Underwater property and basis limitations

Article Abstract:

Nonrecourse debt in excess of fair market value is excluded in determining federal income tax deductions for interest and depreciation, according to 1997 Bergstrom and 1975 Estate of Franklin decisions. However, these holdings contradict the Third Circuit's 1988 Pleasant Summit ruling, so tax positions similar to Pleasant Summit should be disclosed in order to protect taxpayers. A purchase of a partnership interest holding nonrecourse debt property exceeding its value is similarly problematic, and the Estate of Franklin holding may be inapplicable.

Cases, Valuation, Real property, Real estate appraisal, Basis (Taxation), Nonrecourse debt

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Recent rulings stake out the Service's position on section 1031

Article Abstract:

The IRS has provided guidance through Letter Ruling 9807013 and Technical Advice Memorandum 9748006 regarding IRC section 1031 like-kind exchanges. The use of a qualified intermediary in a real estate exchange transaction was rejected as a tax avoidance device. Use by limited partnerships of entities disregarded for tax purposes to receive replacement property was approved. Tax professionals should continue to be wary in structuring such transactions despite apparent increased IRS liberality.

Tax Law, Public Finance Activities, Like-kind exchanges, Business enterprises, Tax-free exchanges

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Section 704(c) - proposed regulations relating to property contributed to a partnership

Article Abstract:

The IRS has proposed regulations under IRC section 704(c) covering allocations for property donations to partnerships. The rules cover three methods for allocation of income, loss, gain and deductions. The methods are deferred sales, traditional and traditional with curative allocations. An anti-abuse rule restricts which allocation method can be chosen. A disparity offset model's approach should meet the method requirements in the regulations.

Partnership, Partnerships, Real property tax, Real property taxes, Allocation (Taxation), Tax allocation

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