An often-overlooked estate-planning benefit of the 721 exchange is estate liquidity for heirs. A classic estate challenge is that heirs inherit valuable but illiquid real estate — they may need cash (to pay estate taxes, cover expenses, or fairly divide the estate among multiple heirs), but a property can't easily be turned into cash (selling takes time, and dividing a single property is hard). The 721 exchange helps solve this: by converting the property into OP units before death, the heirs inherit convertible, divisible units that give them a path to liquidity — they can convert units to REIT shares and sell for cash, with the step-up making this low-tax. So the 721 exchange transforms an illiquid estate asset into a more liquid, divisible one for the heirs. This guide explains how 721 exchanges provide estate liquidity for heirs.
The estate liquidity challenge
The estate liquidity challenge is that heirs often need cash but inherit illiquid assets. When an estate includes real estate, the heirs may face liquidity needs — paying estate taxes (which can be substantial and due relatively soon after death), covering estate expenses (legal, administrative), or providing cash to divide the estate fairly among multiple heirs (especially if some want cash rather than the property). But real estate is illiquid — it can't be quickly turned into cash, and selling takes time and may be at a discount if rushed.
So a heir inheriting a property might be 'asset rich but cash poor' — holding valuable but illiquid real estate while needing cash for the estate's obligations. This can force a rushed sale (at a poor price), borrowing, or other unfavorable measures to raise the needed liquidity. So the illiquidity of real estate creates an estate liquidity challenge.
This challenge is common for estates with significant real estate, and addressing it is an important estate-planning consideration. The 721 exchange offers a solution by making the real estate asset more liquid (as OP units) for the heirs. The estate liquidity challenge — heirs needing cash (for estate taxes, expenses, or dividing the estate) but inheriting illiquid real estate, potentially forcing a rushed sale or borrowing — is a common estate problem. Real estate's illiquidity creates the challenge. Understanding the challenge sets up the 721's solution. The estate liquidity challenge (cash needs versus illiquid real estate) is a common estate problem the 721 exchange can help solve.
How OP units provide liquidity for heirs
OP units provide heirs a path to liquidity that direct real estate doesn't, addressing the estate liquidity challenge. Because OP units are convertible into REIT shares (which, for a traded REIT, are liquid and sellable), the heirs can convert units to shares and sell them for cash — a path to liquidity that an illiquid property lacks. So the heirs can raise cash from the inherited units more readily than from an illiquid property.
This convertibility means the heirs aren't stuck with an illiquid asset when they need cash — they can convert and sell units (in portions, as needed) to fund the estate's needs. So the OP units give the heirs liquidity flexibility (accessing cash) that a property can't, solving the asset-rich-cash-poor problem.
The divisibility of OP units further helps — the units can be divided among heirs, and each heir can independently convert and sell their portion for cash if they need it. So the heirs collectively and individually have liquidity access. How OP units provide liquidity for heirs — through their convertibility (to REIT shares, sellable for cash) and divisibility (each heir's portion accessible), giving heirs a path to cash that illiquid real estate lacks — addresses the estate liquidity challenge. The units are more liquid than property. Understanding this shows the 721's liquidity solution for heirs. OP units give heirs a path to liquidity (convertible, divisible) that illiquid real estate can't, solving the estate liquidity challenge.
OP units give heirs what illiquid property can't — a path to cash. They can convert units to REIT shares and sell, in portions as needed, to fund estate taxes, expenses, or buyouts among heirs.
The step-up enabling low-tax liquidity
The step-up in basis makes the heirs' liquidity access low-tax, enhancing the 721's estate-liquidity solution. Because the heirs inherit the OP units with a stepped-up basis (reset to the date-of-death value), converting and selling the units shortly after inheriting produces little gain (the deferred gain is erased by the step-up). So the heirs can convert and sell for cash with little or no income tax — low-tax liquidity.
This is a key advantage — the heirs get liquidity (by converting and selling) without a large tax hit (thanks to the step-up). So they can raise the cash they need from the units efficiently, without losing much to tax. This combines the units' convertibility (liquidity) with the step-up (low tax) for an efficient liquidity solution.
So the step-up enables the heirs to access liquidity from the units tax-efficiently — a significant benefit for funding estate needs without the tax drag of recognizing the deferred gain. The step-up enabling low-tax liquidity — the heirs inheriting the units with a stepped-up basis, so converting and selling for cash produces little gain (low-tax liquidity) — enhances the 721's estate-liquidity solution. The step-up makes the heirs' liquidity tax-efficient. Understanding this shows the combined liquidity-and-tax benefit. The step-up enables the heirs to access liquidity from the units with little tax, making the 721's estate-liquidity solution tax-efficient.
Dividing and selling among heirs
The OP units' divisibility helps heirs divide the estate and access individual liquidity, solving the multi-heir division challenge. A single property is hard to divide among multiple heirs — you can't easily split a building, which often forces a sale (to divide the proceeds) or shared ownership (with disputes). OP units, by contrast, divide cleanly — each heir receives their own units.
Each heir, with their own units, can independently decide what to do — hold them (for income), or convert and sell them for cash (if they need liquidity or prefer cash). So heirs who want cash can convert and sell their portion, while those who want to keep the investment can hold theirs — without forcing a single decision on the whole property. This flexibility resolves the common conflict where some heirs want cash and others want to keep the property.
So the divisibility lets each heir get their own liquidity (or keep the investment) as they prefer, dividing the estate cleanly. This solves both the division challenge (clean division) and the individual liquidity challenge (each heir's access). Dividing and selling among heirs — the OP units dividing cleanly so each heir gets their own units to hold or convert/sell for cash, resolving the conflict where some heirs want cash and others want to keep the property — solves the multi-heir division and liquidity challenges. The divisibility gives each heir flexibility. Understanding this shows the multi-heir solution. The OP units' divisibility lets each heir access their own liquidity or keep the investment, cleanly dividing the estate and solving the multi-heir liquidity conflict.
- The estate liquidity challenge: heirs need cash (for estate taxes, expenses, or dividing the estate) but inherit illiquid real estate.
- OP units give heirs a path to liquidity (convertible to cash, divisible) that illiquid property lacks.
- The step-up makes the heirs' liquidity low-tax (converting/selling shortly after inheriting produces little gain).
- The divisibility lets each heir access their own cash or keep the investment, resolving the conflict where some heirs want cash and others want the property.
Funding estate needs
The estate liquidity from OP units helps heirs fund various estate needs efficiently. Estate taxes — if the estate owes estate tax (depending on its size), the heirs may need cash to pay it (relatively soon after death). The convertible OP units give them a liquidity source to fund the estate tax (converting and selling units for the cash), avoiding a forced property sale.
Estate expenses — administrative, legal, and other costs of settling the estate require cash, which the units' liquidity can fund. And equalizing distributions — if the estate plan provides for unequal asset distributions that need cash to equalize (or buyouts among heirs), the units' liquidity provides the cash. So the OP units' liquidity helps fund these estate needs.
So the 721 exchange's estate liquidity (via the convertible, divisible, low-tax OP units) helps the heirs meet the estate's cash needs efficiently — a valuable practical benefit. Funding estate needs — using the OP units' liquidity to fund estate taxes, expenses, and equalizing distributions or buyouts, avoiding a forced property sale — is a practical benefit of the 721's estate liquidity. The units provide the cash for the estate's needs. Understanding this shows the practical value. The 721 exchange's estate liquidity helps heirs fund estate taxes, expenses, and other needs efficiently, a valuable practical benefit avoiding forced property sales.
Comparing to illiquid property
Comparing the OP units' estate liquidity to inheriting illiquid property clarifies the 721's benefit for heirs. Inheriting illiquid property (without a 721 exchange) leaves the heirs with the liquidity challenge — they have a valuable but illiquid asset, and meeting cash needs (estate taxes, expenses, division) may require a rushed sale (at a discount), borrowing, or other unfavorable measures. And dividing the single property among multiple heirs is difficult. So inheriting illiquid property carries the liquidity and division challenges.
Inheriting OP units (via a 721 exchange before death), by contrast, gives the heirs convertible, divisible, low-tax-liquidity units — solving the liquidity challenge (a path to cash) and the division challenge (clean division). So the heirs are far better positioned for the estate's cash needs and division.
So the comparison favors the 721 exchange for estate liquidity — the OP units (convertible, divisible, low-tax) provide the heirs liquidity and division flexibility that illiquid property lacks. This is a meaningful benefit of doing the 721 exchange for estate purposes. Comparing to illiquid property — inheriting illiquid property leaving the heirs with the liquidity and division challenges (forced sales, hard division) versus inheriting OP units giving them convertible, divisible, low-tax liquidity — favors the 721 exchange for estate liquidity. The units solve the challenges illiquid property creates. Understanding this comparison shows the 721's estate-liquidity advantage. The 721 exchange's OP units provide heirs far better estate liquidity and division flexibility than inheriting illiquid property, a meaningful estate benefit.
How Baker 1031 helps with estate liquidity
Baker 1031 Investments helps owners use the 721 exchange to provide estate liquidity for their heirs — explaining how the OP units (convertible, divisible, low-tax via the step-up) give heirs a path to cash for estate needs (taxes, expenses, division), solving the estate liquidity challenge. We help you understand and plan this estate-liquidity benefit, coordinating with your estate attorney and CPA.
REIT units and related securities are offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), and any recommendation follows a suitability review. We don't provide tax or legal advice (your estate attorney and CPA handle the estate planning, the step-up, and estate tax); we help you understand the estate-liquidity benefit and coordinate the 721 exchange within your estate plan. Our role is to help you use the 721 exchange to give your heirs estate liquidity — transforming your illiquid real estate into convertible, divisible, low-tax OP units that solve the heirs' liquidity and division challenges — integrated into your estate plan. For owners concerned about leaving heirs an illiquid estate, the 721 exchange's estate liquidity is a valuable benefit, and we help you plan it with your estate professionals.
Frequently Asked Questions
What is the estate liquidity challenge?
The challenge that heirs often need cash (to pay estate taxes, cover estate expenses, or fairly divide the estate among multiple heirs) but inherit illiquid real estate — which can't be quickly turned into cash. So a heir might be 'asset rich but cash poor,' holding valuable but illiquid property while needing cash for the estate's obligations, potentially forcing a rushed sale (at a discount), borrowing, or other unfavorable measures. Real estate's illiquidity creates this challenge, common for estates with significant real estate. The 721 exchange helps solve it by making the real estate asset more liquid (as OP units) for the heirs.
How do OP units provide liquidity for heirs?
Through their convertibility and divisibility. OP units are convertible into REIT shares (which, for a traded REIT, are liquid and sellable for cash), so heirs can convert units to shares and sell them for cash — a path to liquidity an illiquid property lacks. And the units divide cleanly among heirs, so each heir can independently convert and sell their portion for cash if needed. So OP units give heirs a path to cash (convertible, divisible) that illiquid real estate can't, addressing the estate liquidity challenge. The heirs aren't stuck with an illiquid asset when they need cash.
Does the step-up help with estate liquidity?
Yes — the step-up makes the heirs' liquidity low-tax. Because the heirs inherit the OP units with a stepped-up basis (reset to the date-of-death value), converting and selling the units shortly after inheriting produces little gain (the deferred gain is erased by the step-up). So the heirs can convert and sell for cash with little or no income tax — low-tax liquidity. This combines the units' convertibility (liquidity) with the step-up (low tax) for an efficient liquidity solution, letting heirs raise needed cash without a large tax hit. The step-up makes the 721's estate liquidity tax-efficient.
How does this help divide the estate among heirs?
The OP units divide cleanly, so each heir receives their own units — unlike a single property (hard to split, often forcing a sale or shared ownership). Each heir can then independently hold their units (for income) or convert and sell them for cash (if they want liquidity or prefer cash). This resolves the common conflict where some heirs want cash and others want to keep the property — each heir gets their portion to handle as they prefer. So the divisibility lets each heir access their own liquidity or keep the investment, cleanly dividing the estate and solving the multi-heir liquidity conflict.
Can OP units help pay estate taxes?
Yes — if the estate owes estate tax (depending on its size), the heirs may need cash to pay it (relatively soon after death). The convertible OP units give them a liquidity source — they can convert and sell units for the cash to fund the estate tax, avoiding a forced property sale. So the units' liquidity helps the heirs meet the estate tax obligation efficiently. This is a valuable practical benefit, especially for larger estates with estate-tax exposure — the 721's estate liquidity provides a way to fund the estate tax without selling an illiquid property under time pressure. The units are a liquidity source for estate taxes.
Is inheriting OP units better than inheriting property?
For estate liquidity, generally yes — inheriting OP units gives the heirs convertible, divisible, low-tax-liquidity units (solving the liquidity and division challenges), while inheriting illiquid property leaves them with those challenges (forced sales, hard division). So the OP units position the heirs far better for the estate's cash needs and division. Both can get the step-up (erasing the gain), but the OP units add liquidity and divisibility the property lacks. So for owners concerned about leaving heirs an illiquid, hard-to-divide estate, the 721 exchange's OP units provide a meaningful estate-liquidity advantage over inheriting the property directly.
Do all OP units provide good estate liquidity?
The liquidity depends on the REIT type. OP units convertible into a publicly-traded REIT's shares provide good liquidity (the shares are market-sellable). OP units convertible into a non-traded REIT's shares provide more limited liquidity (via redemption programs). So for the best estate liquidity, the units should convert into a traded REIT (or one with reliable liquidity). So consider the REIT type when planning for estate liquidity — a traded REIT generally provides better liquidity for the heirs than a non-traded one. The estate-liquidity benefit is strongest with a traded REIT, which the heirs can readily sell after converting.
What if some heirs want to keep the investment?
The divisibility accommodates this — heirs who want to keep the investment can hold their units (earning distributions, retaining the real estate exposure), while heirs who want cash can convert and sell theirs. So not all heirs have to do the same thing; each handles their own portion as they prefer. This flexibility means the 721's estate liquidity doesn't force a sale on heirs who want to keep the investment — they can hold, while others access cash. So the units accommodate diverse heir preferences (some keeping, some selling), a benefit of the divisibility for families with different heir goals. Each heir chooses for their own units.
How does Baker 1031 help with estate liquidity?
We help you use the 721 exchange to provide estate liquidity for your heirs — explaining how the OP units (convertible, divisible, low-tax via the step-up) give heirs a path to cash for estate needs (taxes, expenses, division), solving the estate liquidity challenge. We help you understand and plan this benefit, coordinating with your estate attorney and CPA. REIT units are offered through the broker-dealer (Aurora Securities, member FINRA/SIPC) after a suitability review. We don't provide tax or legal advice (your estate professionals handle the estate planning); we help you understand the estate-liquidity benefit and coordinate the 721 exchange within your estate plan, so your heirs inherit a liquid, divisible asset.
Should estate liquidity be a reason to do a 721 exchange?
For owners concerned about leaving heirs an illiquid, hard-to-divide estate (especially with estate-tax exposure or multiple heirs wanting different things), estate liquidity is a meaningful reason to consider a 721 exchange — it transforms illiquid real estate into convertible, divisible, low-tax OP units that solve the heirs' liquidity and division challenges. So estate liquidity is a valid and valuable reason, alongside the 721's other estate benefits (the step-up, the deferral during life). It's part of the broader estate-planning case for the 721 exchange. For estate-focused owners, the estate-liquidity benefit (easing the heirs' cash needs and division) is a compelling consideration.
Is the estate-liquidity benefit different from the step-up benefit?
Related but distinct. The step-up benefit erases the deferred gain for heirs (a tax benefit), while the estate-liquidity benefit is about the heirs' access to cash (a practical, liquidity benefit). They work together: the OP units' convertibility gives the liquidity, and the step-up makes accessing that liquidity low-tax. So the estate-liquidity benefit (the heirs can get cash from the convertible, divisible units) and the step-up benefit (the gain is erased) are complementary — the units provide liquidity, and the step-up makes using it tax-efficient. So while related, they're distinct benefits: one about liquidity (cash access), the other about tax (erasing the gain). Together they make the 721 exchange powerful for estate planning, combining liquidity and tax efficiency for heirs.
What if my heirs disagree about keeping or selling?
The OP units' divisibility resolves this — because the units divide cleanly among heirs, each heir gets their own units and can independently decide: heirs who want to keep the investment hold their units (earning distributions), while heirs who want cash convert and sell theirs. So disagreement doesn't force a single decision; each heir handles their own portion. This is a major advantage over an undivided property (where heirs must agree on one course, or force a sale). So the divisibility accommodates heir disagreement — each heir does what they prefer with their portion. This is especially valuable for families where heirs have different financial situations or goals, avoiding the conflict an indivisible property can create among heirs who disagree.
Does providing estate liquidity reduce the inheritance's value?
No — providing liquidity (the ability to access cash) doesn't reduce the inheritance's value; it makes the same value more accessible. The heirs inherit OP units worth the property's value (with the step-up erasing the gain), and the liquidity benefit means they can convert that value to cash when needed — the value is the same, just more accessible (liquid) than illiquid property. So the estate-liquidity benefit adds accessibility without reducing value. The heirs get the property's value in a more liquid, divisible form. So providing liquidity is purely a benefit (easier access to the value), not a cost — the inheritance's value is preserved (and the gain erased via the step-up), with liquidity added. It enhances, rather than diminishes, the inheritance.
Glossary
- Estate Liquidity
- Cash available to meet an estate's needs, provided by OP units.
- Liquidity Challenge
- Heirs needing cash but inheriting illiquid real estate.
- Illiquid Property
- Real estate that can't be quickly turned into cash.
- Convertibility
- OP units' ability to become sellable REIT shares.
- Divisibility
- OP units dividing cleanly among heirs.
- Step-Up in Basis
- The death-time reset making the heirs' liquidity low-tax.
- Estate Tax
- A tax the units' liquidity can help heirs fund.
- Estate Expenses
- Settlement costs the units' liquidity can cover.
- Equalizing Distributions
- Cash to balance unequal inheritances, from the units.
- Buyout
- One heir buying another's share, funded by the units' liquidity.
- Asset Rich, Cash Poor
- Having illiquid assets but needing cash, the challenge.
- Forced Sale
- A rushed property sale to raise cash, avoided by the units.
- Traded REIT
- A REIT whose shares provide the best heir liquidity.
- Heir Liquidity
- Each heir's access to cash from their units.
- Clean Division
- Dividing the estate via the units, avoiding shared property.
- Low-Tax Liquidity
- Accessing cash with little tax, thanks to the step-up.
Sources & References
- Cornell Legal Information Institute. 26 U.S. Code § 1014 — Basis of property acquired from a decedent
- IRS. Estate and Gift Taxes
- Cornell Legal Information Institute. 26 U.S. Code § 721 — Nonrecognition of gain or loss on contribution
- IRS. Publication 559, Survivors, Executors, and Administrators
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
