721 exchange vs 1031 exchange: what’s the difference?

A 1031 exchange defers capital gains tax when you swap one investment property for another. A 721 exchange defers capital gains tax when you contribute appreciated property or securities to an operating partnership in exchange for units in that partnership.

Both defer capital gains tax through an exchange rather than a sale, under separate sections of the tax code (1031 and 721 respectively): a 1031 keeps you in direct real estate ownership, while a 721 exchange is for concentrated stock.

What is a 1031 exchange?

A 1031 exchange lets a real estate investor sell an investment property and defer capital gains tax by reinvesting the proceeds into another “like-kind” property within a strict timeline (45 days to identify a replacement, 180 days to close). The investor keeps directly owning real estate throughout. It’s a well-established strategy for real estate investors who want to trade up, consolidate, or relocate their holdings without triggering a tax bill on the sale.

What is a 721 exchange?

A 721 exchange works differently. Instead of trading one property for another directly, you contribute appreciated property or securities to a partnership in exchange for units in that partnership, again without triggering capital gains tax at the time of contribution. This is the structure exchange funds use to let investors with a concentrated stock position swap that single holding for a diversified basket of assets, deferring the tax bill rather than paying it upfront.

721 exchange vs 1031 exchange

Can the same investor use both types of exchange?

Yes, but not for the same asset. A 1031 exchange only applies to real estate property, and a 721 exchange applies to securities. They aren’t competing options you’d weigh against each other for the same holding. They’re two different tools built for two different asset classes that happen to share the same underlying idea: defer the tax bill by exchanging instead of selling.

An investor could conceivably use a 1031 for a real estate portfolio and, separately, an exchange fund for a concentrated stock position, but that’s two decisions, not one.

Glidepath is the exchange fund for people with concentrated positions

Glidepath’s exchange fund is a 721 structure built specifically for concentrated stock positions, not real estate. If you’re holding an oversized position in one company’s stock and want to diversify without an immediate capital gains hit, this is the tool built for that case. Eligibility is limited to accredited investors — generally $200,000 in individual income (or $300,000 jointly), or $1 million in net worth excluding your primary residence — with a $100,000 minimum contribution.

See if you qualify before deciding which route fits your situation.

Which is right for you?

• You hold real estate you want to exchange for other real estate. A 1031 exchange is the tool built for this. A 721 exchange for stock has no relevance to your situation.

• You hold a large, appreciated position in one stock and want to diversify without selling. A 721 exchange fund allows you to diversify without triggering capital gains. A 1031 exchange isn’t available to you here, since it only covers real property.

Ready to diversify without giving a chunk of your unrealized gains to the IRS?

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