On January 29, 2014, the Internal Revenue Service and Treasury Department issued a notice of proposed rule-making, which has created substantial controversy, particularly in the real estate industry and professionals representing participants in it. The proposed regulations interpreting Section 752 of the Code, if adopted in the form proposed, would drastically change the way that partnership-level debt, both recourse and nonrecourse, is allocated among partners under existing regulatory provisions, creating both significant problems and possible opportunities. This Alert is a general description of how the regulations affect partners and partnerships (and other entities taxed as partnerships); a related GT Alert more specifically discusses the possible impact of the proposed regulations on the REIT industry. Background. The way in which partnership level debt is allocated among partners has very important implications for partners (including members of limited liability companies and other entities that have elected to be treated as partners), both in terms of the way they share in operating income and more importantly operating losses, and especially in terms of the income tax consequences when members join and leave an entity. Generally speaking, a partner’s share of partnership level debt is considered part of his, her or its tax basis in the partnership interest. … Read full this story
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