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Tax Professionals Propose Ways to Enhance Real Estate Commerce

JUL. 4, 2017

Tax Professionals Propose Ways to Enhance Real Estate Commerce

DATED JUL. 4, 2017
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July 4, 2017

The Honorable Steven T. Mnuchin
Secretary of the Treasury
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Re: Tax basis proposal to enhance real estate commerce

Dear Secretary Mnuchin:

The undersigned are tax professionals who participate in national real estate tax groups such as the Tax Policy Advisory Committee (“TPAC”) of the Real Estate Roundtable (“RER”). This letter reflects the views of the undersigned, but not their respective firms, TPAC or the RER.

(A) Support for RER 752 regulation repeal proposal. In the letter to you from the Real Estate Roundtable dated April 6, 2017, RER requested the repeal of the newly issued partnership liability regulations under Section 752. We support RER’s request to repeal those controversial 752 regulations that can restrict real estate commerce.1

(B) New 752 basis regulation requested to promote real estate commerce. In addition to such repeal of the restrictive 752 regulations, to promote real estate commerce even further (and create related jobs), we also ask that the Treasury adopt a new regulation under Code Section 752 that allows a contributing partner to retain sufficient basis following a refinancing of pre-contribution debt (so that debt guarantees are not required). The new regulation would provide:

“ A partner contributing property to a transferee partnership that is encumbered by non-recourse debt may both (i) retain a share of the nonrecourse debt of the partnership upon contribution equal to such partner’s share of the minimum gain with respect to the contributed property at the time of contribution [as under the current 752 regulations] and (ii) upon a refinancing of such debt after such contribution, obtain and continue thereafter to retain (without a guaranty being required) an equivalent share of any other nonrecourse debt of such transferee partnership, including the transferee partnership’s line of credit that is recourse only to the other assets of the transferee partnership but not its owners (provided that the partners of the transferee partnership agree to such debt allocation), minus any reduction in such partner’s share of minimum gain thereafter.”

This rule would avoid the need for any non-economic guarantees to be added for the contributing partner and avoid restricting (and promote) the free flow of real estate commerce.

Respectfully Submitted by:

Sandy Presant, Esq. (presants@gtlaw.com), Los Angeles, CA
(Past Chair, Partnership Tax Committee of the American Bar Association)

Les Loffman, Esq. (lloffman@proskauer.com), New York, NY
(Past Chair, Real Estate Tax Committee of the American Bar Association)

Richard M. Lipton, Esq. (richard.lipton@bakermckenzie.com), Chicago, Ill.
(Past Chair, ABA Tax Section; Past Chair, American College of Tax Counsel)

Adam M. Cohen, CPA (acohen@istar.com), New York, NY
(Past Vice-Chair, Tax Policy Advisory Committee (TPAC) of the Real Estate Roundtable)

FOOTNOTES

1 The RER’s April 6, 2017 letter provided in relevant part:

  • Repeal recently finalized and proposed regulations affecting real estate partnership structures. Newly issued partnership liability allocation regulations under section 752 will greatly restrict the ability of individuals to pool their capital, property, and expertise for productive real estate activities. The partnership liability allocation rules have important implications for the movement of real estate in common partnership contribution transactions, whether involving a single property or a portfolio of properties in roll-up transactions and REIT transactions using umbrella partnership (UPREIT) structures. Today, UPREIT structures and partnership roll-up transactions allow individual property owners to diversify their investments and obtain greater liquidity and transparency with respect to their property ownership interests in a tax-deferred transaction akin to a tax-deferred corporate reorganization. Liability guarantees are widely used in connection with these transactions in order to match the allocation of partnership liabilities with the partner with risk of loss with respect to the liability and to preserve the deferral of capital gain. Legitimate guarantees allow a partner to accept a risk of economic loss and obtain basis that can be used to deduct allocated losses. Under newly issued regulations under section 752, many guarantees, including bottom dollar guarantees, no longer are recognized for tax purposes. By withdrawing the final and proposed regulations, the Administration could ensure that any new rules do not discourage capital formation, job creation, and economic activity.

END FOOTNOTES

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