Welcome to SMI Fund Management’s 721 Exchange program, a unique niche in which investors may complete a tax-deferred, non-taxable contribution of real property, utilizing Section 721 of the Internal Revenue Code, in exchange for membership interests in our managed fund.
Similar to a 1031 Exchange, investors may contribute real estate assets in exchange for membership interests by utilizing Section 721 of the Internal Revenue Code. The key difference between the 721 Exchange and a 1031 Exchange, is the ability of the investor to receive membership interests rather than being limited to replacement like-kind real estate. By participating in a 721 Exchange, an investor has the opportunity to divest from the individual responsibility of management, tort-liability, and debt liability, all while preserving the investor’s depreciated tax basis, and pass-through tax treatment. In addition, in most cases the investor’s estate will retain the opportunity to realize a stepped-up basis upon their demise, which will significantly reduce income taxes for their heirs on the contributed real estate assets, along with potential estate and gift tax advantages that could significantly reduce the investor’s estate tax.
Benefits of the 721 Exchange:
What is a “721 Exchange”?
The 721 Exchange is a term used to describe the contribution of assets into an entity taxed as a partnership, like the Fund, as a non-taxable event. This contribution is non-taxable pursuant to Internal Revenue Code Section 721(a), which provides “No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership.”
Income Tax Advantages
Investors defer capital gains taxes via this tax-deferred exchange of real property for membership interests in the Fund or other managed funds as the case may be. The 721 Exchange is similar to a Section 1031 exchange in that gain is not recognized on the “transfer.” However, unlike a 1031 tax-deferred exchange the investor does not have to acquire like-kind replacement property. Instead, the investor is acquiring membership interests in the Fund, which owns the transferred real property along with its other assets.
Estate Tax Advantages
In addition to the income tax advantages described above, investors may receive estate or transfer tax benefits like a stepped-up basis in the membership interests upon their demise, which will significantly reduce income taxes for their heirs on the contributed real estate assets, along with potential estate and gift tax advantages that could significantly reduce the investor’s estate tax. Additionally, through proper estate planning investors can receive a significant reduction in transfer taxes, in some cases by as much as 45% of the fair market value of their membership interests.
Increased Liquidity
Investors may complete a full 721 Exchange, or partial 721 Exchange, preserving the investor’s capacity to realize a portion of their equity in cash at closing (subject to tax), and contributing the remaining portion through the 721 Exchange (tax-deferred).
Depreciation
Investors maintain their existing individual depreciation schedule. Investors may gain additional depreciation on a pro-rata basis as we make acquisitions and grow the real estate portfolio. Additionally, we often utilize cost-segregation to accelerate and increase the depreciation benefit to investors.
Prospective investors are not to construe the contents herein, or as described above, as legal, business, tax, accounting, investment or other advice. Each prospective investor should consult its own advisers as to legal, business, tax, accounting, U.S. Employee Retirement Income Security Act of 1974, as amended, and other related matters concerning an investment in SMI Fund Management’s managed funds. Any reference to contribution and investment herein is not an offer to sell to any person, or a solicitation to any person to buy, such interests in any state or jurisdiction in which such an offer or solicitation would be prohibited by law or to any person who is not an “accredited investor” as defined in Regulation D under the Securities Act.