchange, this strategy could be the solution. If you have any questions, feel free to call or text me at 480-270-5782 or email me at info@rhouserealty.com. I’m here to help you come up with a strategy that can maximize your real estate investment.