What Is a 721 Exchange? Real Estate's Best Kept Secret
What Is a 721 Exchange?
A 721 Exchange lets you contribute your rental property to a diversified real estate fund in exchange for ownership shares — deferring capital gains tax without buying another property.
A 721 Exchange lets you trade your rental property for ownership shares in a diversified real estate Fund—like swapping one stock for a mutual Fund. You keep your equity, defer capital gains taxes, and earn real estate returns across hundreds of properties without landlord responsibilities.
It’s a long-established provision of the U.S. tax code (Section 721), used by institutions for decades, now available to individual property owners through Flock.
A 721 Exchange, also known as an “UPREIT transaction”, lets property owners exchange their real estate into a partnership for ownership units—without triggering immediate capital gains taxes. Rather than selling and facing a large tax bill, you roll your property into a diversified real estate portfolio and continue to share in its growth and income.
Unlike the better known 1031 Exchange, there are no strict timelines or replacement properties to chase. You’re not trading one property headache for another—you’re transitioning to truly passive ownership. Your property becomes part of a professionally managed Fund, while you hold units that represent the value of your invested equity.
This strategy has long been used by institutional investors and wealthy families to defer taxes and compound wealth. Flock brings the same powerful tool to individual landlords, helping them exit day-to-day management, preserve their equity, and build a smoother path toward long-term financial and estate planning.
What Are the Benefits of a 721 Exchange?
Three things change the day your property becomes fund shares.
Defer paying capital gains tax and depreciation recapture when you exchange your property for shares in Flock's Fund.
You avoid the hit from an outright sale—you keep generating income and maintain appreciation potential.
Passing on properties to your heirs is hard, but passing on shares is seamless. They come without the headaches but with the same "step-up in basis", creating a smoother, more tax-efficient wealth transfer for your family.
Unlike selling and exiting the market altogether, a 721 Exchange keeps your equity tied to a diversified, professionally managed portfolio—delivering growth and passive income without the burden of being a landlord.
721 Exchange vs. 1031 Exchange vs. Selling
|
721 Exchange
(Flock) |
1031 Exchange
|
DST (Delaware
Statutory Trust)
|
Selling Outright
Selling Outright
Immediate sale of your property. Triggers capital gains and depreciation recapture taxes, reducing the amount of equity available to reinvest.
| |
|---|---|---|---|---|
|
Hassle Free Ownership
|
|
|
|
|
|
Professional Management
|
|
|
|
|
|
Diversification
|
|
|
Limited
|
|
|
Tax Deferral
|
|
|
|
|
|
Estate Planning Benefits
|
|
|
|
|
|
Flexible Liquidity
|
|
|
|
Moderate
|
|
Key Features
|
|
|
|
|
|
721 Exchange (Flock)
| |
|---|---|
| Hassle Free Ownership |
|
| Professional Management |
|
| Diversification |
|
| Tax Deferral |
|
| Estate Planning Benefits |
|
| Flexible Liquidity |
|
| Key Features |
|
|
1031 Exchange
| |
|---|---|
| Hassle Free Ownership |
(strict 45/180 days, replacement needed, active landlord)
|
| Professional Management |
|
| Diversification |
|
| Tax Deferral |
|
| Estate Planning Benefits |
|
| Flexible Liquidity |
|
| Key Features |
|
|
DST (Delaware Statutory Trust)
| |
|---|---|
| Hassle Free Ownership |
|
| Professional Management |
|
| Diversification | Limited |
| Tax Deferral |
|
| Estate Planning Benefits |
|
| Flexible Liquidity |
|
| Key Features |
|
|
Selling Outright
| |
|---|---|
| Hassle Free Ownership |
|
| Professional Management |
|
| Diversification |
|
| Tax Deferral |
|
| Estate Planning Benefits |
|
| Flexible Liquidity | Moderate |
| Key Features |
|
How Does a 721 Exchange Affect Estate Planning?
Shares are far easier to pass on than a house — they divide cleanly and step up in basis.
Step-Up in Basis for Your Heirs
Heirs inherit units with a stepped-up basis to current market value, effectively eliminating deferred capital gains tax liabilities.
Simple to Divide
Shares can be easily split among beneficiaries—avoiding disputes, forced sales, or complicated property transfers.
Preserve Generational Wealth
Your family keeps your real estate wealth working for them, with income and appreciation compounding across generations.
Understanding the Tax Impact
The 721 Exchange allows you to defer all capital gains and depreciation recapture taxes, keeping more of your money working for you.
is lost to taxes
(100% value preserved)
How a 721 Exchange Works at Flock Homes
Four steps, closings often in under two weeks, and you never list the property.
- Once limited to institutions and wealthy families
- Now available to individual property owners through Flock
- No strict deadlines or intermediaries
- Legal and tax details managed by our team
- Exchange into a diversified pool of single-family and multifamily rental properties
- Properties selected across growing U.S. markets
- Transition from landlord to passive investor
- Earn income and appreciation without the midnight calls
FAQ
Many real estate investors utilize the 1031 exchange to sell their property for proceeds, and use those proceeds, tax-deferred, to purchase other investment real estate. With Flock Homes, investors can use the 721 exchange to seamlessly exchange their properties, tax-deferred, for direct ownership in Flock's managed real estate Fund. With a 1031 exchange, investors commonly continue to be active investors and operators of real estate properties. With Flock, the 721 exchange enables investors to take a long-term, passive approach to real estate investing.
Flock’s Fund accepts single-family and multifamily rental properties. All rental properties that join Flock’s Fund must meet our financial return requirements. Properties with lower mortgage balances (generally, less than 50% of the property’s value) are more likely to be accepted into the Fund. To see if yours qualifies, submit a property for valuation and our team will connect with you to discuss your valuation.
No. Once you join Flock, title of your properties is transferred over to the Fund and you now own equity in Flock’s diversified Fund. As a result, you retain all of the benefits of real estate ownership, including access to cash flow and appreciation potential. However, you do not hold liability for managing any singular property.
The 721 exchange allows you to defer substantial capital gains and depreciation recapture taxes you might otherwise trigger in a traditional sale of property. Following the minimum hold period, you can also access greater cash flow quarterly and better control your tax liability by liquidating Flock equity over time. Finally, Flock equity also benefits from a step-up in tax basis upon inheritance which can provide your heirs significant tax savings when they choose to liquidate their equity. We recommend you consult with your tax advisor, attorney, and/or the IRS website to understand how Flock can complement your personalized tax planning.
Yes. Flock Homes can accept properties that are occupied or vacant. If the property is occupied, we will honor the existing lease and work with the resident to renew once the lease expires.
Yes. Flock Homes can acquire properties with outstanding mortgages, however, properties with lower mortgage balances (generally, less than 50% of the property’s value) are more likely to surpass Flock's acquisition criteria for the Fund. At close, Flock Homes pays off your existing mortgage with your lender, and the value of Flock equity you receive will be tied to the remaining value of your equity.
Flock Homes charges investors two simple fees: a one-time onboarding fee of 6% and an ongoing annual management fee of 1.5%. The onboarding fee is deducted from the value of your received equity in Flock's Fund, and the ongoing management fee is collected from the net operating income of the Fund. Investors typically do not need to separately provide cash to transact or own with Flock. Unlike many other Funds, Flock does not charge a performance fee. Read our Fee Document for more information on our fees.
Yes, with significant tax advantages. Like a traditional rental property, Flock equity ownership benefits from a step-up in tax basis upon inheritance, which can grant your heirs substantial tax savings when they eventually liquidate. Additionally, the flexibility afforded by owning equity in Flock's Fund rather than one illiquid property makes Flock an attractive estate planning instrument. However, we recommend you consult with your tax advisor, attorney, and/or the IRS website for personalized advice on your situation.