Presentation on theme: "IPED Tax Credit Property Disposition 2008: Obligations and Opportunities Through Year 15 and Beyond Boston, Massachusetts, November 20-21, 2008 Forrest."— Presentation transcript:
IPED Tax Credit Property Disposition 2008: Obligations and Opportunities Through Year 15 and Beyond Boston, Massachusetts, November 20-21, 2008 Forrest David Milder Nixon Peabody LLP 100 Summer Street Boston, MA Tax Consequences of Dispositions
Kinds of Dispositions l Sale of partnership Interest l Sale of property and allocation of gain to partners l Donation of partnership interest
Sale of partnership Interest l Gain is equal to cash and other property received reduced by the partners basis in his/its interest l The partners share of nonrecourse debt is included in this computation as cash received. Rev. Rul
Example l Partners basis is $100,000, partners share of debt on property is $80,000. Partner receives $50,000 for the partnership interest. l Gain is $80,000 (debt relieved) plus $50,000 (cash received) less $100,000 (basis), or $30,000
Sale of property and allocation of gain to partners l Gain is computed at partnership level, and then allocated to the partner l Subsequent distribution of cash can result in further gain or loss
Example l GPs capital account is $1. LPs is $2m l Property has basis of $3m, and theres $1m of debt. Sales price is $4.8m l Gain is $4.8m less $3m, or 1.8m. l If 80% of the gain is allocated to the GP, he gets $1.44m of gain, and the LP gets.36m of gain. l So, cap accounts are now GP $1.44m and LP $2.36m. l Proceeds of $4.8m go $1m to pay off the debt, $1.44m to GP and $2.36m to LP.
Donation of partnership interest l Charitable Contribution of a Limited Partnership Interest is treated as a part gift part sale. Rev. Rul Treas. Reg. section (c), example 4. l The excess of the value of the property over the debt is the gift, but the amount of the debt is the proceeds of sale l The Basis in the property has to be divided between the two
Example l Assume: Partnership interest has a gross value of $1.5 m; partners share of nonrecourse debt is $1m; basis in interest is $900k. l The amount of the gift is the $1.5m gross value of the property less $1m of debt, or $500k. The proceeds of sale is the debt, or $1m. l The basis is allocated between the gift and the debt, so, one- third ($500k/$1.5m) goes to the gift, and two-thirds ($1m/$1.5m) goes to the sale. Since the basis is $900k, this would be $300k to the gift and $600k to the sale. l Thus, the gift is $500k; the sale is $1m of proceeds less $600k of basis, or $400k of gain – i.e., $500k of gain and $400k of deduction.
Other Tax Issues l Ordinary Income vs. Capital Gain l Installment Sales l Partnership Termination l Distributions in Accordance with Capital Accounts l Nonpayment of Deferred Fees l Sale of Less Than All of an Interest
Ordinary Income vs. Capital Gain l Receivables and depreciation recapture are treated as hot assets under Section 751, and are subject to tax at ordinary rates. l This is true, even if the partnership interest (rather than partnership assets) is sold. l Corporations pay the same rate on both (35%), but individuals do not (35% vs. 15%)
Distributions in Accordance with Capital Accounts l Whats the business deal? Get LP to a target? (like original capital contribution?) Get GP to a certain percentage? Share residuals at a certain rate? l The parties often have a deal that calls for the GP to get a high percentage (e.g., 80%) of proceeds, and the LP to get the balance, regardless of where there capital accounts are at the time of the sale. l But distributions have to be made in accordance with capital accounts l So, if the LP has a large capital account, it may get most of the money l What to do when the numbers dont add up?
Example l GPs capital account is $1. LPs is $2m l Bus. deal is 80% to GP, 20% to LP l Property has basis of $3m, and theres $1m of debt. Sales price is $4.8m l Gain is $4.8m less $3m, or 1.8m. If entire amount of gain is allocated to GP, then cap accounts are now GP $1.8m and LP $2m. l Proceeds of $4.8m go $1m to pay off the debt, $1.8m to GP and $2m to LP. This is 47%--53%, not 80%--20%.
Installment Sales l Installment sales treatment is only available for capital asset part of sales price l So, not for depreciation recapture or receivables l Also there will be an interest component (at AFR) on delayed payments
Nonpayment of Deferred Fees l Suppose that its 15 years later, and the development fee is unpaid. l Forgiving it is a taxable event l The IRS may dispute failure to pay the development fee, since it wasnt just a depreciable/deduction item; it also went into tax credit basis.
Partnership Termination l A partnership terminates for tax purposes if within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits. l Not that much of a tax problem, BUT l Many partnership agreements require special approvals or tax opinions if the transfer would cause a termination.
Sale of Less Than All of an Interest l Can have LIHTC recapture if a partners interest is reduced below 66-2/3% of what it used to be (Reg ) l E.g., partner owns a 99% interest, and it is reduced to 60%. Thirty-nine percent may be subject to recapture l Elimination of recapture bond rules make this less important, provided property is well run