1031 vs. 721 Exchanges: Choosing the Right Strategy to Protect and Grow Your Portfolio

Scott Fouser
Sep 8
3 min read

Updated: Sep 9

One of the most powerful advantages in real estate investing is the ability to defer taxes through exchange strategies. Two of the most common — and most misunderstood — are the 1031 exchange and the 721 exchange. While both can preserve capital and accelerate portfolio growth, they serve very different purposes. At RealNet, we help investors understand and execute these strategies so they can maximize long-term returns.

The Basics: What Is a 1031 Exchange?

A 1031 exchange allows an investor to defer capital gains taxes by reinvesting proceeds from the sale of one property into another “like-kind” property. Key features include:

Tax Deferral: No immediate capital gains tax on the sale.
Direct Ownership: You exchange one property for another you own outright.
Strict Timelines: 45 days to identify a replacement property, 180 days to close.
Hands-On Management: You continue to own and manage real estate directly.

1031 exchanges are ideal for investors who want to stay actively involved in property ownership while upgrading, diversifying, or consolidating their holdings.

The Basics: What Is a 721 Exchange?

A 721 exchange (sometimes called an “UPREIT” exchange) allows an investor to contribute property into a Real Estate Investment Trust (REIT) or similar structure in exchange for operating partnership units. Key features include:

Tax Deferral: Like a 1031, gains are deferred until you sell your units.
Passive Ownership: Instead of managing property directly, you hold units in a diversified portfolio.
Liquidity Options: Units can often be converted into REIT shares, providing eventual liquidity.
Institutional Alignment: You benefit from professional management, scale, and diversification.

721 exchanges are ideal for investors seeking a more passive role, portfolio diversification, and access to institutional-quality real estate without direct management responsibility.

Key Differences at a Glance

Feature	1031 Exchange	721 Exchange
Ownership	Direct ownership of new property	Units in REIT/operating partnership
Tax Deferral	Yes	Yes
Management	Active (you manage the property)	Passive (REIT manages portfolio)
Liquidity	Limited — tied to property sale	Units may convert to REIT shares
Diversification	Single-property risk	Diversified REIT portfolio
Timeline	45/180-day rules strictly apply	No 45/180-day timeline pressure

Which Strategy Fits Your Goals?

The right exchange depends on your investment profile:

Stay Active? A 1031 exchange is often best if you want to continue acquiring and managing properties while deferring taxes.
Go Passive? A 721 exchange works better if you’re ready to step back from active management but still want the benefits of real estate ownership.
Blend of Both? Some investors begin with 1031 exchanges to grow their portfolios and later contribute properties into a 721 exchange as part of estate or retirement planning.

How RealNet Helps Investors Decide

Choosing between a 1031 and a 721 isn’t just about taxes — it’s about aligning with your long-term strategy. At RealNet, we help investors:

Evaluate current holdings and market timing.
Model the financial impact of each exchange.
Navigate the mechanics of identification, structuring, and closing.
Connect with the right partners — whether in direct acquisitions or institutional roll-ups.

Final Word

Exchanges are powerful tools, but they’re not one-size-fits-all. The best strategy depends on your portfolio, your time horizon, and your appetite for management.

At RealNet, our job is to help you choose the right path — whether it’s upgrading through a 1031 exchange, transitioning into passive ownership through a 721 exchange, or combining both as your portfolio evolves.

Because in real estate, it’s not just what you own — it’s how you own it.