What Is a 721 Contribution?
A 721 contribution refers to Section 721 of the Internal Revenue Code, which generally allows property to be contributed to a partnership in exchange for a partnership interest without triggering immediate income tax. Under § 721, neither the contributing partner nor the partnership recognizes gain or loss on the exchange — the tax is deferred until a later sale.
How § 721 Works
- A partner contributes property (cash, real estate, or other assets) to a partnership
- In return, the partner receives a partnership interest
- The transaction is generally tax-deferred — no gain is recognized at contribution
- The partner's basis carries over into the partnership interest
The "721 Exchange" in Real Estate
In real estate, investors sometimes use a § 721 contribution — often called an "UPREIT" or "721 exchange" — to contribute property to a partnership affiliated with a real estate investment trust (REIT) in exchange for operating-partnership units, deferring capital gains while gaining diversification and liquidity. Because § 721 (and partnership tax generally) is complex and the rules change, these transactions should be structured with tax counsel. Note this is distinct from a § 1031 like-kind exchange.
Related Terms
- Title 26 U.S.C. — The Internal Revenue Code, where § 721 lives
- Estate Planning — Where deferral strategies are coordinated
- Capital Gain — What a 721 contribution defers
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Federal Law Reference
26 U.S.C. § 721
Generally provides that no gain or loss is recognized when property is contributed to a partnership in exchange for a partnership interest, deferring tax until a later disposition.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC