Be Aware of These Risks With a 721 Exchange

Be Aware of These Risks With a 721 Exchange

Property owners have a lot of options when it comes to exchanges, including a 721 exchange. As with any tax strategy, it’s important to be aware of the risks involved before jumping in headfirst. We’ll review some risks to be aware of with a 721 exchange. We will also provide an understanding of what 721 exchanges are. Then, you can decide if this option is right for you and your properties.

What Is a 721 Exchange?

A 721 exchange is a tax-deferred exchange that allows you to trade property for shares in a partnership. This exchange can be a great way to avoid paying capital gains taxes on the property you’re exchanging. However, you should be aware of some risks associated with 721 exchanges.

Partnership Liability

When you join a partnership, you’re taking on some degree of liability for the debts. This can be a serious risk if the partnership is not well-managed or runs into financial difficulties.

Diluting Ownership

When you trade property for shares in a partnership, you’re diluting your ownership stake. If the partnership issues more shares in the future, your ownership stake in the property will decrease.

Market Fluctuations

If the value of the shares you receive in the exchange goes down, you could end up with less value than you started with. Additionally, if the partnership is not well-run, the value of your shares could decrease due to poor performance.

Tax Law Changes

The tax laws surrounding 721 exchanges could change at any time, which could impact the benefits of the exchange. Be aware of this risk, and monitor tax laws if you decide to go forward with a 721 exchange.

A 721 exchange can be a useful exit strategy, but it’s important to know the risks involved before making any decisions. Consulting a tax professional can also help you make a sound decision for your financial situation.