Most real estate projects are owned by either a partnership, either general or limited, or a limited liability company, all of which are governed by the provisions of subchapter K of the Internal Revenue Code. Any restructuring or workout of a troubled loan must be tested under the Code partnership tax provisions to determine whether there are any adverse tax consequences. This column discusses Code Section 752 and the troubled loan.
Refinancings and Allocation of Partnership Liabilities Under Code Section 752. Any increase in a partner’s share of partnership liabilities, or any increase in a partner’s individual liabilities by reason of the partner’s assumption of partnership liabilities, is treated as a contribution of money by that partner to the partnership. Conversely, any decrease in a partner’s share of partnership liabilities or any decrease in a partner’s individual liabilities by reason of the partnership’s assumption of the individual liabilities of the partner, is treated as a distribution of money by the partnership to that partner. Any deemed distribution attributable to a reduction in a partner’s share of liabilities decreases (but not below zero) the basis of the partnership interest of the partner. To the extent that the deemed distribution exceeds the partner’s basis, the excess results in gain to the partner under Code Section 751(b) or Code Section 731.
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