This webinar explained meeting tax compliance obligations for partnership allocations to LLC members and partners. John T. Alfonsi, a Managing Director with Cendrowski Corporate Advisors, and David A. David A. Gilbert, Partner with Pierson Ferdinand, break down the complex rules for nonrecourse deductions, special allocations, and 704(b) compliance for tax advisers working with real estate investors.
A partnership or LLC structure provides real estate investors the flexibility they need to make unusual but necessary distributions and income allocations. The price of this flexibility includes a labyrinth of challenging calculations and considerations.
Real estate partnerships and LLCs are required under IRC Section 704(b) to make tax allocations to partners and members that have substantial economic effect. Before Section 704(b), investors sought to minimize or eliminate taxes paid by aggressively allocating losses to taxable partners and gains to tax-exempt or low-bracket partners. Operating agreements must now contain a DRO, deficit restoration obligation, or a QIO, qualified income offset. 704(b) considerations are only one of many highly complex compliance obligations tax advisers to real estate investors must consider. To meet these requirements, many real estate agreements contain targeted allocation provisions to ensure the partners’ intended cash distribution goals are met while complying with existing tax provisions.
Another benefit of real estate partnerships is being able to use nonrecourse debt to increase partners’ basis. This can generate additional deductions for these partners but also can trigger minimum gain, the excess of a property’s nonrecourse debt balance over its book value, and the relative minimum gain chargeback. Partnership allocations for real estate entities are complex. Tax practitioners working with owners of real estate need to understand how special allocations affect the tax consequences of investors.
Click here to gain access this webinar on Strafford’s website and see how John and David explain partnership allocations for real estate entities, including QIO and DRO requirements under Section 704(b), minimum gain chargebacks, and targeted allocations unique to real estate investors.