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IPED Tax Credit Property Disposition 2008: Obligations and Opportunities Through Year 15 and Beyond Boston, Massachusetts, November 20-21, 2008 PowerPoint PPT Presentation


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IPED Tax Credit Property Disposition 2008: Obligations and Opportunities Through Year 15 and Beyond Boston, Massachusetts, November 20-21, 2008. Tax Consequences of Dispositions . Forrest David Milder Nixon Peabody LLP 100 Summer Street Boston, MA 02110 617-345-1055 [email protected]

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IPED Tax Credit Property Disposition 2008: Obligations and Opportunities Through Year 15 and Beyond Boston, Massachusetts, November 20-21, 2008

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IPED Tax Credit Property Disposition 2008: Obligations and Opportunities Through Year 15 and BeyondBoston, Massachusetts, November 20-21, 2008

Tax Consequences of Dispositions

Forrest David MilderNixon Peabody LLP100 Summer StreetBoston, MA [email protected]


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Kinds of Dispositions

  • Sale of partnership Interest

  • Sale of property and allocation of gain to partners

  • Donation of partnership interest


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Sale of partnership Interest

  • Gain is equal to cash and other property received reduced by the partner’s basis in his/its interest

  • The partners’ share of nonrecourse debt is included in this computation as cash received. Rev. Rul. 74-40.


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Example

  • Partner’s basis is $100,000, partner’s share of debt on property is $80,000. Partner receives $50,000 for the partnership interest.

  • Gain is $80,000 (debt relieved) plus $50,000 (cash received) less $100,000 (basis), or $30,000


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Sale of property and allocation of gain to partners

  • Gain is computed at partnership level, and then allocated to the partner

  • Subsequent distribution of cash can result in further gain or loss


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Example

  • GP’s capital account is $1. LP’s is $2m

  • Property has basis of $3m, and there’s $1m of debt. Sales price is $4.8m

  • Gain is $4.8m less $3m, or 1.8m.

  • If 80% of the gain is allocated to the GP, he gets $1.44m of gain, and the LP gets .36m of gain.

  • So, cap accounts are now GP $1.44m and LP $2.36m.

  • Proceeds of $4.8m go $1m to pay off the debt, $1.44m to GP and $2.36m to LP.


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Donation of partnership interest

  • Charitable Contribution of a Limited Partnership Interest is treated as a “part gift part sale”. Rev. Rul. 75-194. Treas. Reg. section 1.1011-2(c), example 4.

  • 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”

  • The Basis in the property has to be divided between the two


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Example

  • Assume: Partnership interest has a gross value of $1.5 m; partner’s share of nonrecourse debt is $1m; basis in interest is $900k.

  • 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.

  • 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.

  • 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.


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Other Tax Issues

  • Ordinary Income vs. Capital Gain

  • Installment Sales

  • Partnership Termination

  • Distributions in Accordance with Capital Accounts

  • Nonpayment of Deferred Fees

  • Sale of Less Than All of an Interest


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Ordinary Income vs. Capital Gain

  • Receivables and depreciation recapture are treated as “hot assets” under Section 751, and are subject to tax at ordinary rates.

  • This is true, even if the partnership interest (rather than partnership assets) is sold.

  • Corporations pay the same rate on both (35%), but individuals do not (35% vs. 15%)


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Distributions in Accordance with Capital Accounts

  • What’s the business deal? Get LP to a target? (like original capital contribution?) Get GP to a certain percentage? Share residuals at a certain rate?

  • 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.

  • But distributions have to be made in accordance with capital accounts

  • So, if the LP has a large capital account, it may get most of the money

  • What to do when the numbers don’t add up?


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Example

  • GP’s capital account is $1. LP’s is $2m

  • Bus. deal is 80% to GP, 20% to LP

  • Property has basis of $3m, and there’s $1m of debt. Sales price is $4.8m

  • 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.

  • 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%.


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Installment Sales

  • Installment sales treatment is only available for capital asset part of sales price

  • So, not for depreciation recapture or receivables

  • Also there will be an interest component (at AFR) on delayed payments


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Nonpayment of Deferred Fees

  • Suppose that it’s 15 years later, and the development fee is unpaid.

  • Forgiving it is a taxable event

  • The IRS may dispute failure to pay the development fee, since it wasn’t just a depreciable/deduction item; it also went into tax credit basis.


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Partnership Termination

  • 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.

  • Not that much of a tax problem, BUT

  • Many partnership agreements require special approvals or tax opinions if the transfer would cause a termination.


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Sale of Less Than All of an Interest

  • Can have LIHTC recapture if a partner’s interest is reduced below 66-2/3% of what it used to be (Reg. 1.47-6)

  • E.g., partner owns a 99% interest, and it is reduced to 60%. Thirty-nine percent may be subject to recapture

  • Elimination of recapture bond rules make this less important, provided property is well run


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