While selling a business or investment property can feel tedious, it can pressure you to make the best return possible. When investors leverage a 721 exchange, it can help speed up the sale while getting the most out of their property value. So, here are tips to know before starting a 721 exchange and how they work.
Similarly to 1031 exchanges, 721 exchanges allow investors to exchange appreciated real estate properties for like-kind properties solely for business or investment. The operating partnerships convert into real estate investment trust shares known as real estate investment trusts (REITs). As such, properties allowing for 721 exchanges within a REIT can work as an umbrella partnership real estate investment trust (UPREIT).
Here are tips to know before starting a 721 exchange so you have the preparation you need. Understanding 721 exchange qualifications, benefits, and things to avoid can help you set a foundation of knowledge to go into it confidently.
There is a list of qualifications to meet for a721 exchanges. Most 721 exchanges focus on and require investments for institutional-grade real estate due to certain investors owning the properties. As such, they cannot directly contribute properties to a REIT via 721 exchanges.
Additionally, one of the things to know about 721 exchanges is that investors must follow several rules; the investor’s sold property must get exchanged for a like-kind property of equal or greater value. Furthermore, 721 exchanges must occur through qualified intermediaries, along with the sale and purchase of properties within a specific time. Lastly, investors must complete a 721 exchange by notifying the IRS.
A notable downside to 721 exchanges is their investment inflexibility. More specifically, clients can’t pursue other deferred tax exchanges after receiving shares for a REIT. As a result, investors must take considerable thought and care when choosing a long-term REIT work availability to avoid making regretful decisions.
Many investors choose to move forward with 721 exchanges due to their immense benefits. Firstly, they offer tax advantages by deferring taxes via tax-deferred exchanges of appreciated real estate in operating partnership shares. Furthermore, 721 exchanges offer properties in various locations, creating areas of diversification.
Lastly, upon the death of a 721 exchange investor, it allows them to pass their investments onto their heirs. Shares become equally split, either remaining held or liquidated by trust beneficiaries. Because shares pass through trusts, beneficiaries can defer capital gains taxes.
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