So-called “bottom guarantees” can be an important tax planning tool for partners of a partnership in certain circumstances. The term “bottom guarantee” is used to refer to a guarantee by a partner of the repayment of the “last dollars” of a partnership liability. For example, if a partnership has a property with a value of $10 million subject to $6 million of mortgage debt, a partner might make a bottom guarantee of the last $3 million of the debt. This would mean that the partner should not need to make any payments on its guarantee unless the value of the property declines from $10 million to less than $3 million.
To illustrate the potential significance of a bottom guarantee, consider a partner that contributes to a partnership property subject to mortgage debt that exceeds the partner’s tax basis in the property. Despite this mortgage in excess of basis in the contributed property, the partner would generally be allocated sufficient nonrecourse liabilities of the partnership such that the transaction would be tax-free. However, suppose that the partnership subsequently repays the debt secured by the property that this partner had contributed.
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