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.”
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.
- 1031 Hotline: If you have questions about 721 contributions, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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