This spring, Craft introduced its novel 721 exchange fund, the Craft Pod, which offers investors a tax-efficient way of diversifying their investment portfolios – while enjoying access to the freedom of private air travel.
In light of this unique offering, it’s worth taking a closer look at what 721 exchange funds are, how they work, and what makes the Craft Pod such a compelling option for investors who value both financial growth and lifestyle flexibility
What is a 721 Exchange Fund?
A 721 exchange fund is a tax-advantaged investment vehicle that allows investors to defer capital gains taxes, benefit from depreciation of the fund’s illiquid assets, and diversify holdings through a professionally managed portfolio. By contributing assets (liquid or illiquid) to the fund, investors avoid triggering an immediate taxable event at the time of
transfer and gain access to a diversified, income-generating, professionally managed
portfolio.
By contributing qualified assets to a 721 exchange fund – whether illiquid or liquid assets – investors can transfer value into the fund without immediately triggering a taxable event. In return, they receive Operating Partnership (OP) Units in a diversified portfolio.
To qualify for this tax deferral under Section 721 of the Internal Revenue Code, a 721 exchange fund must hold at least 20% of its portfolio in illiquid assets. Funds will typically rely on real estate holdings to satisfy this requirement – but other illiquid assets, like aircraft, can also be used.
How Does a 721 Exchange Fund Work?
Here’s a simplified overview of how a typical 721 exchange fund works:
1. Asset Contribution: Investors contribute eligible assets – such as stock, cash, orqualified illiquid holdings– into the fund, in exchange for OP Units.
2. Professional Management: All contributed assets are pooled together, and the fund is actively managed by a professional investment team.
3. Portfolio Growth: Over time, investors can benefit from potential long-term appreciation of the fund's portfolio. Among other methods of growth, excess liquidity can be reinvested into the fund.
4. Access to Liquidity: After a certain period of time, investors can choose to liquidatetheir investments or to remain invested in the 721 exchange fund.
Key Benefits for Investors
721 exchange funds offer several compelling benefits for investors, including:
1. Capital Gains Tax Deferral: One of the key benefits of participation in a 721 exchange fund is the ability to defer capital gains taxes at the time of asset contribution.
2. Diversification: By contributing to a professionally managed fund, investors diversify their holdings and reduce the risk of being overly concentrated in a single stock, asset, or sector.
3. Growth Potential: As a 721 exchange fund’s value increases, so does the value of investors’ OP Units.
4. Simplified Portfolio Management: By rolling appreciated assets into a single fund,investors can minimize the complexity of tracking multiple individual holdings and dealing with capital gains taxes from individual sales. Additionally, 721 exchange funds are becoming increasingly accessible to investors.
5. Estate Planning Advantages: OP units can be passed down to heirs with a stepped-up cost basis, potentially reducing future tax liabilities.
6. Liquidity Options: When converted to liquid shares, an investor’s OP units can be sold or traded more easily
Why Should Private Air Travelers Take Note?
721 exchange funds are typically tied to real estate, but the Craft Pod is redefining this model. Rather than the typical buildings or land, the Craft Pod will hold private aircraft as its illiquid asset – offering investors something far more dynamic.
Investors in Craft’s 721 exchange fund can book private air travel on fund-owned aircraft with a simple phone call or email to Craft’s dedicated scheduling team.
This level of access to physical assets is highly unique for a 721 exchange fund. By combining lifestyle perks with traditional tax deferral, asset depreciation, and portfolio diversification benefits, the Craft Pod offers a truly differentiated experience for investors.
Ready to explore your options? Contact our team to learn more about how investment in the Craft Pod can help you transition your appreciated assets into a tax-efficient, growth-oriented portfolio, while giving you access to a better way to fly private.
