The 721 Exchange: A Smart Exit Strategy for Brooklyn Real Estate Investors

The 721 Exchange: A Smart Exit Strategy for Brooklyn Real Estate Investors

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

For many Brooklyn real estate investors, the 1031 Exchange has long been a powerful tool for deferring capital gains taxes while scaling a portfolio. But what happens when you’re done managing tenants, toilets, and turnover—and you're ready to shift toward truly passive income?

Enter the 721 Exchange, also known as the UPREIT strategy—an often overlooked yet highly effective tax-deferral option that transforms actively managed real estate into long-term, tax-efficient investments in Real Estate Investment Trusts (REITs).

If you're holding appreciated property in neighborhoods like Bay Ridge, Park Slope, or Carroll Gardens, understanding the 721 Exchange could help you unlock portfolio diversification, eliminate management headaches, and position yourself for generational wealth.

🧠 What Is a 721 Exchange?

A 721 Exchange allows a real estate investor to contribute property into an Umbrella Partnership Real Estate Investment Trust (UPREIT) in exchange for Operating Partnership Units (OP Units). These OP Units function similarly to REIT shares and can eventually be converted into publicly traded securities, offering greater liquidity and steady dividend income.

But here’s the key: when structured correctly, the transfer of real estate into the REIT is tax-deferred, just like a 1031 Exchange.

Unlike the 1031, which still requires you to hold and manage new real estate, the 721 Exchange lets you exchange ownership for passive income—with none of the day-to-day headaches.

🧮 1031 vs. 721: What's the Difference?

If you’re already familiar with the 1031 Exchange, you know it requires selling one investment property and purchasing another “like-kind” property within 180 days. It’s powerful for growth, but it also means ongoing active management.

The 721 Exchange builds on this concept. Typically, an investor will:

1. Use a 1031 Exchange to purchase a property within the REIT’s acquisition criteria.

2. Hold the new property for a “reasonable time.”

3. Contribute that property into the REIT through a 721 Exchange, receiving OP Units in return.

From that point forward, you can receive passive income through dividends, and eventually convert those units into REIT shares.

📚 Read more: IRS Overview on 721 Exchanges

🏙️ Why Brooklyn Investors Should Pay Attention

Brooklyn property values have surged in the past decade. Neighborhoods like Williamsburg, Clinton Hill, and Downtown Brooklyn have seen cap rates compress and appreciation skyrocket. That growth has created significant unrealized capital gains for long-time property owners.

Selling these properties outright could result in substantial tax liability—especially in high-tax states like New York.

With a 721 Exchange:

• 📉 You avoid capital gains tax at the time of transfer.

• 🏢 You gain exposure to institutional-grade real estate (think luxury office buildings, industrial parks, multi-state apartment portfolios).

• 📬 You receive consistent dividend income—without ever fixing another leaky faucet.

For aging investors, or those simply looking to simplify, this is a compelling exit strategy.

⚠️ What to Watch Out For

The 721 Exchange is not without its limitations:

• Once you contribute property to a REIT, you cannot exchange it again via 1031.

• Not all REITs accept 721 contributions, and those that do often require a certain property profile.

• OP Units may have holding periods before they can be converted or sold.

That’s why it’s essential to consult with a qualified intermediary, real estate attorney, and tax professional before initiating this strategy.

🔗 Learn more: The Real Deal – How Investors Are Using REITs to Retire Smarter

🧩 Who Is the 721 Best For?

The 721 Exchange is ideal for:

• Investors with highly appreciated Brooklyn assets

• Owners looking to retire or reduce active management

• Estate planners seeking to pass tax-efficient assets to heirs

• Professionals who want to reallocate wealth into national portfolios

If you’ve grown tired of rent collections or building repairs—and you’re wondering how to transition into a retirement plan that keeps working for you—the 721 may be the solution.

🏁 Final Thoughts: From Local Landlord to Passive Power Player

The 721 Exchange is one of the most strategic ways Brooklyn investors can evolve from hands-on operators to passive wealth-builders. It’s a bridge from local ownership to national scale—with smart tax advantages along the way.

📞 Have questions? Let’s talk strategy. I’ve helped Brooklyn investors like you navigate 1031 and 721 Exchanges to maximize value, preserve gains, and simplify life.

🌐 Explore more at penrealty.net
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📺 Watch the 721 Exchange Series: YouTube: 721 Exchange Explained

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