Tax Deferral, Passive Income & Estate Planning — but What’s the Catch?

721 Exchange Pros and Cons: Is It the Right Fit for Brooklyn Real Estate Investors?

By Peter Mancini | Licensed Real Estate Broker, Pen Realty
Member of REBNY & BNYMLS | A Signature Experience

Brooklyn real estate investors are no strangers to strategic decisions. When it comes to tax deferral and portfolio growth, two standout tools dominate the conversation: the 1031 Exchange and its more passive counterpart, the 721 Exchange.

In earlier posts, we explored what the 721 Exchange is, how it compares to a 1031, and how the process works. But today, we focus on the question every savvy investor must ask:

What are the real pros and cons of a 721 Exchange—and is it the right move for your long-term strategy?

✅ The Advantages of a 721 Exchange

1. Capital Gains Tax Deferral
   At the heart of the 721 Exchange is the opportunity to defer capital gains taxes when you contribute your real estate into a Real Estate Investment Trust (REIT) through what are known as Operating Partnership Units (OP Units). That means no immediate tax bill on appreciation gains—a major win.

2. Passive Income Through REIT Dividends
   Once your property is contributed to the REIT, you’re no longer an active landlord. Instead, you receive dividend-paying shares that provide regular, passive income, giving you time and peace of mind.

3. Diversification Across Multiple Assets
   Unlike owning a single property (or even a few), REITs manage entire portfolios of income-producing assets. Your exposure is diversified across asset classes, locations, and tenants.

4. Estate Planning Benefits
   For investors thinking about generational wealth, OP Units can offer simplified estate transfer options. In many cases, heirs can receive REIT shares more easily than individual properties, while still enjoying step-up in basis tax benefits.

⚠️ The Trade-Offs You Should Consider

1. No Going Back to 1031 Exchanges
   One key limitation is irreversibility. Once your investment enters the REIT via a 721, you can no longer perform a traditional 1031 Exchange. Your real estate is now part of the REIT ecosystem, not individually exchangeable.

2. Loss of Property Control
   You’re not a landlord anymore—you’re a shareholder. You don’t decide rent increases, renovations, or who manages the property. For some investors, that’s a relief. For others, it’s a loss of autonomy.

3. Limited Liquidity
   OP Units are not immediately tradable on public markets. It may take time (and approval) to convert them into REIT shares, and then more time before selling. This isn’t a short-term flip strategy—it’s long-term positioning.

4. Market Exposure
   Your investment is now tied to the performance of the REIT, which can be influenced by macroeconomic factors, interest rates, and market trends. As The Wall Street Journal recently pointed out, while REIT-based exchanges are growing in popularity, they’re best suited for patient, low-maintenance investors.

“For Brooklyn investors nearing retirement, seeking passive income, or planning for heirs, the 721 Exchange may offer unmatched efficiency—but it’s not for everyone.” — Peter Mancini

Who Is the Ideal Candidate for a 721 Exchange?

If you're:

• Nearing retirement or seeking hands-off income

• Looking to exit active management of property

• Planning to pass assets to heirs with tax efficiency

• Concerned about capital gains exposure
  …then a 721 Exchange may align perfectly with your investment goals.

But if you're still in acquisition mode, want the flexibility of future 1031 Exchanges, or prefer direct control over your portfolio, it’s worth considering other options—or even a hybrid strategy.

Final Thoughts: Know Your Goals, Know Your Timeline

As with all real estate strategies, the right move depends on your long-term objectives. The 721 Exchange isn’t a universal solution—but for the right investor, it can be a wealth-preserving, tax-efficient tool that simplifies your legacy.

Thinking about your own next move?
Let’s talk through your unique situation and build a roadmap for your portfolio.

📩 Contact Peter Mancini at penrealty.net/contact
🧠 Or explore more on the full series: YouTube 721 Exchange Series

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Peter Mancini
Licensed Real Estate Broker | Pen Realty
Member of REBNY & BNYMLS
A Signature Experience in Brooklyn Real Estate