Bipartisan Budget Deal Overhauls Real Estate Partnership Audits
WASHINGTON, D.C. – October 30, 2015 – (RealEstateRama) — Congress is poised to approve a federal budget this week that would include a dramatic overhaul of the way real estate partnerships are audited, including multifamily. Specifically, this two-year bipartisan budget deal approved by the White House and congressional leaders would set discretionary spending levels through 2017 and increase the nation’s debt ceiling. With this overhaul, lawmakers are trying to address the fact that large real estate partnerships are audited at much lower rates than their C corporation counterparts. They have simplified the audit process in the budget deal because they believe it will capture more tax revenues.
Currently, the IRS generally holds individual partners within a partnership responsible for their share of tax liability. But this proposal would mandate that a partnership be audited at the entity level. Then, the partnership would be responsible for any additional taxes. But there is an option to remit amended K-1s in reporting partnership shares to the underlying partners.
NMHC/NAA requested and secured two extremely beneficial changes to this proposal from the original version introduced by Representatives Jim Renacci (R-OH) and Ron Kind (D-WI). First, the original proposal would have made all partners jointly and severally liable for the entire partnership’s tax liability. This would have curbed investment because a partner wouldn’t want to participate in a partnership with essentially unlimited tax liability. This proposal has been removed and is a significant benefit to the real estate industry.
Second, the original proposal would have enabled smaller partnerships with 100 or fewer partners to opt out of the audit streamlining provisions. But not all partnerships were eligible for this opt out. In particular, if a smaller partnership had another partnership or REIT as a partner, it would fail to qualify. In comparison, the presence of a C corporation of any size as a partner wouldn’t have impacted the ability to opt out.
The final budget deal ultimately makes REITs an eligible partner for the opt out partnership. It also includes language that would enable the Treasury department to draft guidance to make a partnership an eligible partner for purposes of the opt out.