DST Sect 721 Oh My!

Technical topics regarding tax preparation.
#1
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54
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12-Feb-2020 2:57pm
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Hawaii
Client 1031'd into a Delaware Statutory Trust (DST) a few years back and has been reporting on Sch E ever since. Brought his tax information in and saw that during 2021, "contributed" properties to a newly formed Delaware Limited Partnership. As a result, he was credited with a capital contribution to the Partnership.

Based on the literature provided and my quick research, looks like a Section 721 non-taxable transaction as treated as tax-deferred contribution of properties of the DST to a REIT partnership. I don't see any settlement statements like I would receive for a 1031 exchange; so, it appears there is no tax reporting requirement? I haven't found any reference to use any tax forms to report like a 1031 transaction.

The only reporting would be the income generated and reported via the K-1?
 

#2
MilesR  
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California
There is at least some extra tracking for built-in gain under 704(c). You add this onto the K-1. There's a box to check and some notes to add.

Some states like CA (and maybe HI) require a form on the personal return to tell them you have not gotten rid of the 1031 property if it was transferred out of state. So if the client did a 1031 out of state and is required to file this, there might be some issue with the property being transferred to a partnership. Something I'd double check if I had this situation.
 

#3
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I did see the 704(c) built in gain on the K-1 and from my understanding, doesn't affect the income but is tracked as you mentioned. If my understanding is not correct, do let me know.

For CA, do they have the "claw back" provisions? Basically, what the attorney involved mentioned that for HI, if a HI property was 1031'd to another state, there would not be tax implications per se for HI reporting. It would however, come into play as if the property were to be eventually sold, the income would be taxed in the other state but since HI has "worldwide" income provisions, it would end up on the HI return anyway and then take the out of state paid credit. We didn't go as far as to go into a scenario where there owner moves out of HI when property sold.
 

#4
MilesR  
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California
The 704(c) requires tracking and then there can be situations where the partner that contributed that asset realizes gain but no income effect otherwise.

CA has the claw-back provisions and will let you defer their gain but one day will tax it (unless you die and get a step-up). So every year you have to report to them on form 3840 that it's not sold or if it is, that it was another 1031. If it's sold and not exchanged, that's when they'll tax it. Resident or not, it was CA gain.

It looks like HI is not a claw-back state. I just figured they would be since HI is another heavily taxed state.
 

#5
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54
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Yes, I was shocked Hawaii does not have claw-back provisions. I was sure it had something to that effect even before I heard the claw-back term.
 


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