{"id":6631,"date":"2025-07-08T07:38:32","date_gmt":"2025-07-08T11:38:32","guid":{"rendered":"https:\/\/www.deeds.com\/articles\/?p=6631"},"modified":"2025-07-08T07:38:33","modified_gmt":"2025-07-08T11:38:33","slug":"what-is-a-721-exchange-and-is-it-worth-doing","status":"publish","type":"post","link":"https:\/\/www.deeds.com\/articles\/what-is-a-721-exchange-and-is-it-worth-doing\/","title":{"rendered":"What Is a 721 Exchange\u2014And Is It Worth Doing?"},"content":{"rendered":"\n
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Numerous companies offer 721 exchange <\/em>investment opportunities. One of the newer firms is Denver-based Flock Homes. The company sends proposals out to deed holders. Perhaps you\u2019ve received one.<\/p>\n\n\n\n

Seniors who own investment properties<\/a> are especially likely targets of these pitches. Flock calls it \u201cthe retirement solution for landlords.\u201d<\/p>\n\n\n\n

Let\u2019s take a look.<\/p>\n\n\n\n\n\n\n\n

What Is the 721 Exchange?<\/h2>\n\n\n\n

The term comes from IRS Code Section 721. This provision of the law lets high-equity real estate owners avoid capital gains tax<\/a> by transferring their property into a fund in exchange for a partnership interest.<\/p>\n\n\n\n

Marketers describe the 721 exchange as a way to offer senior deed holders (or their heirs) a way to trade real estate they don\u2019t need for positions in real estate funds. At the same time, the deed holders defer capital gains taxes they might have paid in regular sales.<\/p>\n\n\n\n

The company could send you a purchase offer. It\u2019s based on an automated appraisal. It\u2019s not final; they\u2019ll still inspect the home. They will also take out a sum to cover the work needed to revamp the home as a rental.<\/p>\n\n\n\n

If you accept the company\u2019s appraisal, you\u2019ll receive a Contribution Agreement to sign. Flock Homes calls this document \u201csimilar to a Purchase and Sale Agreement\u201d although you do not receive cash for the deed. So this is not the same thing as a traditional home sale.<\/p>\n\n\n\n

You\u2019ll pay the necessary deductions and fees. On the other side of the coin, you won\u2019t have to hire a real estate agent to market your home.<\/p>\n\n\n\n

(For details on fees, refer to the Flock Homes Fee Document<\/a>.)<\/p>\n\n\n\n

Assume you have a second home that you\u2019ve been renting out. Your circumstances have changed, and you no longer wish to keep the property and do the maintenance and deal with renters. But you did appreciate the income! To keep money coming in, but say goodbye to the upkeep tasks, you might accept an offer from a 721 exchange company. The Flock company puts it in a nutshell: \u201cExit your real estate, without giving up your hard earned gains.\u201d<\/p>\n\n\n\n

You\u2019ll exchange your deed for the value of your equity, which you\u2019ll get as shares in the company\u2019s fund. The company will then add your property to the collection of homes it maintains and rents out.<\/p>\n\n\n\n

How Is the Fund Set Up?<\/h2>\n\n\n\n

Companies of this sort might hold hundreds of homes. At the time of this writing, Flock\u2019s website says it holds 930 homes, for a total of $210 million in real estate value.<\/p>\n\n\n\n

The company rents out these homes, and the income from its real estate portfolio funds the investors\u2019 payouts. Investors receive their dividends on a quarterly basis. They have access to an investor platform where they can keep up with their home\u2019s income-generating activity.<\/p>\n\n\n\n

Participants in this investment model receive shares in a REIT. A REIT, or real estate investment trust, is a taxable company. In practical terms, it acts much like a mutual fund. Its key benefit is the ability to take an illiquid asset (real estate) and turn it into money.<\/p>\n\n\n\n

By federal law, a REIT must:<\/p>\n\n\n\n