Portfolio Diversification – Compared to an individual owning a single property in a single market, 721 exchanges, when completed in conjunction with a larger diversified REIT, allow individuals to achieve greater diversification while removing concentration risk. While both the Section 1031 exchange and the 721 exchange are tax-deferred transactions, REIT portfolios are generally more diversified than single asset Section 1031 investments or DSTs.
Partial Liquidity – An individual property or a DST does not typically offer partial liquidity. The OP Units of a REIT, acquired via a 721 exchange, typically provide the ability to convert OP Units into REIT shares to achieve partial or full liquidity after a holding period. Partial liquidity may benefit real estate owners who prefer to spread their tax liability over time or simply want to access their capital.
Distributions and Potential Tax Benefits – Investors also receive any distributions generated by the DST prior to a 721 exchange and also typically receive distributions generated by the OP Units after such transaction. In addition, depending on the investor’s cost basis and other relevant factors, ownership of DST Interests and OP Units may have additional tax benefits primarily due to depreciation and other items.