Partnerships, Real Estate, and Selected Basis Issues

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Partnerships, Real Estate, and Selected Basis
Issues
Bill Johnson, CPA, ABV Jeff Olson, CPA
Babush, Neiman, Kornman Johnson,
LLP www.bnkj.com
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A Universal Given????

• Cost Basis
• or, to say it another way,
• Basis Cost
• Is either just what was paid?
• What is cost basis?

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Whats the Big Deal About Basis?????

• Transaction economics and tax accounting may
  differ! Why?
• Transactions negotiated on fair
  value
• Tax accounting may record them at something other
  than negotiated value
• Carry over cost basis (as in 1031
  exchanges with deferred gain)
• But, not always

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Whats the Big Deal About Basis?????

• It effects reported gain
• Who reports it
• How much

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What is Cost?

• Seems simple, but that depends
• Whose cost?
• The partners or the partnerships
• Inside basis/outside basis
• Depending on which you mean, then you have to
  determine
• Is it reflected, or not, on the partnerships
  books/tax records?

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Partnership Basis Topics

• IRC Code Sections 721/704 and 754
• Only an overview
• It is very complex
• What gives rise to these complicated tax
  accounting rules?
• Can tax basis presentations ever have any useful
  meaning if they are not always based on the
  value/economics of a deal?

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Problem Cause 1

• A Partners contribution of
• property to, or distributions
• from, a partnership generally do
• not trigger a recognizable tax
• event - Section 721
• This is generally a good thing - deferred
  recognition of appreciation gains
• It just screws up the tax accounting relative to
  the deal economics

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Basic Example - No Issues
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Basic Example - 721 Issue
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Basic Example - 721 Issue
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Assets Subject to Debt

• Other potential complications
• What if the asset is not sold, but held for
  rental and depreciated?
• What if only part of the project is sold in a tax
  year?
• What cost is being depreciated?
• How is it allocated among the partners?

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Complex Example - 721 Issue
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Assets Subject to Debt

• Contributions of assets subject to debt can
  trigger recognizable gain to the contributing
  partner
• But limited to the proportion of the debt
  shifted to other partners
• Up to the debt in excess of his basis in the
  contributed asset

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Assets Subject to Debt
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Complex Example - 721 Issue
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The Problem Cause 2

• Transactions between
• partners may give rise to
• accounting on the
• partnerships books
• Home Depot example
• Partnerships are different!

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Example 754 Issue

• Sale of partnership interest
• Assets are adjusted upward (stepped up) to
  account for the value paid by the new partner
• The purchase value of a new partners interest is
  pushed down to the partnership
• Partners capital account at the date of
  contribution equals his purchase price

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Example 754 Issue
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Section 754 Effects

• Acquiring partners stepped up basis gives
  appropriately larger depreciation deductions to
  that partner
• Upon sale, increased basis reduces gain
  recognizable to that partner
• Former partners are unaffected
• Only a proportionate step up --- not to 100 of
  asset values as in 704(c)

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Contribution of Development Fees

• Contribution of services, immediate capital
  account credit (capital interest)
• equals immediate taxable income---ordinary
• Distribution priority (future profits interest)
• No immediate tax event
• If partnership gains are capital, then some of
  the services treated as capital gain