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Contribute Property w/ BIG to Partnership; Then 1031

Technical topics regarding tax preparation.
#1
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Taxpayer has property with large appreciation. Wants to contribute the property to a privately held real estate fund. The fund then wants to 1031 the contributed property into various assets that the fund has experience managing. The fund would then hold these replacement assets for a period of ~10 years.

After researching extensively, I'm confused on two issues:
1. Will there be any BIG taxes on the contribution?
2. Are there any issues with holding period requirements on the contributed property being 1031'd (meaning, when can the contributed properties be 1031'd)?

Thank you!
 

#2
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"BIG tax" is a very very very special term, defined in the Internal Revenue Code, related (only, I'm pretty sure) to S corporations. You don't want to use that term for anything else. :)
 

#3
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Oh really? Sorry for the confusion and thanks for the correction.

To correct Q #1 - I'm trying to determine if a taxpayer with a highly appreciated asset will be subject to tax on that appreciation upon contribution to a partnership (real estate fund).
 

#4
JR1  
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Agree, you threw me with the BIG reference....so this is about doing a 1031...I don't see how it qualifies, but I'm no expert on it. Since the investment isn't truly like-kind...real estate for real estate....and even then, there are rules about it being similar kind of real estate.....I'd want to know if they have some private letter ruling.
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#5
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Check out IRC Section 721. It will begin to address at least some of your questions.
 

#6
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“BIG” is typically a reference to the “Built in Gains” tax that applies to S-corp’s…but it’s a concept that’s thrown about in the partnership arena as well, so I’m fine with you using it.

What you have is a 704c issue, but that’s for the partnership to figure out, although you’d want to negotiate whatever method is most favorable to your client. There wouldn’t be any personal gain on client’s contribution.

The issue is whether or not the partnership holds the property for the requisite purpose (i.e. business, investment, rental) prior to the exchange. If it doesn’t, that could be an issue. But this would be a partnership issue, largely outside of your client’s control. The only way your client could control it, if client thinks this is a bogus 1031 transaction, is to not contribute the property in the first place.

If your client makes the contribution, and if your client gets a K1 with no gain on it, such that the partnership took the position that the exchange qualifies under Sec 1031, then you’d have to go with that treatment. (Sounds doubtful that the partnership would do anything different, based on what you wrote). If it later turns out that the IRS disputes 1031 treatment, then client would be stuck with whatever the final outcome turns out to be.
 

#7
Nilodop  
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Since the real estate fund you refer to is a partnership, it must not be a REIT, right? So it's OK under the 721 rule that says you apply the 351 rule as if the partnership were incorporated, the rule that says 351 does not avoid gain on transfer to an investment company, which includes REITs. So you're OK there.

I'd think a bit about step transaction, but I'm not sure. The theory to challenge it would be that if your client had done the 1031 first, that 1031 might have failed because the properties it received would then not be held but rather transferred almost immediately to the partnership. 1031 requires that the received property be property
... which is to be held either for productive use in a trade or business or for investment.
 


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