Exchange Funds for Concentrated Stock: 7-Year Rule, 20% Sleeve

The problem an exchange fund solves

You hold a large position in one stock, bought or granted long ago, with a basis far below its value. Selling it realizes the gain. An exchange fund is the alternative that investors and advisers talk about: contribute the shares to a pool, receive an interest in the pool, and own a share of a diversified portfolio instead of one company. The Code makes that tax-free in only one narrow way, and the rest of this page is that way, read from the text.

Eaton Vance, the best-documented sponsor because its funds filed 10-Ks, described the purpose in plain words. Belcrest Capital Fund LLC is “a private investment company organized by Eaton Vance Management (Eaton Vance) to provide diversification and tax-sensitive investment management to investors holding large and concentrated positions in equity securities of selected public companies” (Form 10-K for 2011, accession 0000950123-12-004648).

Step one: the contribution (Sections 721 and 351)

Read together, these explain the design. Many people contributing single, nonidentical positions is diversification by definition, so the fund would be an investment company unless a fifth or more of its value sits in something that is not a readily marketable stock or security. Section 351(e)(1)(B) lists what counts as stock and securities, including “any interest in a real estate investment trust”; direct ownership of real property is not on the list (our reading). So the sponsor buys real estate, and the filing language follows the regulation: Belcrest's 10-K says that for the contributions to be nontaxable “not more than 80% of the Fund's assets (calculated in the manner prescribed) may consist of ‘stocks and securities’ as defined in the Code” and that it “normally invests at least 20% of its assets as so determined in certain real estate investments”.

One caution on dates. Section 351(e)(1) in its present form applies to transfers after June 8, 1997 (Pub. L. 105-34, section 1002(b)). The regulation's 80 percent test is older text. Which number the Treasury applies to the statute's broader list is not stated in the statute; the 10-K figure is the sponsor's reading, and we do not give a view on it.

Step two: the seven-year rule (Sections 704(c)(1)(B) and 737)

The contributed stock keeps its old basis inside the fund (Section 723), so the built-in gain stays with the contributing partner. Section 704(c)(1)(B) protects the Treasury from that gain being shifted to someone else: “if any property so contributed is distributed (directly or indirectly) by the partnership (other than to the contributing partner) within 7 years of being contributed”, the contributing partner “shall be treated as recognizing gain or loss (as the case may be) from the sale of such property”. Section 737(b)(1) is the mirror image: if the contributor receives other property from the partnership, gain is measured on property the contributor put in “within 7 years of the distribution”.

Worked example (our arithmetic). You contribute stock worth $1,000,000 with a basis of $100,000, a built-in gain of $900,000. Five years later the fund distributes that same stock to another investor when it is worth $1,200,000. Section 704(c)(1)(B)(i) measures your gain by “the variation” between basis and value at contribution, so the amount at stake is up to the $900,000 built in at contribution, not the later $200,000, which the partnership agreement allocates among partners. After seven years the same distribution does not trigger the rule.

Exchange fund documents follow the statute. Belcrest's 10-K: “Securities contributed by a Shareholder may be distributed to other Shareholders in the Fund (or to other investors in Belvedere Company or the Portfolio) after a holding period of at least seven years and, if so distributed, would not be available to meet subsequent redemption requests made by the contributing Shareholder.” That is the lock-up in practice: it is a tax design, not only a sales feature.

Five years or seven? Both numbers circulate. The statute changed from 5 to 7: “Pub. L. 105-34 substituted ‘7 years’ for ‘5 years’ in introductory provisions”, effective for property contributed to a partnership after June 8, 1997. The regulation on eCFR (current as of October 28, 2026) still says the partner “must recognize gain or loss under section 704(c)(1)(B) and this section on the distribution of such property to another partner within five years of its contribution”. We rely on the statute; a reader comparing sources will find both.

What a real fund's 10-K showed, 2007 to 2011

Between 1998 and 2002 Eaton Vance launched Belair, Belcrest, Belmar, Belport and Belrose Capital Funds. Each had more than 300 record holders and filed annual reports on Form 10-K. We read six of them, each the last or one of the last annual reports available. All numbers are as stated in the filings.

Three readings, none of them a judgment on the funds.

1. The sleeve is real and borrowed. Each 10-K says the fund “acquires its real estate investments with borrowed funds”. In five of the six filings the borrowings are larger than the real estate (at Belcrest on December 31, 2010: $144.0 million against $130.7 million, 110%, our arithmetic); the facility was not used only for real estate, so this is a comparison, not an accounting. A shareholder owns a leveraged real estate position they did not choose, alongside the stock pool.
2. The 20% was on a tax measure, not on the balance sheet. Reported real estate shares range from 21.0% to 13.1% of total assets. The 10-K calls the 20% a share of assets “as so determined” and “calculated in the manner prescribed”, and does not reconcile it to the GAAP figure. We cannot say how the test was computed.
3. The real estate does not come back to you. On redemption “No interests in Subsidiary Real Estate Investments, Partnership Preference Units or other real property investments will be distributed to meet a redemption request”; the fund pays mainly in securities, and “if a redeeming Shareholder receives cash in addition to securities to settle a redemption, the amount of cash received will be taxable to the Shareholder to the extent it exceeds such Shareholder's tax basis in Fund Shares”. Belcrest also reported that fees paid to Eaton Vance and its affiliates were about 1.06% of average net assets for 2011.

One structural detail shows how closely the design follows the Code: Belcrest Realty, the real estate subsidiary, elects REIT status, and its preferred shares “are owned by not less than 100 charitable organizations”, because a REIT needs 100 or more owners.

None of the five funds reports to the SEC now: Form 15 filings were made on November 6, 2008 (Belair), February 19, 2010 (Belmar), July 9, 2010 (Belport), October 8, 2010 (Belrose) and March 22, 2012 (Belcrest) according to EDGAR's filing lists. We use them because they are the only audited, public descriptions of how the structure works; they are not a description of any fund you can buy today.

Who files a Form D today: 20 issuers named “exchange fund”

Current exchange funds are private placements. They owe the SEC a Form D, which shows who raised how much, but not the lock-up, the real estate share or the fees. We read the SEC's quarterly Form D data sets from the first quarter of 2014 through the third quarter of 2026 and kept every issuer whose name contains “exchange fund”, then removed the vehicles for 1031 exchanges (PV 1031 Exchange Fund III) and the two real estate vehicles (Monroe Exchange Fund and Monroe Exchange Fund II). That leaves 20 issuers. For each we take its most recent filing (the latest amendment), and its “total amount sold” and “total number already invested”. A Form D amount is a cumulative figure as the issuer reports it; it is not performance, and it says nothing about whether any fund is well run. Funds that do not have “exchange fund” in their name, which includes some of the largest sponsors' products, are not in this count, so it is a floor.

The other ten of the 20 report nothing sold on their latest filing: Diversification Partners Exchange Fund LP (2014), Liquidax Global Exchange Fund I, LP (2017), Cincinnati Exchange Fund, LP (2021), Fidelity Exchange Fund REIT, LLC (2023), Cache Exchange Fund I, LLC, Cache Exchange Fund - GNU, LLC and Cache Exchange Fund - COBOL, LLC, Dimensional US Equity Exchange Fund I LP (August 1, 2025), and two NonPublic Exchange Fund series (2026). The ten that report sales add to $1,685,021,463 (our arithmetic). The investors are not additive across funds, because one household can be in several, and the dates differ.

Two fast-growing examples show amendments over time:

In two years Fidelity's reported total rose 4.5 times and its investor count 3.7 times; Cache Unix's reported total rose 2.5 times in under a year (our arithmetic). The Form D does not say how contributed stock is valued in these totals, and it does not say how much of any fund is in real estate. The sponsors' offering documents do, and we have not seen them.

What a reader can do with this

This is analysis of public documents, not investment, legal or tax advice. Here is what the documents let you check before you talk to anyone.

• Ask for the offering memorandum and read three things in it: the stated lock-up and what happens if you leave early (the Eaton Vance 10-K says a redemption is met mainly with securities, not your original shares, and not with real estate); the real estate share and how much of it is financed; and the fees.
• Compare the alternatives on the same page. A sale realizes the gain now. A 1031 exchange only reaches real property (our 1031 rules page). A fund that holds real estate through an operating partnership is a different tool, the 721 exchange for real estate owners (721 exchange and DST programs). Gift or charitable routes are another family (charitable remainder trusts), and a death transfer gets a new basis (step-up in basis). Opportunity zone funds defer gain only from sales (opportunity zone 2.0).
• Ask who the other contributors are. Section 704(c)(1)(B) and Section 721(b) turn on what the fund does with what you put in, so the fund's ability to avoid distributing your shares for seven years matters as much as the headline diversification.
• Ask what the fund tells you about the 20%. The Eaton Vance 10-K shows the share can sit well under 20% on the balance sheet and still be described as “at least 20%” on a tax measure. Ask for the measurement date and method.

If the stake is large, a tax adviser who has read the actual fund documents is the right next step, and the questions above are what to bring.

How this was built, and its limits

The tax text is from the U.S. Code as published by Cornell's Legal Information Institute and the Code of Federal Regulations on eCFR (October 28, 2026 edition), read October 30, 2026; the credit lines of Sections 704, 351 and 721 end at Pub. L. 115-97 (2017), Pub. L. 109-135 (2005) and Pub. L. 105-34 (1997), and we did not find the 2025 law in them (our reading of the credit lines; we did not read the 2025 law itself for this page). The Eaton Vance numbers are from six Form 10-K filings; fund terms may differ from today's sponsors. The Form D census is a name search: it does not capture exchange funds without those words in their names, it ends with the third-quarter 2026 data set, and it cannot tell us which of the 20 accept concentrated public stock; for the NonPublic and Collective funds, for example, the Form D does not tell us what is contributed. We have not read any current exchange fund's offering memorandum.

FAQ

Sources

Read October 30, 2026. 26 U.S. Code Sections 721, 351, 704, 737, 722, 723 and 731 (Legal Information Institute, Cornell Law School); Treas. Reg. 1.351-1 and 1.704-4 (eCFR, current as of October 28, 2026). Eaton Vance Capital Fund Forms 10-K on SEC EDGAR: Belair Capital Fund LLC (CIK 1050816), accession 0001104659-08-014365; Belmar Capital Fund LLC (CIK 1108991), 0000950135-09-001375; Belport Capital Fund LLC (CIK 1138602), 0000950123-10-019493; Belrose Capital Fund LLC (CIK 1170304), 0000950123-10-019491; Belcrest Capital Fund LLC (CIK 1070495), 0000950123-11-019909 and 0000950123-12-004648. Form 15 filings from EDGAR filing lists. SEC Form D data sets, 2014 first quarter to 2026 third quarter.