Understanding the 721 Exchange (UPREIT)

What Is a 721 Exchange?

The 721 Exchange is a tax-deferral strategy that allows real estate owners to contribute property into a partnership — often associated with an UPREIT structure — in exchange for equity, while deferring capital gains taxes.

Known formally as a Section 721 contribution under the Internal Revenue Code, this structure enables investors to shift from direct property ownership into a professionally managed real estate fund without triggering an immediate taxable event.

Because the exchange is treated as a non-recognition event under the tax code, capital gains taxes on the appreciated value of the contributed property are deferred, not eliminated. The investor becomes a partner in the operating partnership (OP), and their ownership interest in the property transitions to an indirect ownership of a portfolio of properties held by the partnership.

At Hamilton Zanze, we incorporate the 721 Exchange structure into our HZ Evergreen Fund in two ways:

By contributing select properties from our existing portfolio into the Fund, allowing qualified investors to maintain exposure to real estate while benefiting from diversification, tax deferral, passive income, and potential distributions; and
By accepting contributions of external real estate assets from qualified property owners, who receive shares in the Fund in exchange for their contributed property.

Key Features & Benefits of a 721 Exchange

Tax deferral: Gain on contributed property is not recognized at the time of the exchange.¹
Ownership shift: Investor receives OP units rather than direct title in a property or DST beneficial interest.
Professional management: The property becomes part of a larger portfolio managed by the sponsor.
Potential future liquidity: OP units may later be converted into shares of a REIT — triggering tax recognition at that time — or liquidated pursuant to the terms of the partnership agreement.

Oasis at Monclair Apartments (Dumfries, VA)

How Does a 721 Exchange Work?

1. Contribute your Qualifying Property – The investor transfers ownership of a qualifying property into a real estate operating partnership or UPREIT structure.²

2. Receipt of OP Units – In return, the investor receives operating partnership units, which represent a proportional interest in the portfolio of properties held by the partnership.

3. Deferred Tax Recognition – No capital gains taxes are triggered at the time of the exchange. The tax obligation is deferred until a future event (such as OP unit conversion to REIT shares or sale).³

4. Receive Passive Income and Grow with the Fund – The investor continues to participate in indirect real estate ownership through the OP structure, receiving distributions and growth potential tied to the performance of the partnership’s portfolio.

When to Consider a 721 Exchange

A 721 Exchange may be worth exploring if you:

Own appreciated investment property and are interested in tax-deferred reinvestment
Are seeking to transition from active property management to passive ownership
Would like to diversify your exposure across a larger multifamily portfolio
Are exploring how to align with an experienced real estate operator

Contact Us to Learn More

The Kingson (Fredericksburg, VA)

1031 Exchange vs. 721 Exchange – Differences at a Glance

Both 1031 and 721 Exchanges offer tax-deferred ways to reinvest real estate gains, and Hamilton Zanze helps investors choose the option that aligns best with their goals. Refer to the chart below for a clear side-by-side comparison.

Feature	1031 Exchange	721 Exchange
IRS Code Section	Section 1031	Section 721
Type of Transaction	Sell property and reinvest proceeds into a like-kind property	Contribute property into a real estate partnership
Tax Treatment	Defers capital gains taxes on the sale of property	Defers capital gains taxes on the contribution of property
Ownership Structure	Direct ownership of new property. DST beneficial interest	Indirect ownership via Operating Partnership (OP) units
Timing Requirements	Must identify replacement within 45 days and close in 180 days	No strict IRS timing rules; timeline guided by sponsor process
Management Responsibility	Typically retained by the investor	Transferred to professional sponsor or partnership manager
Diversification Potential	Typically limited to 1–3 replacement assets	Offers access to a diversified portfolio
Future Liquidity Options	Requires another 1031 or sale (triggering tax)	OP units may convert to REIT shares or be redeemed (tax triggered at conversion or redemption)
Best Suited For	Investors who want to stay active in property ownership	Investors seeking passive ownership in an institutional platform
Used by Hamilton Zanze?	Yes – through our 1031 Exchange platform	Yes – selectively via the HZ Evergreen Fund

721 Exchanges and the HZ Evergreen Fund

We utilize the 721 exchange structure through the HZ Evergreen Fund, our flagship multifamily investment vehicle.

This approach allows qualified property owners to:

Contribute property in exchange for equity in a diversified multifamily portfolio
Defer capital gains taxes
Transition into a passive investment role within a professionally managed platform
Gain exposure to long-term growth opportunities in the multifamily sector

Is a 721 Exchange the same as a 1031 Exchange?

No. A 1031 Exchange involves the sale of one property and the purchase of another like-kind property. A 721 Exchange involves the contribution of property into a partnership structure in exchange for OP units. Both offer tax deferral, but they function differently. In some cases, investors may complete a 1031 Exchange first and later transition into a 721 structure.

Can I contribute any type of real estate?

Eligible properties typically include investment real estate such as multifamily, commercial, or retail. However, the receiving partnership must approve the contribution, and the structure must satisfy specific legal and tax requirements.

Will I still receive income from my investment?

Yes. As an OP unit holder, you are entitled to receive distributions based on the performance of the partnership’s portfolio.

What happens to my OP units over time?

In many structures, OP units may be convertible into REIT shares or cashed out in a taxable event at a future time. The timeline and process vary based on the terms of the partnership.

Can you combine a 1031 Exchange with a 721 Exchange?

Yes. Investors can use a 1031 Exchange to reposition into a property that better aligns with an eventual 721 Exchange. This approach allows you to defer taxes through both steps before contributing the replacement property into an UPREIT structure.

Can a 1031 Exchange occur after a 721 Exchange?

No. Once a property is contributed through a 721 Exchange, you no longer hold direct real estate ownership, so future 1031 Exchanges aren’t available. At that point, the investment follows the REIT structure and its long-term strategy.

What are the pros of a 721 Exchange?

A 721 Exchange allows investors to defer capital gains taxes while moving into a diversified, institutionally managed real estate portfolio. It can offer passive income potential, long-term stability, and relief from day-to-day property operations.

What are the cons of a 721 Exchange?

Contributing a property through a 721 Exchange transitions you from direct ownership to a passive, professionally managed structure, removing the need for future 1031 Exchanges on that asset. Liquidity may depend on the partnership’s internal policies, making the strategy more suitable for long-term investors.