The choice between a 721 and a 1031 exchange largely depends on the investor’s goals and preferences. A 721 exchange offers liquidity, diversification, and professional management, making it suitable for investors seeking these benefits. Conversely, a 1031 exchange provides greater control and flexibility, appealing to those who prefer direct management of their real estate assets and a long-term hold strategy.

If you need more detailed guidance on how these exchanges could fit into your farmland investment plans, give us a call.

Top 10 Questions About a 721 Exchange for Agricultural Property

1. What is a 721 exchange?
   • A 721 exchange, also known as an UPREIT transaction, allows property owners to defer capital gains taxes by transferring their land to a REIT in exchange for OP units.
2. How does a 721 exchange work?
   • Property owners contribute their agricultural land to a REIT’s operating partnership in exchange for OP units, which can later be converted into REIT shares.
3. What are the benefits of a 721 exchange?
   • Benefits include tax deferral, increased liquidity, portfolio diversification, professional management, and potential estate planning advantages.
4. What are the main differences between a 721 exchange and a 1031 exchange?
   • A 1031 exchange involves swapping one investment property for another like-kind property, maintaining direct ownership. A 721 exchange involves contributing property to a REIT, receiving OP units in return, which represents indirect ownership and offers broader diversification and liquidity.
5. Can any type of real estate be used in a 721 exchange?
   • Most types of real estate can be contributed, but it is essential to consult with a tax or financial advisor to ensure the specific property qualifies.
6. Are there tax advantages to a 721 exchange?
   • Yes, the primary tax advantage is the deferral of capital gains taxes until the OP units are converted and sold. This allows investors to reinvest the full value of their property without immediate tax liability.
7. Can an investor perform a 1031 exchange after a 721 exchange?
   • No, once a 721 exchange is completed and the investor has received REIT shares, those shares cannot be used in a 1031 exchange, and capital gains taxes can no longer be deferred via a 1031 exchange.
8. What are the risks involved in a 721 exchange?
   • Risks include changes in market conditions affecting the REIT’s portfolio value, liquidity risks during the conversion of OP units to REIT shares, and potential tax liabilities if the transaction is not structured correctly.
9. Who should consider a 721 exchange?
   • Investors looking for diversification, liquidity, and tax deferral benefits, especially those seeking a more passive investment strategy or involved in estate planning, may find a 721 exchange appealing. It is advisable to consult with financial and tax professionals before proceeding.
10. How does a 721 exchange affect estate planning?
    • A 721 exchange can simplify estate planning by converting real estate into more easily divisible REIT shares, allowing for a step-up in basis and potentially avoiding capital gains taxes for heirs. This makes it easier to manage and distribute the investment among heirs.

Sources of Data/Charts:

• USDA Economic Research Service (ERS)
• National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Index
• National Association of Real Estate Investment Trusts (NAREIT)

All of the the information in this blog post is not considered tax or legal advice. Always seek the advice of an accountant CPA or attorney when making investment decisions. All information contained in this post was obtained from publicly available sources deemed accurate and reliable but not guaranteed, no liability for accuracy, errors or omissions is assumed by Geswein Farm & Land Realty, LLC, its owners, members, or affiliates.