Section 721 and 721(c) Property
Section 721 allows investors to exchange appreciated real estate property held for business or investment purposes for units in an operating partnership. The units can be converted into shares of a REIT. A section 721(c) partnership exists when section 721(c) property is contributed to a partnership by a U.S. transferor and after the contribution, a related foreign person owns certain interests in the partnership.
Investment Company and Section 351(e)(1)
Section 351(e)(1) states that section 351 will not apply to transfers of property to an investment company. As a result, an LLC is not considered an investment company under section 351(e)(1).
Allocation Requirements in Section 704(c)
Section 704(c) mandates that a partnership allocate income, gain, loss, and deduction with respect to contributed property to consider any built-in gain or loss using a reasonable, consistent method.
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The IRS code section 721 allows an investor to transfer property held in a like-kind exchange for shares in a Real Estate Investment Trust without triggering capital gains taxes. For example, an investor does a 1031 exchange to acquire a replacement property, holds it for 10-20 months, then transfers it to a REIT for shares.
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A controlled partnership is a partnership of which 50% or more of the capital interest or profits interest is directly or indirectly owned by or for a person.
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Built-in gain is the excess of property’s book value over the partnership’s adjusted tax basis upon contribution. The remedial allocation method describes how to allocate items regarding section 721(c) property. An acceleration event causes gain recognition.