721 Exchange Overview (2026 Guide): How to Exit Your Investment Property

A 721 exchange lets you contribute a rental property to a partnership in exchange for ownership units, so you can exit the property and defer capital gains taxes without selling. You can read the short version on our 721 exchange page.

Looking to defer your capital gains or depreciation recapture taxes while growing your real estate investments? The 721 exchange is one way to do it.

This little-known section of the Internal Revenue Code (IRC) allows owners to defer taxes on a home sale by contributing property to a partnership in exchange for units.

If you want to increase your liquidity, diversify your investments, and earn no-hassle passive income, a 721 exchange is worth a close look.

Unfortunately, most property owners don't know about it, and if they do, they don't understand it well enough to try it.

We get it, and that's the problem we're trying to solve with this comprehensive 721 exchange overview. Below, we'll walk you through:

• What Is a 721 Exchange?
• What Is the Difference Between a 721 Exchange and a 1031 Exchange?
• How Does a 721 Exchange Work?
• What Are the Benefits of a 721 Exchange?
• How Do I Get Started With a 721 Exchange?

What Is a 721 Exchange?

The 721 exchange lets property owners swap property for units in a partnership that owns real estate (the same structure institutional investors have used for decades through UPREITs, though Flock's Fund is a partnership, not a REIT). Instead of bearing the hassles and costs of selling your property or hiring a property management company, this section of the IRC lets you grow your investments without selling and without paying capital gains and depreciation recapture taxes up front.

When you sell a rental, federal long-term capital gains tax can reach 20%, depreciation recapture can be taxed up to 25%, higher earners may owe a 3.8% net investment income tax, and your state may tax the gain too. With a traditional sale, you'll pay those taxes immediately. With a 721 exchange, you can defer those taxes until you take cash flow or redeem units. To see how the numbers compare for your own situation, try our capital gains calculator.

Using the 721 exchange doesn't help you avoid paying taxes, but it does give you more control over when you pay those taxes. This control helps keep your wealth working for you on your schedule rather than the IRS's. It also lets you redeem your units for cash after a minimum hold period, which is generally faster (and more predictable) than selling a home.

When you take advantage of the 721 exchange with Flock Homes, you gain ownership units in a managed portfolio of homes (equal to your contributed equity value). You'll get ongoing quarterly income from your investment, as well as your stake of appreciation and depreciation from the portfolio. You can redeem your units piece-by-piece or all at once. You can even pass your units on to heirs, and they generally receive a step-up in basis, so the deferred gain isn't taxed to them (talk to your tax advisor about your situation; more on estate planning).

What Is the Difference Between a 721 Exchange and a 1031 Exchange?

The 1031 exchange helps investors defer capital gains taxes by exchanging their investment property for a "like-kind" asset. This section of the IRC essentially lets you trade your property for another without paying capital gains taxes. You might make a profit on each swap, but you won't pay taxes until you cash out years down the road.

However, the 1031 exchange doesn't help investors diversify their assets, earn passive income, or liquidate. You'll still be responsible for an investment property, and that includes maintaining it, finding tenants, collecting rent, and the like.

1031 exchanges aren't simple or easy. For example, to qualify, you'll need to find a replacement property within 45 days of selling your property, and you must close within 180 days of the sale. You'll also need a qualified intermediary to handle the exchange proceeds. In the end, it's a lot of cost, stress, and complication.

Another 1031 structure exists for owners who want to earn passive income, and it's known as the Delaware Statutory Trust (DST). However, DSTs often carry several layers of sponsor fees, and that's on top of the cost and hassle of selling your property prior to the 1031 exchange. Most DSTs have fixed hold periods and limited liquidity, and they tend to invest in real estate assets with limited appreciation prospects.

The 1031 exchange can be a viable solution for experienced real estate investors, but it's not the preferable option for landlords looking for a tax-advantaged exit strategy. It's too riddled with operational hurdles and logistically taxing qualifications. We cover the rules in detail on our 1031 exchange page.

On the other hand, a 721 exchange lets you trade your property for units in a partnership. You won't be responsible for owning and operating your real estate investment anymore, and you'll earn ongoing income (and a share of any appreciation) while deferring your capital gains taxes. Plus, you diversify your risk by joining a larger pool of investment assets rather than holding on to one.

How Does a 721 Exchange Work?

Here's how the 721 exchange process works with Flock Homes:

• Valuation and Offer: Provide a few details about your home and you'll receive a free, no-obligation estimate, usually within a couple of days. Like what you see? We'll set up a discreet, confidential inspection, confirm the valuation, make final adjustments for deferred maintenance (if needed), and give you your offer. Not every property qualifies, and our FAQ explains which ones do.
• Close and Exchange: Closing usually takes about two to three weeks from the start of closing paperwork. We schedule the close to transfer the title and pay off your remaining mortgage. The closing process is similar to a traditional sale, but instead of receiving cash, which triggers taxes, you'll receive units in the Flock Homes Fund to keep growing your investment over time.
• Property Management Hand-Off: We take over all aspects of ownership and property management and honor existing leases. Our fees are simple: a one-time onboarding fee of 6% and an ongoing annual management fee of 1.5%, with no performance fee.
• Own an Optimized, Diversified Portfolio of Homes: We pay you every quarter, and you get real-time insights into your appreciation value and income. Redeem your units one by one or all at once after a minimum hold period. You can even pass your units on to an heir with a step-up in basis, so the deferred gain generally isn't taxed to them.

What Are the Benefits of a 721 Exchange?

So, why would you want to trade your property for units in Flock's Fund rather than sell the home? Good question. Here are the unique benefits you get with a 721 exchange:

• Hassle-Free: Retire from the responsibilities of being a landlord; no more lease-ups, turns, or late-night maintenance calls.
• Diversification: A single property is at risk of negative cash flow, high vacancies, and area depreciation. When you join a pool of properties, you mitigate risk by diversifying your investment.
• Passive Income: We take over the property management, so you no longer deal with tenants or repairs. You receive a share of the Fund's cash flow every quarter, as cash or reinvested.
• Tax Deferral: Selling a home isn't cheap. For starters, you have costly seller and closing fees. Then, you have capital gains and depreciation recapture taxes. A 721 exchange helps you skip the seller and closing costs, defer the taxes, and take more control over your wealth management.
• Liquidity: Homes are considered illiquid assets, meaning this capital is often tied up for an extended period of time before it's able to be turned into cash. On the other hand, units can be converted into cash after a minimum hold period, all at once or over time, though redemption can be a taxable event.

How Do I Get Started With a 721 Exchange?

Selling or renting your home isn't always the best investment option, and neither is a 1031 exchange, which is why we offer homeowners a better way to grow their rental investment.

Start the 721 exchange process with Flock Homes by sharing a few details about your home. We'll send you a free, no-obligation estimate. If you like what you see and want passive income, greater diversification, and a way to take cash out later, we'll walk you through the rest of the exchange, one step at a time.

Have more questions? We have more answers. Learn more about how a 721 exchange works with Flock Homes.