721 Exchange Reporting: Tax Forms You'll File

I have been thinking about how easily the reporting burden gets underestimated when an owner compares a 721 exchange with a property sale. The contribution may be tax-deferred, which can make the transaction feel quiet at first. The reporting is not one-time, though. It continues while the investor owns OP units and changes again if those units are converted or sold.

A 721 exchange creates tax-reporting obligations at several points. At contribution, gain is generally deferred, so there is no immediate gain to report, but the contribution and basis are documented. Each year, an OP unit holder receives a Schedule K-1 reporting their share of partnership income. A conversion to shares, sale, or redemption requires reporting recognized gain. If the path began with a 1031 exchange into a DST before the later 721 event, the 1031 step was reported on Form 8824.

The forms are different from those for a simple property sale and, in important ways, different from a standalone 1031 exchange. This is an overview of the reporting framework, not tax advice. A CPA should handle an investor’s particular return, basis, and tax calculations.

The reporting lifecycle of a 721 exchange

A 721 exchange has reporting at several stages, each with its own documents. At the contribution, an investor exchanges direct property for OP units. The transaction is generally tax-deferred under Section 721, so immediate gain is generally not reported. The contribution is still documented, and the investor’s basis in the units is established.

While the investor holds the units, the operating partnership provides annual reporting through a Schedule K-1. The K-1 reports the investor’s distributive share of income, deductions, and other tax items. On a later conversion, sale, or redemption, the deferred gain is recognized and reported.

First-order thinking says a tax-deferred contribution means no tax reporting. Second-order thinking separates deferral from documentation. The initial contribution establishes carryover basis and brings the investor into partnership tax reporting; the annual K-1 creates an ongoing filing obligation; and the eventual disposition has its own capital-gain and possible recapture reporting. The lifecycle is contribution, annual income, and eventual disposition.

That is unlike a property sale, where the gain may be reported as a one-time event. It is also different from a 1031 exchange, which has Form 8824 reporting. A 721 contribution has ongoing annual K-1 reporting in addition to the reporting when units are disposed of. Understanding each phase allows the investor and CPA to plan for the actual obligations rather than just the initial deferral.

Reporting the contribution

At contribution, a 721 exchange is generally tax-deferred. There is generally no immediate gain to report. That does not mean the transaction disappears from the tax record.

Unlike a 1031 exchange, which is reported on Form 8824, a contribution to a partnership under Section 721 does not have a separate special “exchange” form for the contribution in the same way. The nonrecognition treatment applies to the partnership contribution. The principal documentation is the establishment of the investor’s carryover basis in the OP units and entry into the operating partnership’s tax-reporting system.

The partnership records the contribution in its capital-account and basis records. The investor becomes a partner and begins receiving K-1s. A CPA should maintain the contribution record, carryover basis, deferred gain, and entry into partnership reporting even though current gain is generally not recognized.

Unlike a 1031’s Form 8824, a 721 contribution itself has no special “exchange” form. It is a tax-deferred partnership contribution documented through carryover basis and entry into the partnership’s K-1 reporting.

In short, the contribution phase is deferred but documented. Its reporting is generally basis establishment and partnership entry, rather than a standalone exchange form.

The annual Schedule K-1

The key ongoing document for an OP unit holder is the annual Schedule K-1. Because the investor is a partner in the operating partnership, the partnership issues a K-1 each year. It reports the investor’s distributive share of partnership income, deductions including depreciation, and other tax items.

The K-1 drives the annual reporting of OP-unit income. It can include ordinary income from operations, capital gains, depreciation, return-of-capital information affecting basis, and other items. The relevant tax treatment follows the character of the item. Partnership taxation means the investor reports their share of income, not merely cash distributions received.

This is often more involved than receiving a 1099. A K-1 includes multiple items that flow to different parts of the return, rather than a single dividend line. K-1s can also arrive later than 1099s, which can affect the investor’s filing timetable. Partnerships issue K-1s after the tax year ends, often in the spring, and timing can vary. In some cases the document may arrive close to or after an individual’s filing deadline, making an extension necessary while the taxpayer waits.

An OP unit holder should therefore plan for annual K-1 reporting for every year the units are held. Holding units does not trigger reporting of the deferred contribution gain, but it does not eliminate annual reporting: the holder reports the partnership’s annual income allocated to them. A CPA experienced in partnership K-1s should handle this work.

Reporting income shown on the K-1

K-1 items flow to the appropriate forms and schedules on the investor’s return. A distributive share of ordinary income from partnership operations generally goes to Schedule E, Supplemental Income and Loss. Capital-gain items generally flow to Schedule D. Other tax items are reported on the forms or schedules appropriate to their character.

Depreciation and other deductions shown on the K-1 can reduce reported income. The depreciation pass-through is one reason the K-1 cannot be treated like a simple 1099 dividend: it contains several components, each potentially headed to a different place on the return. Return-of-capital items and related basis effects must also be handled according to their character.

The practical lesson is not that an investor should manually map every box. It is that the annual K-1 is a multi-part tax document requiring careful reporting. A CPA can flow the ordinary-income items to Schedule E, capital gains to Schedule D, and the remaining items to the correct reporting locations.

Reporting conversions, sales, and redemptions

When an investor converts OP units to REIT shares, sells units, or redeems units for cash, the disposition generally triggers recognition of the deferred gain. The gain is generally reported as a capital gain on Schedule D, Capital Gains and Losses, and Form 8949, Sales and Other Dispositions of Capital Assets.

The reporting may involve more than capital gain. If the originally contributed property carries depreciation recapture, the recapture may be reported on Form 4797, Sales of Business Property, or otherwise handled under applicable recapture rules and taxed at recapture rates. The CPA must determine the appropriate calculations and treatment.

After conversion, the investor’s ongoing reporting changes. The holder now has REIT shares rather than an operating-partnership interest. A later sale of those shares is generally reported on Schedule D and Form 8949. REIT dividends are generally reported on Form 1099-DIV. The investor has shifted from partnership reporting on a K-1 to corporate and dividend reporting through Schedule D, Form 8949, and 1099-DIV, as applicable.

This change of reporting regime is easy to miss. Conversion is not merely a liquidity event. It triggers the deferred gain and may involve recapture, then moves the holder from K-1 partnership reporting to share-sale and dividend reporting.

Key Takeaways

• A 721 contribution is generally tax-deferred, with no immediate gain. It is documented through carryover basis and entry into partnership reporting rather than a special exchange form.
• Each year an OP unit holder receives a Schedule K-1 reporting their share of partnership income, deductions, depreciation, and other items. Those items flow to the tax return, including Schedule E where appropriate.
• A conversion, sale, or redemption generally requires reporting recognized gain on Schedule D and Form 8949, and may require depreciation-recapture reporting on Form 4797.
• If the investor reached the 721 through a 1031 exchange into a DST, the 1031 step was reported on Form 8824. A CPA should handle the full reporting process.

Form 8824 when a 1031 came first

Some investors reach a 721 exchange through a 1031-then-721 DST bridge. In that structure, the first step is a 1031 exchange into a DST. Like any 1031 exchange, that step is reported on Form 8824, Like-Kind Exchanges, in the year of the exchange.

The later 721 event is separate. When the DST is acquired by a REIT and the investor’s interest becomes OP units, the 721 exit is generally tax-deferred under Section 721. Like an original contribution, it does not have a specific gain-recognition form because gain is generally deferred.

The two-step route therefore combines several layers of reporting. Form 8824 reports the 1031 exchange into the DST. The investor then has partnership reporting while in the DST and later as an OP unit holder, including annual K-1s. A future conversion, sale, or redemption has the disposition reporting described above, including Schedule D, Form 8949, and potentially Form 4797. Form 8824 belongs to the 1031 step, not to the later 721 exchange itself.

State tax reporting and filing timing

OP units can create state-tax reporting considerations in addition to federal reporting. The operating partnership’s properties may be located in states other than the investor’s home state. The investor’s distributive share of partnership income may therefore be subject to state income-tax reporting in the states where those properties are located. The K-1 may provide state-specific information.

This can create multi-state reporting obligations, depending on the states and the income. It is another reason a CPA familiar with partnership and multi-state taxation is important. The CPA can assess the state information supplied with the K-1, home-state effects, and any needed state filings.

The annual K-1’s timing should also be built into the filing calendar. K-1s often arrive later than other tax documents. Investors should be prepared for the possibility of waiting for the document and, if needed, filing an extension rather than completing a return without the partnership information.

How Baker 1031 helps with reporting

Baker 1031 Investments helps investors understand the reporting framework for a 721 exchange: the deferred, documented contribution; the annual Schedule K-1; K-1 income reporting; conversion and sale reporting; and Form 8824 when a 1031 came first. The purpose is to help an investor know what to expect and coordinate effectively with their 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. Baker 1031 does not provide tax advice or prepare returns. The investor’s CPA handles the specific forms, basis tracking, K-1 items, and disposition calculations. Baker 1031’s role is to help the investor anticipate the ongoing K-1 and eventual disposition reporting so that the reporting framework is understood before and after the transaction.

Frequently Asked Questions

What tax forms does a 721 exchange involve?

The forms vary across the lifecycle. At contribution, the transaction is generally tax-deferred and documented through basis and partnership entry, without a special exchange form. Annually, Schedule K-1 reports the partnership income allocated to the OP unit holder. On conversion, sale, or redemption, gain is generally reported on Schedule D and Form 8949, with possible recapture reported on Form 4797. If the investor used a 1031 exchange into a DST before the 721 event, that 1031 step was reported on Form 8824. A CPA handles the specific reporting.

Is a 721 contribution reported like a 1031 on Form 8824?

No. A 1031 exchange is reported on Form 8824, but a Section 721 partnership contribution does not have a corresponding special exchange form. It is generally a nonrecognition contribution, with no immediate gain to report. The contribution is documented through establishment of carryover basis and entry into the partnership’s tax reporting, including the K-1s the investor will receive.

What is the Schedule K-1 for OP units?

It is the annual partnership tax form issued to an OP unit holder. It reports the holder’s distributive share of operating-partnership income, deductions including depreciation, and other tax items. The holder receives a K-1 rather than a 1099 because they are a partner in the operating partnership. The K-1 is the key annual document for reporting OP-unit income and can be more complex and arrive later than a 1099.

How do I report K-1 income?

The K-1’s multiple items flow to the appropriate portions of the tax return. Partnership ordinary income generally goes on Schedule E, capital gains generally go on Schedule D, and other items flow to their respective forms. K-1 depreciation and deductions can reduce reported income. Because multiple items have different character and destinations, the reporting is more involved than entering a single 1099 dividend amount. A CPA should complete the mapping.

How do I report converting OP units to shares?

Conversion is generally a taxable disposition that triggers deferred gain. The gain is generally reported on Schedule D and Form 8949. If there is depreciation recapture from the originally contributed property, it may be reported on Form 4797 or handled under the applicable recapture rules at recapture rates. A CPA determines the gain, basis, and recapture calculations.

What forms apply after I convert to REIT shares?

After conversion, subsequent reporting shifts from partnership to corporate and dividend reporting. Sales of REIT shares are generally reported on Schedule D and Form 8949, while REIT dividends are reported on Form 1099-DIV. That replaces the K-1 partnership reporting that applied while the investor held OP units.

Was the 1031 step in the DST bridge reported?

Yes. In a 1031-then-721 DST bridge, the initial 1031 exchange into the DST is reported on Form 8824 in the year of the exchange. That report is separate from later partnership reporting. The later UPREIT of the DST into the REIT is generally a tax-deferred Section 721 event, so it does not have a specific gain form. The combined path includes Form 8824, K-1 reporting, and later disposition reporting.

Why is K-1 reporting more complex?

Partnership taxation passes multiple items through to the investor: ordinary income, capital gains, depreciation, return-of-capital information, and other items. Those items can go to different places on the return, unlike a single amount on a 1099-DIV. K-1s can also arrive later than 1099s, affecting filing timing. The complexity reflects partnership pass-through taxation and supports using a CPA experienced with K-1s.

Do I need a CPA for 721 exchange reporting?

Yes. Basis tracking, annual partnership K-1s, conversion and recapture calculations, Form 8824 where a prior 1031 is involved, and possible multi-state reporting are complex. A CPA experienced in partnership taxation and real estate should handle the reporting. Baker 1031 can explain the reporting framework, but does not provide tax advice or prepare tax returns.

How does Baker 1031 help with reporting?

Baker 1031 helps an investor understand the contribution reporting, annual Schedule K-1, K-1 income reporting, conversion or sale reporting, and Form 8824 when the transaction began with a 1031 exchange. REIT units are offered through Aurora Securities, member FINRA/SIPC, after a suitability review. Baker 1031 does not prepare returns; the investor’s CPA completes the specific reporting and forms. The goal is to help investors anticipate the K-1 and disposition framework so they can work effectively with their CPA.

When will I receive my K-1 each year?

Partnerships issue K-1s after the tax year ends, often in the spring. They can arrive later than 1099s and, depending on the partnership’s timing, may arrive close to or after the individual filing deadline. An investor may need to file an extension while waiting. Timing varies by partnership, so the K-1 should be part of the investor’s and CPA’s filing calendar.

Do I report anything if I only hold the units?

Yes. Even without converting, selling, or redeeming OP units, a holder generally reports their annual distributive share of partnership income through the K-1. The deferred gain from contribution remains deferred while the units are held, but the allocated annual partnership income is reported each year. Annual K-1 reporting is separate from later disposition reporting.

Does state tax reporting apply to OP units?

Possibly. An operating partnership may own properties in multiple states, and an investor’s distributive share of income may be subject to reporting in those states in addition to the investor’s home state. K-1 information may include state-specific details. The multi-state aspect adds complexity, and a CPA experienced in partnership and multi-state taxation should address it.

Glossary

Schedule K-1: The annual partnership form reporting an investor’s share of income.

Form 8824: The form that reports the 1031 step in a DST bridge.

Schedule E: The schedule where partnership income from a K-1 is generally reported.

Schedule D: The schedule where capital gains, including conversion gains, are generally reported.

Form 8949: The form used to report dispositions of capital assets.

Form 4797: The form where depreciation recapture may be reported on a disposition.

1099-DIV: The form used to report REIT dividends after conversion to shares.

Contribution Reporting: The deferred, documented reporting at the 721 contribution.

Carryover Basis: The basis established at contribution and tracked for later reporting.

Distributive Share: An investor’s share of partnership income, reported through the K-1.

Disposition Reporting: Reporting gain on a conversion, sale, or redemption.

Depreciation Pass-Through: K-1 depreciation that can reduce reported income.

Recapture: Depreciation recapture reported on disposition.

Partnership Taxation: Pass-through reporting reflected on a K-1.

Capital Account: The partnership account used to track the investor’s interest for reporting.

DST Bridge: The path involving a Form 8824-reported 1031 exchange followed by 721 reporting.

Sources & References

• IRS. About Schedule K-1 (Form 1065)
• IRS. Instructions for Form 8824 (Like-Kind Exchanges)
• IRS. About Schedule E (Form 1040), Supplemental Income and Loss
• IRS. About Form 8949, Sales and Other Dispositions of Capital Assets

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.

Filed under: 721 Exchange · 721 UPREIT · REITs

About the author

Jerry Baker
Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE

Jerry founded Baker 1031 to bring institutional underwriting discipline to the 1031 exchange. He spent more than a decade on Wall Street working on $10B+ of real estate before building diversified DST portfolios for individual investors. Read full bio →

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Reviewed by Lori Kamen — President & CCO, Aurora Securities, Inc. (FINRA Series 4 / 7 / 24 / 53 / 63 / 66), the supervising registered principal. Last reviewed June 2026. Baker 1031 reviews its educational content periodically for accuracy and regulatory compliance. Securities offered through Aurora Securities, member FINRA/SIPC.

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For now, I would manage this risk by keeping a basis-and-K-1 calendar before contributing property, with the CPA involved before the contribution and before any conversion or sale. What part of the reporting cycle would you want clarified before you make a long-term 721 commitment? Share your perspective in the comments.