How recourse liabilities affect basis in your LLC

Allocating Llc Recourse Debts

Jake would increase his tax basis by the $51K because of his personal obligation on that debt. The amount of a member’s payment obligation is adjusted if the member is not required to satisfy the obligation within a reasonable Allocating Llc Recourse Debts period of time after the LLC liability becomes due and payable (Regs. Sec. 1. Real estate acquisitions are often structured with one or more syndicators or active managers and multiple less-active or passive investors .

This tells us how much of the recourse debt to allocate to each owner’s tax basis in the LLC. Liquidation, the deficit capital account restoration provision would require J to contribute $300,000 to the LLC and D to contribute $100,000. Consequently, J’s payment obligation and risk of loss is $300,000, and that amount of the LLC’s debt is includible in the basis of her LLC interest. Individuals, estates, trusts, closely held C corporations, and personal service corporations are subject to the passive activity rules of IRC § 469, which generally prohibit those taxpayers from using losses from passive activities to offset nonpassive income. A passive activity loss is the amount by which a taxpayer’s passive activity deductions for the taxable year exceed his or her passive activity gross income for the year.

Option 2 – Enter a special allocation code to allocate the recourse debt:

A partner bears the economic risk of loss for a partnership liability to the extent that the partner or a related person makes a nonrecourse loan to the partnership and the economic risk of loss for the liability is not borne by another partner. Exculpatory liabilities aren’t relevant in the context of garden-variety general or limited partnerships, because one or more of their general partners will always be personally liable for partnership recourse debts. Assume limited partnership AB has a general partner, A, with a capital account of $75 and a limited partner, B, with a capital account of $25. B is not obligated to restore any deficit capital account and has not personally guaranteed any debts of the partnership. As discussed immediately above, limited partners — whether in a limited partnership or an LLC – are generally not allocated any portion of a recourse debt, because they have no personal liability for the debts of the partnership under state law. The second approach would be to allocate the deductions attributable to a member recourse loan back to the lending or guaranteeing member under the fundamental concept that deductions must be allocated to the partner that bears the economic burden of the deductions.

There exists a plan or arrangement in which the primary obligor or any other obligor with respect to the partnership liability directly or indirectly holds money or other liquid assets in an amount that exceeds the reasonably foreseeable needs of such obligor . The partner or related person is not required to provide commercially reasonable documentation regarding the partner’s or related person’s financial condition to the benefited party, including, for example, balance sheets and financial statements. Another partner, or a person related to another partner, enters into a payment obligation and a principal purpose of the arrangement is to cause the payment obligation described in paragraphs and of this section to be disregarded under paragraph of this section. For purposes of paragraph of this section, a promissory note of the partner or related person that is contributed to the partnership shall not be taken into account unless the note is readily tradeable on an established securities market. That there is not a commercially reasonable expectation that the payment obligor will have the ability to make the required payments under the terms of the obligation if the obligation becomes due and payable as described in paragraph of this section. A statement of whether the payment obligation is treated as recognized for purposes of this paragraph .

Tax, Accounting, & Audit Support

On October 4, 2017, the Treasury released its report, TDNR SM-0172, on planned upcoming actions, including proposing to partially revoke the 2016 temporary regulations. Specifically, the Treasury and the IRS indicated their belief that the 2016 temporary regulations that apply to disguised sales should be proposed for revocation and that the prior regulations should be reinstated. An amount equal to any decrease in the Transition Partner’s share of liabilities to which the rules of this paragraph apply, other than by operation of paragraph of this section. A caption identifying the statement as a disclosure of a bottom dollar payment obligation under section 752. Is the person to whom a partner or related person has the payment obligation. This is only a brief summary of the key changes under the new temporary and final Sec. 752 regulations.

Allocating Llc Recourse Debts

It also applies to payment obligations imposed or undertaken with respect to a partnership liability, other than liabilities incurred or assumed by a partnership and payment obligations imposed or undertaken pursuant to a written binding contract in effect prior to that date. Lastly, on rare occasions, a limited partner in a limited partnership or LLC may agree to a “deficit restoration obligation ,” through which the partner promises to contribute additional funds to the partnership in the event the partner’s capital account goes negative. I call this a “rare occasion” because typically, the whole point of being a limited partner is that you are not exposed beyond your initial investment. By agreeing to a DRO, a limited partner is putting himself at risk of having to invest additional cash. In the event a limited partner does agree to a DRO, however, the partner may be allocated recourse liabilities to the extent of the DRO.

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