721 Exchange: Pros and Cons

When an investor has held an appreciated property for years, the decision to exit is complicated. Selling outright can trigger a large capital gains tax bill, materially changing the economics of the transaction, while holding on means continuing to manage an asset the owner may be ready to leave behind. A 721 exchange, also known as a UPREIT transaction, offers another path, but whether it is the right one depends on the investor's goals, timeline, and long-term plans.

Understanding the 721 exchange pros and cons is the key to making that decision. This guide explains how a 721 exchange works, where it differs from a 1031 exchange and a Delaware Statutory Trust (DST), and the advantages, limitations, and tradeoffs investors should weigh before moving forward.

What a 721 Exchange Does

In a 721 exchange, an investor contributes a qualifying investment property to a real estate investment trust's (REIT's) operating partnership. In return, the investor receives operating partnership (OP) units instead of cash, and generally no taxable gain is recognized at the time of the contribution. The contributed property becomes part of the REIT's portfolio, and the investor's ownership converts into units that track the value of that larger, diversified portfolio.

Take a long-term owner whose apartment building has appreciated well and whose mortgage is long paid off. They are ready to stop managing it and want to simplify their estate for several heirs, but selling outright would trigger a large tax bill and leave them with only cash to redeploy. A 721 exchange lets them transfer the property to a REIT, defer the tax, and hold OP units that aim to pay income and spread performance risk across a portfolio of assets. And because the units are divisible in a way a single building is not, each heir can receive their own portion to hold for income, redeem for cash, or pass on, without the whole family having to agree on what to do with one shared asset.

How It Differs from a 1031 Exchange

A 721 exchange removes some of the biggest constraints of a traditional 1031 exchange:

The tradeoff is that the investor no longer owns real estate directly. Instead, they own OP units in the REIT's operating partnership.

Property Eligibility Matters

One practical limit shapes the entire transaction: the property must fit the REIT's portfolio. A REIT typically focuses on a specific asset class, so an investor is generally best served by a REIT whose strategy aligns with the property they hold.

An owner of a multifamily community would look to a multifamily-focused REIT, an owner of retail or office space to a commercial-focused REIT, and an owner of warehouse or logistics property to an industrial-focused REIT. In each case, the REIT must have an interest in acquiring that specific property through a 721 exchange.

When an investor's property does not align with the REIT they are interested in, a DST can serve as a bridge. For example, an investor who owns an office building but wants exposure to a multifamily REIT could complete a 1031 exchange into a DST, and separately, if that DST later offers an optional 721 conversion, contribute the DST interest into the REIT. Because that conversion cannot be promised or pre-arranged when the DST is acquired, each transaction stands on its own and must be made without a guarantee that the 721 exchange will occur.¹

721 Exchange Pros and Cons

Understanding the 721 exchange pros and cons is essential before contributing property to a REIT, as the structure carries important long-term implications for taxes, liquidity, and ownership.

721 vs. 1031: Choosing the Right Path

A 721 is not automatically better or worse than a 1031. The right choice depends on what the investor wants next. Here are three questions to narrow the field quickly:

721 UPREIT vs. 1031 Exchange: Comparing the Paths

*A DST is a way to complete a 1031, so the investor can exchange again later. OP units received in a 721 cannot.

• A 1031 suits investors who want to stay in direct real estate or keep the flexibility to exchange again.
• A 1031 into a DST suits those who want full passivity while preserving 1031 treatment and the ability to re-exchange.
• A 721 suits those ready to commit to passive, diversified ownership for the long term, and willing to accept its one-way nature in exchange for diversification and estate-planning benefits.

Where Bonaventure Comes In

The risk in any single-product sponsor is simple: if the only tool they offer is a 721, the answer will always be a 721. An investor is better served by a sponsor who can structure the transition around their situation rather than around a single product.

Bonaventure offers 721 UPREIT contributions alongside DSTs and custom 1031 structures, so the recommendation follows the investor's goals rather than the product on the shelf. Its 721 path can lead into BMIT®**, a non-traded, perpetual-life multifamily REIT that Bonaventure owns and operates, with roughly $148 million of Bonaventure's own capital invested in the fund.² A 721 contribution is made in exchange for OP units, in one of two forms:

The two classes let investors weigh current income against participation in portfolio growth. Distributions are not guaranteed, may be funded in part from borrowings, and may be adjusted at the board's discretion.³

Multifamily owners with qualifying property can contribute directly into Bonaventure's private multifamily REIT**, while owners of other property types can reach it through the DST path. Because Bonaventure acquires, finances, operates, and manages the underlying multifamily properties, investors work with a single sponsor responsible for the assets throughout the investment period.

For investors weighing a transition, the most useful preparation is knowing a few things going in: the estimated embedded gain, whether the property would qualify for a REIT's portfolio, liquidity needs over the next five to ten years, and whether estate transfer is a goal. With those answers in hand, Bonaventure's team can help map which structure fits.

The Right Exchange Fits the Goals Behind It

A 721 exchange is a powerful tool for the right investor, one who is ready to trade control and liquidity for tax deferral, diversification, and passive real estate ownership. It is not a universal answer. Understanding the pros and cons of a 721 exchange and weighing them against those of a 1031 exchange and a 1031 into a DST is key to choosing the strategy that best aligns with your investment goals.

Whether you're evaluating a direct 721 contribution or considering other tax-efficient exit strategies, Bonaventure can help you assess your options.

Speak with our team to discuss your property, long-term objectives, and the approach that best fits your goals.

Connect With the Bonaventure Advisor Team

*The article is for informational and educational purposes only and not intended to be all-inclusive and may be changed at any time without notice or obligation to update. The information contained herein does not constitute legal, compliance, tax, or financial advice. This communication is not a recommendation of any security, strategy, or service. Any such recommendation or solicitation would be made under separate cover.

Footnotes

[1] A 721 UPREIT contribution is not available in every offering and cannot be promised, pre-arranged, or guaranteed at the time a DST interest is acquired. Availability, timing, and tax treatment depend on the specific offering and on conditions at the time of any potential contribution. Consult your tax and legal advisors.

[2] Reflects principal capital invested by Bonaventure and its affiliates alongside investors across the platform as of July 31, 2026. BMIT refers to Bonaventure Multifamily Income Trust, a Bonaventure-affiliated perpetual NAV REIT in which Bonaventure is the largest investor. Figures are unaudited and subject to change.

[3] Distributions are not guaranteed, may be funded from sources other than property cash flow, and may be reduced or suspended at any time. Past performance does not guarantee future results.

[4] There can be no assurance provided that the offering will continue to provide distributions, execute investment plan, nor return investors' principal. The historical distribution rate is calculated based on the annualized $.08 per-share distribution divided by the current share price. The distribution is comprised of earnings from the assets within the fund as well as loan proceeds. When loan proceeds are used to fund the distribution, the fund will have less capital to invest, which may lower its overall return. Distributions may be modified at the discretion of BMIT's BOD.

[5] There is no guarantee that distributions will be paid, and the amount and frequency are subject to the discretion of BMIT's board of directors.

Investments in the shares involve a high degree of risk that prospective investors should carefully consider before investing. The investment is for accredited investors who have the financial ability and willingness to accept the risks and lack of liquidity inherent in an investment in the shares. There can be no assurance that investment objectives will be achieved or the investors will receive a complete return of the capital.

**This material is not an offer to sell or a solicitation of an offer to buy any interest in the Bonaventure Multifamily Income Trust or any fund sponsored by Bonaventure or its affiliates. Any offering is made only pursuant to a confidential private placement memorandum (PPM) and related offering documents, which should be reviewed in full and which control in the event of any inconsistency with this material. Certain statements are forward-looking and subject to risks and uncertainties. BMIT interests are not registered under the Securities Act of 1933 or any state securities laws, and BMIT is not registered under the Investment Company Act of 1940. Securities offered through Preferred Capital Securities, member FINRA/SIPC.

DISCLOSURES

THE RISKS ASSOCIATED WITH INVESTING IN A REAL ESTATE PRIVATE EQUITY FUND GENERALLY INCLUDE:

Limited Regulatory Oversight - Since private equity funds are typically private investments, they do not face the same oversight and scrutiny from financial regulatory entities such as the Securities and Exchange Commission ("SEC") and are not subject to the same regulatory requirements as regulated investment companies, including requirements for such entities to provide certain periodic pricing and valuation information to investors. Private equity offering documents are not reviewed or approved by the SEC or any US state securities administrator or any other regulatory body. Also, managers may not be required by law or regulation to supply investors with their portfolio holdings, pricing, or valuation information.

Strategy Risk - Many private equity funds employ a single investment strategy. Thus, a private equity fund may be subject to strategy risk, associated with the failure or deterioration of an entire strategy.

Use of Leverage and Other Speculative Investment Practices - Since many private equity fund managers use leverage and speculative investment strategies such as options, investors should be aware of the potential risks. When used prudently and for the purpose of risk reduction, these instruments can add value to a portfolio. However, when leverage is used excessively and the market goes down, a portfolio can suffer tremendously. When options are used to speculate (i.e., buy calls, short puts), a portfolio's returns can suffer and the risk of the portfolio can increase.

Past Performance - Past performance is not necessarily indicative and is not a guarantee of a private equity fund's future results or performance. Some private equity funds may have little or no operating history or performance and may use hypothetical or pro forma performance that may not reflect actual trading done by the manager or advisor and should be reviewed carefully. Investors should not place undue reliance on hypothetical or pro forma performance.

Limited Liquidity - Investors in private equity funds have limited rights to transfer their investments. In addition, since private equity funds are not listed on any exchange, it is not expected that there will be a secondary market for them. A private equity fund's manager may deny a request to transfer if it determines that the transfer may result in adverse legal or tax consequences for the offering.

Tax Risks - Investors in certain jurisdictions and in private equity funds generally may be subject to pass -through tax treatment on their investment. This may result in an investor incurring tax liabilities during a year in which the investor does not receive a distribution of any cash from the Fund. In addition, an investor may not receive any or only limited tax information from private equity funds may not receive tax information from underlying investments in a sufficiently timely manner to enable an investor to file its return without requesting an extension of time to file.

Reliance on Fund Manager; Lack of Transparency - A private equity offering's manager or general partner has total investment authority over the private fund. There is often a lack of transparency as to a private equity offering's underlying investments. Because of this lack of transparency, an investor may be unable to monitor the specific investments made by the offering or to know whether the investments are consistent with the sponsor's historic investment philosophy or risk levels.

Due to the risks mentioned above, it is important to perform proper due diligence in evaluating and choosing private equity managers to place your money with. There have been occasions when private equity fund managers took on too much risk in their portfolio and lost a substantial amount of their investors' money.