Special Allocations Strategies

Many projects with large depreciation deductions create very large negative capital accounts as a consequence. Once the projects start generating phantom income and the owners experience the tax consequences, and the limited partners start to show interest in disposing their partnership interests. The tax ramifications of selling or gifting the limited partnership interests make these transactions prohibitive.

 

Housing & Tax Consultants, LLC has a Special Allocation Strategy to help reduce the annual burden of phantom income. Under this strategy, the partnership would admit a qualified charity as an additional non-equity limited partner. Then using the special allocation rules under Section 704 of the Internal Revenue Code (IRC), the partnership would allocate 95% of the taxable income to the charity. Distributable cash flow (return to owner) is allocated in the same manner.

 

A qualified charity needs to be a public, 501(c) 3, whose mission is related to low-income housing. Early on, we attempted to find charities that would participate in this program, but due to issues with unrelated business taxable income (UBTI), they all backed out. Therefore, our founders assisted in the formation of DLH Low-Income Housing, Inc. (DLH), whose sole mission is preservation of affordable housing. This charity participates as an additional non-equity limited partner.