A 1031 exchange trades your property for another property. A 721 UPREIT exchange trades it for shares in a REIT operating partnership. Both keep your gain deferred and your money tied up in real estate — here's what to know about each, and the path that actually lets you cash out.
A 1031 exchange defers capital gains tax by rolling proceeds from your sold property into a new "like-kind" property, using a qualified intermediary and strict 45-day identification / 180-day closing deadlines. You keep full control of a new asset, but you also keep all the responsibilities: management, tenants, maintenance, and future sale complexity.
It works well for owners who genuinely want to keep growing a real estate portfolio, trade up into a larger asset, or consolidate several properties into one. It works poorly for owners who are simply tired of the deadlines and the day-to-day and are only doing it to avoid tax.
A 721 exchange (often paired with a 1031 into a REIT-owned partnership, sometimes called a 721 UPREIT) lets you contribute your property to a REIT's operating partnership in exchange for operating partnership units. Those units can typically convert into REIT shares later. It defers tax similarly to a 1031, and it does get you out of day-to-day management — but you're now exposed to REIT share price, the sponsor's portfolio decisions, and typically illiquidity for a lock-up period.
For someone who wants diversification within real estate and is comfortable with market risk, a 721 can be a reasonable middle ground. For someone who wants to stop thinking about real estate as an asset class entirely, it still keeps them in the game.
Whether it's 1031 or 721, both structures require you to roll your equity into another investment vehicle. Neither one lets you actually take the money and be done. If your real goal is liquidity — cash you can use, spend, or invest freely — neither exchange gets you there without eventually triggering the deferred tax.
Under the installment sale method (IRC §453), which has been in the tax code for roughly 100 years, you can sell for cash — the buyer pays 100% at closing and walks — and instead of taking the whole gain in one year, your payment stream is assigned to a licensed third party that funds an A-rated insurance-carrier annuity. You're taxed only as payments arrive, over a term you choose.
A $2M gain taxed in one year can run close to $700K in combined federal and California tax. Spread across 10-15 years, the same gain can trend toward $500K total — illustrative only. If the property carries depreciation, §1250 recapture at 25% comes out first and can't be spread; only the capital gain above recapture benefits from the lower brackets over time. And like both exchange types, this has to be arranged before escrow opens — not after.
Here's the quick way to sort it out:
Most Southern California owners we talk with have already tried the first two mentally and keep coming back to the same question: is there a way to just take the money? There is — it just isn't an exchange at all.
No. A 1031 exchanges property for property. A 721 exchanges property for units in a REIT operating partnership, which typically convert to REIT shares. Both defer tax, but they put you in very different positions afterward.
REIT operating partnership units are generally subject to lock-up periods and then trade based on REIT share performance. A §453 structure pays you a scheduled, contractually fixed stream regardless of market performance.
Yes — like a 1031, a 721 exchange defers the gain rather than eliminating it. A future taxable event (redemption or sale of REIT shares) can still trigger the deferred tax.
Yes, that combination exists and is sometimes marketed as a 1031-to-721 strategy. It still requires staying invested in real estate through the REIT structure rather than cashing out.
If your goal is to actually receive cash and step away from real estate entirely — not roll into another property or REIT — §453 is built for that; 1031 and 721 are not.
Plug in your sale price, basis, and state — the calculator runs your exact 2026 federal + California tax and shows what a Structured Installment Sale keeps in your pocket.
See your number → Full calculator
Or talk it through: 213-340-2018 · Hans Goldstein · NPN 20602398. Educational only — not tax, legal, or accounting advice.
