Federal Tax Compliance for LLCs and Partnerships in Commercial Real Estate Tackling Tax Challenges in Acquisitions, Financing, Development, Leasing and Dispositions TUESDAY, AUGUST 13, 2013, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours . To earn credit you must: • Respond to verification codes presented throughout the seminar . If you have not printed out the “Official Record of Attendance”, please print it now . (see “Handouts” tab in “Conference Materials” box on left -hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form . • Complete and submit the “Official Record of Attendance for Continuing Education Credits,” which is available on the program page along with the presentation materials. Instructions on how to return it are included on the form. • To earn full credit, you must remain on the line for the entire program. For this program, attendees must listen to the audio over the telephone. WHOM TO CONTACT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Program : - On the web, use the chat box at the bottom left of the screen - On the phone, press *0 (“star” zero)
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Federal Tax Compliance For LLCs And Partnerships In Commercial Real Estate Seminar Aug. 13, 2013 Wray Rives, Rives CPA PLLC Jon Funk, Ernst & Young wray@rivescpa.com jon.funk@ey.com
Today’s Program Passive Activity Losses Slide 7 – Slide 18 [Jon Funk] Rehabilitation Tax Credits Slide 19 – Slide 20 [Wray Rives] Installment Sales Slide 20 – Slide 30 [Jon Funk] Involuntary Conversions Slide 31 – Slide 35 [Wray Rives] Like-Kind Exchanges Slide 36 – Slide 57 [Jon Funk] Environmental Clean-up Costs Slide 58 – Slide 59 [Wray Rives] Energy Efficiency Tax Deductions Slide 60 – Slide 64 [Jon Funk]
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Jon Funk, Ernst & Young PASSIVE ACTIVITY LOSSES
Passive Activity Loss (PAL) Limitations “Passive activity income does not include the following: Income from an activity that is not a passive activity.” – quote from instructions for Form 8582 8
PAL Limitations I. Income and loss (loss includes credits) from passive activities are netted. II. If taxpayer’s passive activities net to a loss, passive activity loss is suspended and not currently deductible. I. Individuals, estates and trusts may have to file Form 8582. II. You can find examples at http://cs.thomsonreuters.com/ua/ut/2012_cs_us_en/pdfs/i_pas act.pdf III. In the year of disposition of an entire interest of a specific passive activity, any previously suspended losses (to the extent they exceed the income or gain for the taxable year from all other passive activities) shall be treated as a loss not from a passive activity (see IRC Sect. 469(g)). 9
PAL Limitations (Cont.) I. Passive activity generally includes: A. A trade or business activity in which taxpayer does not materially participate B. Any rental activity II. For non-rental activities, must meet at least one of seven material participation tests to be a non-passive activity A. Limited partners can qualify for material participation under only three of the seven material participation tests. 10
PAL Limitations: Material Participation I. Taxpayer works more than 500 hours during year in activity. * II. Taxpayer does substantially all work in activity. III. Taxpayer works more than 100 hours in activity during year, and no one else works more than taxpayer. IV. Activity is significant participation activity (SPA) in which taxpayer works more than 100, but not more than 500, hours, and total SPA participation exceeds 500 hours for year. V. Taxpayer materially participated in activity in any five of prior 10 years. * VI. Activity is a personal service activity, and taxpayer materially participated in that activity in any three prior years. * VII. Based on all facts and circumstances, taxpayer participates in activity on a regular, continuous and substantial basis during such year. * Denotes tests apply to limited partners 11
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PAL Limitations: Activity Grouping I. Taxpayers may aggregate multiple activities into a single activity or fragment a single activity into multiple activities. II. Activity grouping must be an “appropriate economic unit.” III. Facts and circumstances; regulations list five factors: A. Similarities and differences in types of trades or businesses B. Extent of common control C. Extent of common ownership D. Geographical location E. Interdependence between or among activities 13
PAL Limitations: Activity Grouping (Cont.) I. Once an activity or grouping is adopted, it cannot be changed in subsequent years unless: A. Original grouping was “clearly inappropriate”, or B. Facts and circumstances have changed materially to make it clearly inappropriate. II. Proposed regulations permit a one- time “fresh start” in activity grouping for 2013 or any later year in which taxpayer is first subject to net investment income tax under IRC Sect. 1411. 14
PAL Limitations: Real Estate Professional I. IRC Sect. 469(c)(7) makes an exception to the per se passive activity classification rule of real estate activities if the person: A. Spends more than 750 hours working in real property trades or businesses in which the taxpayer materially participates, and B. More than half of all personal service hours performed are in real property trades or businesses in which the taxpayer materially participates. 15
PAL Limitations: Real Estate Professional (Cont.) I. If these two requirements are satisfied, then rental real estate income or loss is non-passive if the taxpayer materially participates in the rental real estate. II. “Real property trade or business” A. Includes any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business 16
PAL Limitations: Real Estate Professional (Cont.) I. Aggregation election A. Generally for purposes of the real estate professional exception, all rental real estate activities are treated as separate activities. A. Special rules apply to rental activities group by pass-through entities. B. Taxpayer may elect to aggregate and treat all rental real estate activities as a single activity. C. Consistent with general rules, material participation through limited partnership interests is allowed only under three of the seven tests. II. Election is binding for the taxable in which it was made and all future years. III. Election may be revoked if there is a material change in the facts. 17
PAL Limitations: Net Investment Income Tax (NIIT) I. A passive activity is subject to NIIT if: A. Such activity is a trade or business. B. Such trade or business is a passive activity as defined in Sect. 469. C. Generally, this includes rental real estate activities. II. Gross income from a passive activity does not include: A. Portfolio income: Interest, dividends, rents and royalties not derived from a trade or business B. Net gains from disposition of property (not used in trade or business) C. Although not gross income from passive activities, the above items may still be subject to NIIT . 18
Wray Rives, Rives CPA PLLC REHABILITATION TAX CREDITS
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