7790 / How can a limited partnership be used in conjunction with real estate investments to realize tax benefits?

A publicly traded partnership is taxed as a corporation unless 90 percent of the partnership’s income is passive-type income. A publicly traded partnership is a partnership that is traded on an established securities market or is readily tradable on a secondary market or a substantial equivalent. In general, “passive-type income” for this purpose includes interest, dividends, real property rents, gain from the sale of real property, income and gain from certain mineral or natural resource activities, and gain from sale of a capital or IRC Section 1231 asset. A grandfather rule treats electing 1987 partnerships (See Q 7728) as not subject to corporate taxation if they elect to be taxed at a rate of 3.5 percent on gross income; such a partnership otherwise operates as a passthrough entity. Taxation as a corporation would defeat the “passthrough” feature of a limited partnership. See Q 7728 on publicly traded partnerships.

Particular programs vary in their tax sheltering goals and methods. Some emphasize tax-free cash flow, some losses that offset other income, and some appreciation and equity build up. Real estate investments combine these elements in varying proportions – more of one element generally means less of another.

Another form of real estate investment, the real estate investment trust (REIT), is discussed at Q 7975 to Q 8000.