This column continues the review of the considerations1 for the individual partners and LLC members owning an interest in a partnership or limited liability company (LLC) owning real property that secures a loan (a troubled investment) which loan defaults or is restructured, with a discussion of holding or selling the interest.
Retaining Interest
There may be a benefit from holding onto an interest that produces taxable income without cash because the phantom income generated will generally constitute passive activity income under Section 469. Consequently, such passive activity income can be sheltered by the passive activity losses of other more recently acquired passive investment. These passive activity losses which would otherwise be disallowed can now provide a current tax benefit to the extent of the passive activity income being generated by the troubled investment.
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