Tax Update Blog: Permalink
« Previous · Tax Update Blog Home · Next »
BURN OUT, OR FADE AWAY?
October 18, 2005
Professor Maule addresses the problem of burned-out tax shelters:
But eventually the shelter "burns out." Over time, depreciation deductions diminish and then terminate, while revenue usually increases. At some point, the partnership is passing out net income rather than net deductions. Sometimes this is not a problem, because the partner may have need of passive income and if the income is passive the shelter continues to serve a tax-savings purpose. Often, though, the partner does not want the net income, has no need of passive income, and wants out. The partner's adjusted basis is low, or even zero, because of the deductions. And the capital account probably is negative.
The good professor says the "classic" advice is to die with the shelter. When death becomes an attractive planning option, you know you have a problem.
• Tax Shelter News Bookmark: del.icio.us • Digg • reddit
Tax Updates
Subscribe to Tax Updates
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not neccesarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Search Tax Updates
Friends and Neighbors
Economics Nerds
Hard-Core Tax Nerds
Gigablogs
Insurance Folk
Goners
Legislation
Tax Update Data Feeds
Comments
Years ago, on the exam for the J.D. Partnership Taxation course I gave a question involving a partner who wanted to leave the partnership. I asked for a general discussion of the options, and the tax advantages and disadvantages.
One response proceeded dutifully through the checklist. "First, the partner could sell the interest." Then followed very good analysis. "Second, the partner could negotiate for a liquidating distribution, with or without a provision for goodwill." Then more very good analysis. This pattern continued until the sentence that lifted me off my chair. "Sixth, you could have your client die." And then followed great analysis of the tax consequences.
Good grief.
Posted by: Jim Maule | October 18, 2005 1:22 PM
Dr. Maule! Thanks for dropping by!
In many of the old-time real-estate shelters, the deductions provided benefits at 50% to 70% rates, not counting state savings. When they turned around, the income was taxed at no more than 39.6%, and often at 15%. Yet many clients insisted we were in error when we reported the income, because they didn't receive that much cash. "It's not fair!"
How soon they forget those deductions.
Posted by: Joe Kristan | October 18, 2005 1:34 PM