Structuring Contributions of Appreciated Property to Partnerships: Avoiding Tax Recognition on Built-In Gain Assets

This CLE/CPE course will provide tax counsel with a comprehensive guide to the tax consequences of contributing appreciated property to a partnership or multi-member LLC. The panel will discuss the specific tax treatment of appreciated property's contribution with debt, depreciation allocation, both liquidating and nonliquidating distributions, and capital account adjustments and allocations.

For partnerships and their tax advisers, the contribution of appreciated property to an entity in exchange for a partnership or LLC ownership shares presents specific tax challenges. While in most cases the exchange of assets for partnership interests is not a recognition event, a contribution of appreciated property can have significant consequences for both partnership operations and distributions.

An exception to the nonrecognition rule of Section 721 occurs when the contributed property is encumbered by debt, and the contributing partner is deemed to have been relieved of debt in an amount in excess of his basis in the contributed property. In these situations, the partnership must adjust its basis in the contributed asset to reflect the current gain recognition.

Currently, partnerships that receive appreciated property face specific Code provisions on distributing the appreciated asset and rules that require recognition when other partnership property is distributed to the contributing partner under the "seven-year rule" of Section 737. However, recently proposed tax law changes can significantly impact or repeal this rule. Tax advisers must have a firm grasp of the rules governing the contribution of appreciated property to partnerships to avoid unforeseen tax and penalties resulting from incorrect distributions or allocations.

Listen as our experienced panel provides a comprehensive and practical guide to the tax consequences and rules of contributing appreciated property to partnerships.