Federal Tax Update: Bipartisan Budget Deal Overhauls Real Estate Partnership Audits

The two year budget deal signed into law by President Obama contains provisions that overhaul the process by which large real estate partnerships are audited. Currently, the IRS holds individual partners responsible for their share of a partnership’s tax liability. Under the new measure, partnerships would be audited at the entity level. The partnership would then be responsible for any additional taxes. Additionally, there is an option for the partnership to remit amended K-1s in reporting partnership shares to the underlying partners.

 

The NAA/NMHC requested and secured two extremely beneficial changes to this proposal from the original version that was introduced in the House of Representatives. First, the original proposal would have made partners jointly and severally liable for the entire partnership’s tax liability (this would have created a risk to any potential investor and would therefore curb investment). Second, the original proposal would have enabled smaller partnerships (partnerships with 100 or fewer partners) to opt out, but not all partnerships were eligible. The final deal would allow REITs, in addition to C corporations, to be an eligible partner for the purposes of opting out.

 

Members who may be subject to these new requirements are encouraged to reach out to their tax attorney and/or accountants for additional information.