Langston Real Estate Limited Partnership (Langston) formed on January 1, 2021, to purchase, construct, and manage residential real estate. They adopt accrual method of accounting and calendar year for federal income tax purposes. February 2, 2021 – Langston purchased the Grand West Estate apartment complex for a total price of $5,000,000. Of the purchase price, $1,000,000 was allocated to the land, and $4,000,000 was allocated to the buildings.
Langston financed the acquisition by obtaining a fifteen year, three percent interest rate, $4,500,000mortgage from a lender that is unrelated to any of the Langston partners. The mortgage is secured by the apartment complex, but it is fully recourse to the partnership. No other properties were purchased during the year.
Agreement says corporate general partner, Beach Comber Properties Inc, will receive an annual management fee equal to 5 percent of the gross rental income earned by the partnership. In return for the fee, Beach Comber will provide all necessary services, so that Langston need not hire any partnership employees. All partnership taxable income, gain, or loss will be allocated 5 percent to Beach Comber and 95 percent to the limited partners, based on each limited partner’s specified percentage interest.
The partnership agreement provides that partners’ capital accounts will be determined and maintained in accordance with the §704(b) regulations, and that liquidating distributions will be made in accordance with capital account balances. As the general partner, Beach Comber must restore any deficit balance in its capital account upTon liquidation; limited partners are not subject to this deficit restoration requirement. However, the partnership agreement does contain a “qualified income offset” to satisfy the alternate test for economic effect.1
On January 20, 2021, client Nancy Nelson contributed undeveloped land, known as Coastal, and various intangible assets such as goodwill associated with her reputation, to Langston in exchange for a 38 percent limited partnership interest (i.e., Nancy will receive 40 percent of the 95 percent allocations to the limited partners). Beach Comber, as general partner, agreed to this exchange because the land is situated ideally for future development as residential rental property.
Nancy inherited Coastal a number of years ago, and her tax basis in the property is $50,000; the appraised value of the landat the date of contribution was $75,000, and the entry to Nancy’s partnership capital account properly reflected this contributed value. The partnership agreement provides that limited partners cannot be called upon to make mandatory additional capital contributions in the future
Nancy Nelson is a plastic surgeon employed by a medical professional corporation. During 2021, she received a salary of $330,000 for her medical services. She also earned $19,400 of dividend and capital gain income from her mutual funds, and an allocation of $20,600 of operating business income from an oil and gas partnership in which she has a 0.3 percent limited partnership interest.
Langston Revenue and Expenses:
Gross rental revenues – 2,100,000
Operating expenses for properties – 1,700,000
Repairs and maintenance – 212,000
Interest expense – 126,000
Property taxes – 110.000
Total of all expenses: 2,148,000
Net Cash flow (operations) – (48,000): 2,100,000 – 2,148,000
Note* negative cash flow from operations was financed with short term recourse borrowing. Management fee not included.
A: Calculate the following items:
i. Langston taxable income/loss to include the following additional computations of deductions: MACRS Cost recovery; and Guaranteed payments.
ii. Construct Nelson’s capital account and tax basis in her partnership interest, as of the date of her contribution. Her allocation might be restricted by her capital account balance. Refer to §704(b) for assistance. Then update Nancy Nelson’s capital account and tax basis as of the end of the year.
iii. Use constructive liquidation rules to derive Nancy Nelson’s deductible 2021 loss. Refer to IRC§704(d) for assistance.
iv. Apply the rules of IRC §§465 and 469 to compute Nancy Nelson’s deduction for her allocated loss.