1031 Exchanges Involving 721 Contributions

Many investors have questions about like-kind exchanges involving private 721 contributions. In this article, we are going to talk a little bit about 1031 exchanges involving 721 contributions.

Buying Property with a Co-Purchaser

We see people who buy replacement properties with a co-purchaser. Let’s say that you sell a property for $5 million. Your brother-in-law has $5 million so you agree to purchase a $70 million property together as tenants-in-common rather than as partners. Remember - a single taxpayer doing a 1031 exchange can’t buy an interest in a multi-member entity or joint venture partnership – they need to buy replacement property, and a tenant-in-common interest in real estate would qualify.

Now imagine years down the line, you and your co-purchaser decide that it doesn’t make sense to be separate tenant-in-common owners of the property. Eventually you may want to each contribute your co-ownership interest to a joint-venture entity. You can certainly do a private 721 contribution. That’s the more traditional way it’s been used in the past.

Contact CPEC1031

If you have any questions about 721 contributions and 1031 exchanges, we’ve got you covered. Our qualified intermediaries are proficient in all aspects of the like-kind exchange. We’ve been helping taxpayers across the country with their exchanges for the past two decades. Let us put our experience to work for you on your next 1031 exchange. Contact us today at our Minneapolis office to learn more about our extensive 1031 exchange services.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

Alternatives to the 721 Contribution

Sometimes a developer will approach a seller and say: “I don't want to buy your property, I want to become partners with you. Rather than giving you cash for your property I'd like to give you a partnership interest in my new development entity. All you have to do is to contribute your property to my partnership.”

Section 721

Under Section 721 of the Internal Revenue Code when you contribute property to a partnership and you receive back partnership interest, that can be a tax neutral or untaxed transaction. However, there's a lot of traps for the unwary with regard to 721 contributions.

One very important one is the problem of mortgage over basis (or MOB). Mortgage over bases his when you're debt on the contributed property exceeds your basis. To the extent that you have debt relief over and above your basis you may inadvertently trigger the recognition of gain.

721 Contribution Alternatives

So what's the alternative to doing a 721 contribution? The alternative is to do a cash sale. Tell the developer you're not interested in being his partner but you'd happily sell the property in a cash transaction using your qualified intermediary to do a 1031 insulate you from receiving that cash so you can redeploy it into other unrelated replacement properties. Sometimes being in a partnership isn't all that it's cracked up to be.

• Start Your Exchange: If you have questions about 721 contributions, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

721 Contributions & 1031 Exchanges

Sometimes a property seller is interested in contributing a portion of his or her real estate into the project as equity, but also wants to take some cash out for a 1031 exchange. Here's a strategy to accomplish that.

721 Tax-Free Contributions

One way to structure the sale agreement is to have the taxpayer (seller) enter into two agreements with the buyer — typically an LLC taxed as a partnership.

• First, the taxpayer agrees to sell to the LLC an undivided X percent of the property for cash that will be assigned to a qualified intermediary for a 1031 tax-deferred exchange.

• Second, the taxpayer agrees to contribute the remainder of his or her interest in the property to the same LLC in a 721 tax-fee contribution in exchange of a partnership interest (LLC membership interest).

By splitting the transfers in two and doing the 1031 sale first, the taxpayer is able to get the most tax efficient treatment on both transfers.

Potential Complications

There are some potential complications if the LLC distributes cash to the members after the contribution, so you need to be careful when taking-out construction financing. Here are some issues to consider:

• What amount of debt — if any — encumbers the property at this time?

• What is the seller’s current adjusted basis in the property? (check for “MOB” mortgage over basis)

• What is the cash price allocated for the sale portion of the transaction?

• What is the value or amount of the LLC/partnership interest being given in exchange for the contribution or the remainder of the property?

Having a qualified intermediary on your side to tackle these issues can ensure the most tax-efficient strategy possible.

• Start Your 1031 Exchange: If you have questions about the 1031 exchanges combined with 721 contributions, feel free to call me at 612-643-1031.

Defer the tax. MAXIMIZE your gain. 

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved