Section 721(c) Partnerships: Form 8865 Schedule G and H

Last Updated: January 16, 2026 | International tax CPA firm with Big Four experience

Key Takeaways

Section 721(c) applies to partnerships formed on or after January 18, 2017

Triggered when a U.S. person contributes built-in gain property to a partnership with related foreign partners

Default rule: Immediate gain recognition on contribution

Gain Deferral Method: Allows deferral if specific requirements are met

Schedule G reports Section 721(c) property and gain deferral method application

Schedule H reports acceleration events that trigger gain recognition

Remedial allocation method required for 721(c) property using gain deferral

What Is a Section 721(c) Partnership?

Section 721(c) partnerships involve specific rules that can override the general tax-free treatment of property contributions to partnerships. Understanding when these rules apply is essential to avoid unexpected gain recognition.

Direct Answer: A Section 721(c) partnership is a partnership formed on or after January 18, 2017, where a U.S. person contributes property with built-in gain (fair market value exceeds basis), and a related foreign person is also a partner. Under the default rule, the U.S. person must recognize the built-in gain immediately. The gain deferral method provides an alternative that postpones recognition if specific requirements are met.

When Section 721(c) Applies

Three Conditions

Section 721(c) applies when all three conditions are met:

Partnership formed on or after January 18, 2017
U.S. person contributes property with built-in gain
- Fair market value exceeds adjusted basis
- Even $1 of built-in gain can trigger the rules
Related foreign person is a partner
- Directly or indirectly
- “Related” under Section 267(b) or 707(b)(1)

Why These Rules Exist

Before Section 721(c), a U.S. person could contribute appreciated property to a foreign partnership, and the built-in gain could effectively be shifted to foreign partners through partnership allocations. Section 721(c) closes this planning opportunity.

Default Rule vs. Gain Deferral Method

Default Rule: Immediate Recognition

Without the gain deferral method election, the U.S. transferor must recognize the built-in gain immediately upon contribution. The contribution is treated as if the property were sold at fair market value.

Example:

Property FMV: $1,000,000
Adjusted basis: $400,000
Built-in gain: $600,000
Result under default rule: Recognize $600,000 gain immediately

Gain Deferral Method: Postponing Recognition

The gain deferral method allows the U.S. transferor to defer the built-in gain if the partnership meets ongoing compliance requirements. The gain isn’t forgiven. It’s tracked and recognized over time through partnership allocations.

Same example with gain deferral method:

Built-in gain: $600,000
Result: No immediate recognition
Ongoing: Built-in gain tracked and allocated to U.S. transferor as partnership earns income or sells property

Gain Deferral Method Requirements

The gain deferral method isn’t automatic. The partnership must satisfy specific requirements annually.

Requirement 1: Remedial Allocation Method

The partnership must adopt the remedial allocation method (under Section 704(c)) for all Section 721(c) property. This ensures the built-in gain is allocated to the contributing partner rather than shifted to other partners.

The remedial method creates notional tax items that:

Allocate built-in gain to the contributing U.S. person
Allocate offsetting deductions to other partners
Prevent any built-in gain from shifting to foreign partners

Requirement 2: Consistent Reporting

All related U.S. transferors must apply the gain deferral method consistently. The partnership agreement must include provisions supporting the method’s requirements.

Requirement 3: Annual Reporting

The U.S. transferor must file Form 8865 with Schedule G every year the gain deferral method applies. This continues until:

All built-in gain is recognized
The partnership disposes of the property
An acceleration event occurs
The partnership terminates

Schedule G: Section 721(c) Partnership Information

Schedule G reports the application of the gain deferral method. It’s required for the year of contribution and each subsequent year until the method no longer applies.

Schedule G Structure

Part I: Section 721(c) Property

Report each item of Section 721(c) property:

Property description
Whether it’s Section 197(f)(9) property (certain intangibles)
Whether it’s ECI property
Fair market value at contribution
Adjusted basis at contribution

Part II: Remaining Built-in Gain, Remedial Income, and Gain Recognition

Track the built-in gain annually:

Beginning remaining built-in gain
Remedial income allocated to U.S. transferor
Gain recognized during the year
Ending remaining built-in gain

Part III: Allocation Percentages

Report allocation percentages for:

U.S. transferor
Related foreign persons
Other partners

Part IV: Allocation of Items to U.S. Transferor

Detail the specific allocations made to the U.S. transferor for the tax year, coordinating with Schedule K-1.

Parts V and VI: Supplemental Information

Report additional information required by the regulations, including any exceptions or special circumstances.

Filing Timing

Year of contribution: File Schedule G with Form 8865
Annual basis: File for each year gain deferral method applies
Final year: File when property is fully depreciated, sold, or acceleration event occurs

Schedule H: Acceleration Events

Schedule H reports events that trigger gain recognition under the gain deferral method.

What Is an Acceleration Event?

An acceleration event is any event that would:

Reduce the remaining built-in gain under the gain deferral method, OR
Defer recognition of remaining built-in gain beyond what the method intended

When an acceleration event occurs, the U.S. transferor may need to recognize the remaining built-in gain immediately.

Types of Acceleration Events

Termination Events (Reg. 1.721(c)-5(b))

Partnership terminates
U.S. transferor’s interest terminates
Section 721(c) property ceases to exist

Partial Acceleration Events (Reg. 1.721(c)-5(d))

Partial dispositions of 721(c) property
Events affecting a portion of the built-in gain

Successor Events (Reg. 1.721(c)-5(c))

Transfer of 721(c) property to another partnership
Certain restructurings

Partnership Interest Dispositions (Reg. 1.721(c)-5(f))

Taxable disposition of portion of partnership interest
May trigger partial gain recognition

Section 367 Transfers (Reg. 1.721(c)-5(e))

Direct or indirect transfer of 721(c) property to a foreign corporation under Section 367

Elective Acceleration

The U.S. transferor may affirmatively choose to treat any event as an acceleration event. This might be advantageous when:

Current tax rates are favorable
Losses are available to offset gain
Administrative burden of continued tracking is high

Consequences of Acceleration

When an acceleration event occurs, the U.S. transferor recognizes gain equal to the remaining built-in gain (or a portion for partial events). This gain is treated as occurring immediately before the event.

Connection to Schedule O

Schedule O and Schedule G both apply to property contributions, but they serve different purposes.

Schedule O: Documenting the Contribution

Schedule O reports the basic facts of the property contribution:

What property was transferred
When it was transferred
Fair market value and basis
Section 704(c) allocation method

Schedule O is required for all Category 3 filers meeting the thresholds.

Schedule G: Documenting Gain Deferral Method

Schedule G reports the application and ongoing tracking of the gain deferral method:

Detailed 721(c) property information
Annual built-in gain tracking
Allocation percentages
Compliance with method requirements

Schedule G is required specifically for Section 721(c) property using the gain deferral method.

When You Need Both

If you contribute appreciated property to a Section 721(c) partnership:

Schedule O: Required (documents the contribution)
Schedule G: Required if using gain deferral method

Practical Considerations

When Gain Deferral Method Makes Sense

Consider the gain deferral method when:

You plan long-term partnership investment
Property has substantial built-in gain
You can maintain ongoing compliance
Immediate recognition would create significant tax burden

When Default Recognition May Be Better

Consider recognizing gain immediately when:

Built-in gain is relatively small
Current tax rates are low
Losses available to offset
Administrative burden of tracking is disproportionate
Near-term exit from partnership planned

Compliance Burden

The gain deferral method requires:

Annual Schedule G filing
Ongoing built-in gain tracking
Coordination with partnership accounting
Monitoring for acceleration events

For partnerships with multiple 721(c) properties or complex structures, this can be substantial.

Frequently Asked Questions

What is a Section 721(c) partnership?

A Section 721(c) partnership is one where a U.S. person contributes built-in gain property (FMV exceeds basis) to a partnership formed on or after January 18, 2017, and a related foreign person is a partner. This triggers special rules potentially requiring immediate gain recognition.

What triggers Section 721(c)?

Three conditions together: (1) partnership formed on or after January 18, 2017, (2) U.S. person contributes property with built-in gain, and (3) a related foreign person is a partner.

Can I avoid immediate gain recognition?

Yes, through the gain deferral method. This requires the partnership to use the remedial allocation method for 721(c) property and annual Schedule G reporting. The gain is tracked and allocated over time rather than recognized immediately.

What is the remedial allocation method?

The remedial allocation method is a Section 704(c) method that creates notional tax items to ensure built-in gain is fully allocated to the contributing partner. It prevents any shifting of built-in gain to other partners, including foreign partners.

How long do I need to file Schedule G?

File Schedule G annually until the gain deferral method no longer applies. This continues until all built-in gain is recognized (through allocations, property sale, or acceleration event).

What happens if I miss a Schedule G filing?

Failing to file Schedule G can be treated as failing to comply with the gain deferral method requirements. This could trigger recognition of remaining built-in gain. Penalty relief may be available for reasonable cause.

What is an acceleration event?

An acceleration event is any event that would reduce remaining built-in gain or defer its recognition beyond what the gain deferral method intended. Examples include partnership termination, property disposition, and transfers to foreign corporations.

Do these rules apply to domestic partnerships?

Section 721(c) can apply to domestic partnerships if they have related foreign partners. The “foreign partnership” label isn’t required. The rules focus on preventing gain shifting to related foreign persons.

Next Steps

Section 721(c) involves complex ongoing compliance. Before contributing appreciated property to any partnership with related foreign partners, analyze whether the gain deferral method is feasible and advisable for your situation.

Need Help With Section 721(c)?

Section 721(c) involves complex ongoing compliance requirements. Evaluate your options with a CPA experienced in international partnership taxation before contributing appreciated property.

Schedule a Consultation

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Disclaimer: This article is for general informational purposes only and does not constitute tax, legal, or financial advice. Each taxpayer’s situation is unique and requires individual analysis. Consult with a qualified CPA for advice specific to your circumstances.