The weird reason millions of homes sit—and stay—empty

Across the US, about 7.2 million homes sit empty—not because no one wants to live in them, but because many are simply too expensive to sell.

Take Los Angeles, where the average seller over age 65 would incur an “exit tax” totaling $185,054. Capital gains eat up about 20% of the profits. And if the property’s a rental, the IRS takes another 25% to recapture depreciation. Meanwhile, annual holding costs average $9,899, meaning a home can sit vacant for nearly 19 years before those costs surpass the tax hit from selling the property.

To avoid this tax bill, some wait until they die and pass the home on to an heir. Rental owners often defer these taxes by buying a new rental property via a 1031 exchange. But there’s another, less-talked-about, option: a 721 exchange, also known as an UPREIT.

“This is a popular tax-deferral tool for stocks and institutional real estate investments, but few mom-and-pop investors have ever heard of it,” says investor Ari Rubin. He hopes to change that with his platform, Flock Homes. How it works: You transfer your property into Flock, which finds an occupant and manages the rental. The Flock Fund then pays quarterly cash flow on your shares, much like a REIT. “Since no cash changes hands, it’s typically a non-taxable event,” Rubin explains.

Flock targets homeowners who don’t want the tax hit from selling or the landlord headaches of a 1031 exchange. As Rubin explains, “sometimes, you just want out.” The Flock Fund now holds nearly 1,200 homes across the US, valued at $279 million, and aims to track the housing market’s 8% to 10% annual returns.

Flock is one of a handful of new platforms helping investors rake in tax-free, hassle-free dividends via a 721 exchange or a similar product called a Delaware Statutory Trust (which does not need to happen in that state). But these seemingly sweet deals do come with downsides.

“It’s a one-way door, so once you’re in, you lose the ability to do future 1031 exchanges with that equity,” says Amanda Hahn of Keystone CPA. “You give up all control over how the property is managed or sold—which is good for some investors, while others may not like that.”

“I understand getting burnt out as a landlord and switching to passive investing, because that’s what I did,” says G. Brian Davis, co-founder of the real estate Co-Investing Club. “But the devil’s in the details.” Fees (including 6% onboarding, 1–2% closing, and annual 1% management on Flock, for example) will eat into returns. “This is why I stopped investing in crowdfunding platforms,” he explains. “Too many retail funds hit you with fees, and they never end up delivering what they promise.”

These platforms may also have minimum hold times (Flock is four to eight years, depending on your property) before you can redeem your shares. And once you do cash in, capital gains still apply, unless you pass those shares to heirs. Taxes can be deferred, but not avoided forever. As Rubin explains, “You’re kicking the can down the road.”