No transaction erases capital gains tax on appreciated real estate outright. What the tax code offers instead is deferral, and sometimes a change in the character or timing of the tax bill, through a handful of recognized mechanisms. An owner who has held a property for years and watched its value climb usually has more than one option, and the options are not interchangeable: they trade control, liquidity, and complexity against the size and timing of the deferral.
The four paths worth comparing are a Section 1031 exchange into replacement real estate, a Section 721 contribution of the property to a REIT's operating partnership in exchange for OP units, investment of the gain into a qualified opportunity fund, and an installment sale that spreads recognition of the gain over the years payments are received. Each defers tax differently, and each imposes a different set of obligations going forward.
The right comparison starts with what the owner wants after the transaction: continued direct ownership and management, a passive diversified holding, a bet on a designated low-income census tract, or simply cash flow spread over time. That answer narrows the field faster than any tax rate comparison does.
A Section 1031 exchange lets an owner sell investment or business real property and defer gain by acquiring replacement real property of like kind, using a qualified intermediary to hold sale proceeds so the seller never has actual or constructive receipt of cash. The identification period is 45 days from the relinquished-property closing, and the exchange must close within 180 days. Both deadlines are fixed by 26 CFR 1.1031(k)-1 and are not extended for financing delays or a slow closing on the replacement side.
The tradeoff is that the owner remains a direct property owner, with all the management, leasing, and capital-expenditure responsibility that entails. Gain deferred under Section 1031 is not gain eliminated; it reduces the replacement property's basis, and the deferred amount comes due when the owner eventually sells without exchanging again, subject to depreciation recapture rules on the way.
A Section 721 contribution moves real property into a REIT's operating partnership in exchange for units in that partnership rather than cash. Under 26 U.S.C. Section 721, no gain or loss is recognized on the contribution itself, which produces deferral similar in effect to a 1031 exchange but through a different mechanism: the owner is not acquiring another parcel of real estate, but a partnership interest whose value tracks the performance of a diversified portfolio managed by someone else.
OP units typically carry a holding period before they can be redeemed or converted to REIT shares, and there is no public market for them while they remain OP units. Deferral continues only until the units are sold, redeemed, or converted and the resulting shares are sold; it is not a permanent tax-free outcome, and the owner has given up the ability to direct decisions about the specific property once it is inside the operating partnership.
A qualified opportunity fund lets a taxpayer reinvest capital gain, not the full sale proceeds, into a fund that invests in designated opportunity zones, deferring recognition of that gain and potentially reducing tax on the fund investment's own appreciation if the position is held long enough. The reinvestment window is 180 days from the date the gain is realized, and the IRS guidance on certifying and maintaining a qualified opportunity fund controls what the fund itself must do to keep its status.
This path only defers the original gain; it does not touch depreciation recapture on the relinquished property, and it concentrates the reinvestment in whatever opportunity-zone projects the fund selects, which is a different risk profile than either a 1031 replacement property or a diversified REIT operating partnership.
An installment sale lets a seller finance part of the purchase price for the buyer and report gain proportionally as principal payments are received rather than all at once in the year of sale, under the mechanics described in IRS Publication 544. This does not lower the tax rate or change the total amount of gain eventually taxed; it changes when the tax is due, and it makes the seller a creditor exposed to the buyer's ability to pay.
An installment note can be combined with other planning in limited circumstances, but on its own it is a timing tool, not a deferral tool in the same sense as 1031 or 721, since depreciation recapture on the sale is generally recognized in the year of sale regardless of when principal is collected.
Deadline pressure matters. A 1031 exchange and a qualified opportunity fund both run on strict federal clocks measured in days from a triggering event, while a 721 contribution to an operating partnership and an installment sale are negotiated transactions without an identical statutory countdown, though each has its own closing and documentation timeline set by the counterparty.
Control and liquidity move in opposite directions across the four paths. Direct 1031 replacement ownership keeps the most control and the least liquidity relief. A 721 contribution trades that control for units in a professionally managed portfolio that still cannot be sold on a public market on demand. A qualified opportunity fund and an installment note both hand a large share of outcome risk to a third party, the fund manager or the buyer.
None of these four is presumptively better for a given owner; the comparison depends on whether continued property management is wanted or a burden, how much of the gain needs deferral versus how much cash is needed now, and how much illiquidity the owner can tolerate while the deferral runs.