Why CPAs and Attorneys Should Include 721 Exchanges in Farmland Advisory Conversations
Incorporating 721 Exchanges into the Financial Strategy of Farmland Owners
Certified Public Accountants (CPAs) and attorneys should consider recommending a 721 exchange (specifically a contribution under Section 721 of the Internal Revenue Code) to their clients who are farmers or own farmland when a few key conditions are met. This strategy offers compelling tax, estate planning, and financial benefits that can be particularly advantageous for farmland owners looking to transition out of active farming or diversify their wealth.
1. Tax Deferral Like a 1031, But With Added Flexibility
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A 721 exchange allows the landowner to contribute appreciated real estate (like farmland) into a real estate partnership in exchange for operating partnership (OP) units.
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Like a 1031 exchange, it defers capital gains taxes. But unlike 1031, the owner:
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No longer has to manage real estate directly.
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Can receive partial liquidity over time by converting units to shares and then selling them.
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2. Estate Planning & Wealth Transfer Advantages
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Units can be more easily divided among heirs than an indivisible parcel of farmland.
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Upon death, heirs receive a step-up in basis, potentially eliminating the deferred capital gains.
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It simplifies the estate by converting illiquid farmland into marketable securities over time, reducing the burden on successors.
3. Ideal for Farmers Ready to Retire or Transition
Many farmers reach a point where they:
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Want to retire.
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Don’t have heirs interested in continuing the farm operation.
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Want to reduce risk and increase diversification.
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A 721 exchange lets them monetize their farmland tax-efficiently and participate in professionally managed commercial real estate portfolios.
4. Portfolio Diversification
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Instead of a single asset (farmland in one location), the landowner becomes a fractional investor in a diversified portfolio of income-producing real estate (e.g., apartments, warehouses, medical offices).
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This can help reduce risk and generate more stable income.
5. Simpler Compliance Than 1031 Exchanges
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No need to follow the strict identification and timing rules of a 1031 exchange.
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The transaction can be part of a broader estate or financial strategy without racing the clock.
