Depreciation for Syndication Sponsors?

Question

I'm structuring a new syndication and two CPAs disagree. One thinks that General Partners can't take depreciation on their carried interest (until all Limited Partner capital accounts go negative), only on actual cash contributed and the other thinks that allocating depreciation based on overall sponsor ownership (vs cash contributed) is correct. Who is right?

Eamonn McElroy · Answer

@Jesse Daconta

True.  But we must have substantial economic effect for those operating agreement allocations to be respected.

One of the big reasons partnerships are flexible, often advantageous, and often underrated by both practitioners and taxpayers alike IMO.

Kory Reynolds · Answer

Allocating the losses purely on ownership while ignoring capital contributions may have issues with substantial economic effect. Not to mention, investors will likely not appreciate this approach where the sponsor takes losses off of their cash. It makes little economic sense for the investors to provide the cash to purchase the asset, and then someone else gets the deductions for that asset. Additionally, the carried interest will actually need basis to take those losses. Sure we can allocate debt to for the basis, but then when the project sells all that income comes back to fill in the gap. While partnership agreements can be extremely flexible, substantial economic effect needs to work.

For setting up a syndicate, I would recommend talking with a good tax attorney. I have a handful of clients in ME that use Burnstein Shur for very complex partnership structure, not cheap, but they put out a good product. Where syndication often works worth big projects, well worth the money to set up everything proper from the start.

Eamonn McElroy · Answer

The surest way to solve this is to ask each CPA to pull the authoritative guidance that they're relying on and send it to you with the relevant parts highlighted...

Internal revenue code, treasury regs, court cases, revenue rulings, revenue procs...those are all authoritative.  Anything else, including IRS instructions and online articles, is not.

I suspect one of these individuals will not be able to pro-offer anything authoritative for his/her position...

Good luck.

Jesse Daconta · Answer

Hey Dave,

I'm not a CPA but here's my input.

It's based on what % of the building you own. If LPs own 80% of the building according the subscription agreement, they get 80% of the depreciation assuming nothing says different in the operating agreement. I've known syndicators that have received 100% of the depreciation and gave none to the LPs. My company doesn't partner with those syndicators but I have seen it happen.

Best,

Depreciation for Syndication Sponsors?

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