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The 721 Upgrade: Keep the Income. Lose the Management. Transition to Investor.

October 26, 2025

Overview

For a new real estate investor, there are no thrills like closing on your first property and receiving your first rent payment. These are signs that you’ve made the right choice, putting your money into a tangible asset that will grow in value while also providing a reliable source of income.

But while those feel-good milestones can still make you happy as your portfolio expands, there are some drawbacks to real estate investing that can cause you to think about changing up your assets. Fortunately, there’s a well-practiced solution that gives investors the advantages of real estate investment without many of the headaches and complications that it can come with.

A 721 exchange is a process in which you swap a property you own for units in a special partnership controlled by an Umbrella Partnership Real Estate Investment Trust (UPREIT). Created by Section 721 of the Internal Revenue Code, a 721 exchange gives investors a wide array of advantages they would never be able to access without changing their portfolio.

“We recommend taking a good look at your current portfolio and evaluating how it fits into your needs going forward,” says Dwight Dunton, founder, CEO, and CIO of Bonaventure, an integrated alternative asset management firm based in Alexandria, Virginia. “You may find that a solution like a 721 exchange maintains your real estate income while providing you with tax advantages and reducing the time you spend on property management.”

What are the Advantages of a 721 Exchange?

Investors count on the steady income stream they receive from their real estate portfolios, but they also know that money doesn’t flow to them easily. It’s the product of lots of work behind the scenes managing tenants, expenses, and maintenance. If their property(ies) are concentrated in one geographic location or rental category, they also need to keep up on changes in the local economy as well as natural disasters such as floods and earthquakes that can devastate their holdings.

This is why many are looking for solutions that keep them in the real estate market while freeing up their valuable time. Here are some reasons why a 721 Exchange makes sense for investors interested in simplifying their portfolios:

Upgrade Your Workload—With a 721 exchange you’re trading the active management of your properties for the role of a passive investor. You won’t be choosing colors the next time the building is repainted, and you won’t be shaking your tenant’s hand. But you also won’t be scheduling vendors for repairs and maintenance or arranging times for prospects to see the property. And, best of all, you’re still receiving a monthly income stream.

Defer Capital Gains Taxes—Normally when you sell a property, you’re on the hook for capital gains taxes on any profits you receive. But a 721 exchange takes advantage of the more well-known practice of the 1031 exchange. You swap one property for another of equal or greater value, in this case operating partnership (OP) units in a UPREIT portfolio and defer taxes until you sell your units or convert them into REIT shares. In addition, if you leave your 721 portfolio to your heirs, they benefit from a “step-up in basis.” This means the value of the inherited asset resets to its current market value, which can reduce or even eliminate the deferred capital gains taxes.

Upgrade Your Portfolio—Rather than a handful of properties, 721 participants own a well-diversified real estate portfolio of institutional-grade properties. This gives them ownership in assets they otherwise would not have been able to afford and reduces the risks involved in owning properties in a small geographic area or concentrated in a particular category such as just apartments or just office space.

Faster Liquidity—One of the downsides of real estate investment is that if you suddenly need cash, your portfolio is not the first go-to. Properties can take time to prepare, list, and sell, which is difficult when timing is an issue. Liquidity after a 721 exchange, however, is a different story if you’ve already passed a waiting period. You would be able to convert your OP units into corresponding shares of the underlying REIT, which are traded publicly through the stock market. In the case of a private REIT, you would redeem the OP units for cash from the ownership.

Upgrade Your Estate Planning—If you’re planning to leave your estate to more than one loved one, a 721 can help simplify the process. Leaving a rental property to a group can lead to complications if some want to keep the investment while others want to sell it. With a 721 exchange, you can specify how many OP units each person receives, giving them the freedom to keep or sell them as they wish.

Making a 721 Exchange Work for You

In a traditional 1031 exchange, investors must adhere to two strict deadlines that begin the day the relinquished property closes. Within 45 calendar days, you must formally identify up to three potential replacement properties (under the “three-property rule”) to comply with IRS identification rules. Then, within 180 calendar days, you must complete the acquisition of one or more of those identified properties. These deadlines are firm, measured in calendar days rather than business days, and cannot be extended except in the rare cases of federally declared disasters.

These deadlines can be challenging to meet, which makes a 721 exchange an attractive alternative. Unlike a 1031 exchange, the 721 transaction is a streamlined process that typically occurs after the sale of the relinquished property. Investors who begin with a 1031 exchange but become concerned about its strict deadlines often pivot to a 721 exchange as a practical solution. In a 721 structure, the UPREIT sponsor manages the transaction, ensuring that the property contribution and issuance of OP units are completed to comply with IRS requirements that preserve the tax-deferred status.

One limitation is that not every property will align with a given UPREIT’s investment strategy; however there is a solution. In these cases, a two-step approach can deliver all the benefits of a 721 exchange: First, the investor contributes their property to a Delaware Statutory Trust (DST), which pools real estate assets and issues fractional beneficial interests to investors. DSTs are typically limited to 499 investors and hold a defined portfolio of institutional-quality properties.

After a required holding period, those DST interests can be contributed into the UPREIT in exchange for OP units, completing the 721 exchange. Throughout this process, the investor defers capital gains taxes, transitions away from active property management, and continues to receive income distributions—first from the DST interests and ultimately from the OP units.

Finding the Right 721 Exchange

“When you feel a 721 exchange may be the right move for you, talk to your financial advisor to evaluate your personal situation and goals for the future,” says Dunton. “In addition, you’ll want to know how to take advantage of deferred capital gains taxes and ask how this solution affects your estate planning.”

For investors who want to keep real estate as the core of their portfolio but are looking to upgrade their experience with smarter tax deferral, reduced risk, greater liquidity, and freedom from hands-on management, the 721 exchange offers a powerful next step.

Disclosures

The article is for informational purposes only and not intended to be all-inclusive and may be changed at any time without notice or obligation to update. This article does not constitute tax, legal, or financial advice. Bonaventure does not provide tax, legal, or accounting services. Tax laws and regulations are subject to change, and individual circumstances vary. Investors should consult their own tax advisor, attorney, or qualified intermediary regarding their specific situation before pursuing any of the strategies discussed. Forward-looking statements may be influenced by a variety of factors, many of which are beyond the control of Bonaventure and could cause the actual outcomes to be materially different from what is projected. Past Performance is not indicative of future results.

Investments in the shares involves a high degree of risk that prospective investors should carefully consider before investing. The investment is for Accredited Investors who have the financial ability and willingness to accept the risks and lack of liquidity inherent in an investment in the shares. There can be no assurance that investment objectives will be achieved or that investors will receive a complete return of their capital. This material is not an offer to sell or a solicitation of an offer to buy any interest in any fund sponsored by Bonaventure or its affiliates. Any offering is made only pursuant to a confidential private placement memorandum (PPM) and related offering documents, which should be reviewed in full and which control in the event of any inconsistency with this material. Share interests are not registered under the Securities Act of 1933 or any state securities laws, and Bonaventure offerings are not registered under the Investment Company Act of 1940.

How to Take Advantage of Deferred Capital Gains Taxes

Normally, when you sell a rental property, you’re on the hook for the capital gains tax on any profit, which is the same rate as your ordinary income tax and can range from 10% to 37%. This does not include states that also tax capital gains. This tax feature is probably the most popular aspect of a 721 exchange. Here’s how it works:

Finding the Fit—Once you find a UPREIT that fits your goals and the sponsor approves your property, the 721 exchange can proceed. If your property doesn’t meet the UPREIT’s criteria, you can take a two-step path instead by exchanging it for shares in a DST. After a short holding period, those DST interests can then be exchanged for OP units in the UPREIT.

Making the Exchange—Imagine selling a property for $1 million that you originally purchased for $500,000. Ordinarily, you would face capital gains taxes on the $500,000 appreciation. By completing a 721 exchange, however, you can contribute the property to a UPREIT in return for $1 million in Operating Partnership (OP) units. This allows you to defer the capital gains tax until you eventually dispose of those units, which keeps the equity that would have paid taxes working for you.

Simplifying Estate Planning—Instead of leaving behind individual properties that might cause conflicts among heirs as they try to manage, sell, and divide your portfolio, a 721 exchange allows you to divide OP units among them. Each beneficiary can then choose to keep or sell their shares, avoiding the usual complications of shared real estate ownership.

Maximizing the Tax Benefit—A key advantage of the 721 exchange is the potential use of the IRS “step-up in basis” provision. This rule resets the cost basis of inherited assets to their fair market value at the time of inheritance. This means that the capital gains liability you deferred when entering the exchange can be significantly reduced or even eliminated.

For example, imagine you exchanged a $500,000 property into OP units valued at $1 million. Years later, upon your death, those OP units are worth $1.2 million. When your heirs inherit their units, their tax basis resets to $1.2 million. If they later sell for that same amount, no capital gains tax is owed on the original $500,000 of deferred appreciation. Even if the units are sold for more, say $1.25 million, your heirs would only owe tax on the $50,000 gain realized after they took ownership.