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 firstname.lastname@example.org
Kinds of Dispositions • Sale of partnership Interest • Sale of property and allocation of gain to partners • Donation of partnership interest
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.
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
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
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.
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
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.
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
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%)
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?
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%.
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
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.
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.
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