2C — March 15 - 28, 2019 — Pennsylvania — M id A tlantic
Real Estate Journal
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P ennsylvania
By Beverly Jenkins, EA, MST Setting Up a successful real estate partnership
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A
s real estate partner- ships begin, evolve and ultimately dissolve,
to keep track of your partners and how much they own in the real estate partnership. If something other than cash was contributed to the partnership, you will need to know the tax basis and fair market value of all non-cash items at the time they were contributed into the partnership. Determine how items of in- come/loss or gain/loss and dis- tributions are allocated to the partners. In many instances, there are different allocations for distributions of cash flow vs distributions of capital pro- ceeds. The same can be said for allocations of cash flow income and loss vs capital income and loss.
books & records and you have clear entry separation. By not combining the notations and records with the books of any other legal entity or agreement, you’ll minimize the opportunity for confusion. And should you need to quickly discover whom was allocated what, finding the information will be quick and orderly. Next up, always make sure your book keeping is tracked and up to date when it comes to any scheduled or agreed-to plan. Take the time to confirm each year that all entries that effect your books are in fact booked. For example, it is very common for a partnership in a tiered structure to make a distribution from the bottom tier directly to the partners of the final entity even if they skip an entity or two in the middle. In terms of tracking through- out the year, maintain an ac- curate record of the cumulative tax and 704(b) capital accounts for each partner, every year. Since your allocations have to have economic effect under 704(b), you will not know if your allocations are good without tracking the balances. Even if you assume the numbers will be continued on page 4C
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far too many involved par- ties lose track of assets, al- locations and deb t . I t i s crucial to en- sure proper record keep- ing when en- tering into or managing any type of partnership. When the real estate part- nership ends, how should prof- its be divided? Who gets the remaining assets (i.e. cash or property)? These questions and more are sure to pop up if you aren’t properly managing your financial records. To ensure your real estate partnership is on the right path, there are some simple steps to take that can prevent uncertainty and in the worst case scenario, a day in court. First, there is the agreement itself. Each year, read and understand the Partnership Agreement (“PA”) or Operat- ing Agreement (“OA”). Always request signed copies of any amendments to the agreements for your records and make sure Beverly Jenkins
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Confirm that the allocations of the PA or OA have substan- tial economic effect. There are certain provisions under IRC Sec. 704(b) (“704(b)”) that must be met for a real estate partnership to have substantial economic effect. Other items of note to look for in the PA or OA is whether there is a preferred return, guaranteed payments, definitions and liquidating dis- tributions. All of these could be detrimental to your finances. Second, confirm that the partnership has its own set of integrating the ART of landscape architecture with the SCIENCE of civil engineering
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