PLAN AHEAD FOR REAL ESTATE PARTNERSHIP LOSSES

Partnerships and limited liability companies (LLCs) are uniquely adapted to real estate tax shelters and in most (but not all) situations are treated the same. The third requirement destroys all limited partners' and LLC owners' incentives to participate in the partnership because the requ...

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Bibliographic Details
Published in:Practical Tax Strategies 2023-04, Vol.110 (4), p.26-29
Main Authors: Dalton, Thomas M, Lougee, Barbara, Margheim, Loren
Format: Article
Language:English
Subjects:
Advisors
Capital losses
General partners
Limited partnerships
Nonrecourse debt
Partnership agreements
Partnership interest
Planning
Profits
Tax basis
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Summary:Partnerships and limited liability companies (LLCs) are uniquely adapted to real estate tax shelters and in most (but not all) situations are treated the same. The third requirement destroys all limited partners' and LLC owners' incentives to participate in the partnership because the requirement removes the limited liability feature. Since the partners are required to restore their negative economic capital accounts, the lender can collect from the limited partners (or LLC owners) to the extent of the limited partners' negative capital accounts. Baker might eventually be obliged to pay tax on the negative capital account if the real estate market collapses and the partnership liquidates, but he will not be required to restore it with cash. The point is, if the partnership agreement does not have magic language that creates substantial economic effect (or the minimum gain alternative to negative capital account restoration), the loss allocations might be invalid and Baker might not receive the benefit of his 90% loss allocation.
ISSN:1523-6250