Section 721 contributions: basis carryover and the 7-year hold

What actually happens to basis when appreciated real estate goes into a REIT operating partnership? Section 721 of the Internal Revenue Code states the principle plainly: no gain or loss is recognized to a partnership or to any of its partners on the contribution of property to a partnership in exchange for an interest in the partnership. The contribution defers gain, but the basis mechanics determine what that deferral is worth.

Last reviewed: July 8, 2026

What Section 721 does

The REIT structure that receives the property is the Umbrella Partnership REIT, or UPREIT. The publicly traded REIT entity sits on top of an operating partnership that holds the real estate. Outside investors contribute property to the operating partnership and receive operating-partnership (OP) units, which are partnership interests, not shares of the REIT itself. No taxable event occurs at the moment of contribution.

Basis carryover, not basis step-up

The contribution is not a sale. It is an exchange of one form of equity (real property) for another (a partnership interest), and the investor's basis carries over. If the contributing investor had a $1,200,000 adjusted basis in the contributed property, the investor begins with a $1,200,000 outside basis in the OP units. The deferred gain, the difference between fair market value at contribution and that adjusted basis, becomes an embedded gain inside the partnership interest. It will be recognized when the OP units are sold, when they are converted to REIT shares, or, in some cases, when the operating partnership disposes of the contributed property.

This is the same mechanism that governs basis in a 1031 exchange replacement property. In a 1031, the basis is in a parcel; in a 721, the basis is in a partnership unit.

The 7-year hold and built-in gain

Section 704(c) of the Code requires the operating partnership to specially allocate built-in gain or loss on contributed property back to the contributing partner if the property is sold within seven years. Most UPREIT contribution agreements therefore include a covenant in which the REIT agrees not to sell the contributed property for a period of seven years, often longer, to protect the contributing investor from a recognition event triggered by the sponsor's own disposition decisions.

Read the lock-up covenant carefully. If the sponsor reserves the right to sell into a "tax-protected" 1031 exchange of its own, the contributing investor may still avoid recognition. If the sponsor reserves the right to dispose freely after a shorter window, the deferred gain can crystallize on a timeline the contributing investor does not control.

The rest of the lifecycle, distributions, conversion, and the step-up at death, is covered in the Section 721 UPREIT tax treatment overview.

Figures and examples are general and for educational purposes only. Section 721 contributions raise individual tax questions that require coordination with a qualified tax advisor.