1031 vs. 721 Exchange: Which Strategy Builds More Wealth for Brooklyn Real Estate Investors?

1031 vs. 721 Exchange: Which Strategy Builds More Wealth for Brooklyn Real Estate Investors?

When it comes to deferring capital gains and optimizing real estate investments in Brooklyn, savvy investors are increasingly looking beyond the traditional 1031 Exchange. A newer, more strategic option is gaining traction—especially among those seeking passive income and long-term tax efficiency: the 721 Exchange, often called the UPREIT strategy.

At Pen Realty, we work closely with Brooklyn-based investors to navigate both options. Whether you’re scaling your portfolio or preparing for retirement, understanding the differences between these two strategies could reshape your financial future.

What is a 1031 Exchange?

The 1031 Exchange—named after Section 1031 of the IRS tax code—is a familiar tool for experienced investors. It allows you to defer capital gains taxes by “trading up” from one investment property to another of like kind.

For Brooklyn investors who are actively building their portfolios, the 1031 Exchange is often the go-to strategy. You retain control, increase leverage, and reinvest your equity without triggering an immediate tax bill.

Key Benefits of a 1031 Exchange:

• Capital gains tax deferral

• Portfolio growth through reinvestment

• Retention of direct control over real estate assets

• Ability to ladder into higher-value properties over time

This structure is particularly appealing in markets like Brooklyn, where multi-family homes and mixed-use buildings can provide both appreciation and cash flow. However, it also comes with ongoing management responsibilities, tenant relations, and the risk exposure that comes with owning and operating property directly.

Enter the 721 Exchange (UPREIT)

A 721 Exchange begins as a 1031 Exchange. You sell one property and purchase another—usually a property pre-approved by a Real Estate Investment Trust (REIT). The next step is what makes the 721 unique: you contribute your new property to the REIT’s umbrella in exchange for Operating Partnership Units (OP Units). Over time, these units convert into publicly traded REIT shares.

The result? You’ve essentially swapped your Brooklyn building for shares in a diversified, professionally managed real estate portfolio—without realizing capital gains.

Advantages of the 721 Exchange:

• No capital gains tax at the time of contribution

• True passive income through REIT dividends

• Liquidity and estate planning benefits

• Exit from property management responsibilities

This strategy is ideal for investors nearing retirement or those ready to step away from the day-to-day headaches of owning property. With the 721, you transition from real estate operator to shareholder—without sacrificing the wealth you’ve built.

Which Strategy is Right for You?

There’s no one-size-fits-all answer. But here’s a general guide for Brooklyn real estate investors:

As Brooklyn’s market matures and long-time owners look to simplify their holdings, the 721 Exchange is becoming more popular. According to The Real Deal, UPREIT conversions are on the rise across New York City as investors seek stability and diversification. Even The Wall Street Journal recently highlighted how aging portfolios are pushing investors toward tax-efficient exits like the 721.

Real Estate is Evolving. Are You?

In a borough where property values have soared and ownership responsibilities can be burdensome, the 721 Exchange is an intelligent wealth-preservation strategy. It enables you to move from local operator to national investor—without the tax hit.

At Pen Realty, we help Brooklyn investors evaluate these options in partnership with legal and financial advisors. Our goal? To craft an exit or growth strategy that matches your timeline, your lifestyle, and your legacy goals.

Let’s Talk Strategy

If you're wondering whether a 721 Exchange fits your future, let’s start the conversation. I’m Peter Mancini, Licensed Real Estate Broker with Pen Realty, REBNY and BNYMLS member, and your Brooklyn advocate for smarter investing.

Contact me today to explore your options—whether you want to grow, exit, or simply simplify your real estate holdings.

 Also, check out our video breakdown of the 1031 vs. 721 Exchange on YouTube.

💙 And if you found this post valuable, please consider donating to CaringKind NYC—a cause close to my heart that supports Alzheimer’s care and research.

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Related Resources

• IRS: Like-Kind Exchanges – Real Estate Tax Tips

• The Real Deal: More NYC Investors Opting for 721 Exchanges

• WSJ: Wealth Strategies for Real Estate Investors

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