The 721 Exchange: A Step-by-Step Guide for Brooklyn Real Estate Investors

The 721 Exchange: A Step-by-Step Guide for Brooklyn Real Estate Investors

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

When it comes to real estate investing in Brooklyn, savvy investors know that maximizing returns means minimizing taxes. While the 1031 Exchange is a widely-used tool to defer capital gains, many overlook its sophisticated cousin: the 721 Exchange.

This lesser-known strategy allows you to transition out of active property management and into passive income and REIT shares—all while continuing to defer taxes.

So how does the 721 Exchange actually work? Let’s break it down.

Step 1: Start with a 1031 Exchange

The 721 Exchange doesn’t begin in isolation—it starts with a 1031 Exchange. As you may know, a 1031 lets you sell your existing investment property and use the proceeds to buy another like-kind property, deferring capital gains tax in the process.

However, to be eligible for a 721, your replacement property must be structured in a way that allows it to be contributed to a Real Estate Investment Trust (REIT). That often means investing in a Tenants-In-Common (TIC) or Delaware Statutory Trust (DST) that’s pre-approved by the REIT you’re targeting.

🔍 Pro Tip: DSTs are a favored structure in today’s market due to their flexibility and built-in compliance with IRS rules.

Step 2: Hold the Replacement Property

Once you’ve acquired your DST or TIC investment through the 1031, you’ll need to hold the property for a certain period—typically 12 to 24 months. This holding period helps meet the IRS’s continuity-of-interest requirements and aligns with REIT operational guidelines.

The idea here is to satisfy both legal and tax compliance requirements before making the next move.

Step 3: Contribute the Property to the REIT

Now comes the pivot: You contribute your DST or TIC interest to the REIT’s Operating Partnership. In return, you receive Operating Partnership Units (OP Units)—a form of equity that represents your stake in the REIT’s holdings.

💡 Think of OP Units as a bridge between owning a property and holding shares in a publicly traded REIT.

Over time, these OP Units can be converted into REIT shares. At this point, you’re no longer a landlord—but you still benefit from:

• Ongoing dividend income

• Long-term appreciation

• Complete freedom from property management

Why Brooklyn Investors Should Pay Attention

The Brooklyn market has seen rising property values, increasing tenant demands, and tighter regulations. For many landlords, the headaches of day-to-day management are outweighing the benefits of ownership.

A 721 Exchange offers a strategic way to exit active ownership, diversify assets, and protect generational wealth, especially if:

• You’re considering retirement

• You want tax efficiency without giving up real estate exposure

• You’re tired of handling tenant repairs and local compliance

But It’s Not One-Size-Fits-All

Like any advanced tax strategy, the 721 Exchange comes with nuances. Timing, structure, REIT participation, and IRS compliance all matter.

That’s why working with an experienced real estate broker, 1031/721 exchange specialist, CPA, and real estate attorney is critical.

Real Examples in Action

According to The Real Deal, institutional investors are increasingly targeting DST structures as a gateway to REIT contributions. Meanwhile, The Wall Street Journal reports that tax-savvy baby boomers are exploring 721 Exchanges as part of their estate planning.

And here in Brooklyn, we’re seeing growing interest in REIT partnerships as investors seek stable income streams while moving away from building management.

Final Thoughts: Is the 721 Exchange Right for You?

If you’re a Brooklyn investor looking to simplify your portfolio, defer taxes, and start earning passive income, the 721 Exchange could be your next move.

But it starts with the right guidance. At Pen Realty, I’ve helped dozens of local investors navigate these transitions smoothly, ensuring compliance and protecting their returns.

🧠 Have questions? Let’s schedule a discovery call
💼 Visit penrealty.net
🎥 Watch the full explainer vlog on YouTube: https://youtu.be/0mWhp7qer8k
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Peter Mancini
Licensed Real Estate Broker
Founder, Pen Realty
REBNY & BNYMLS Member
Your Signature Experience in Brooklyn Real Estate