Why are GPs in R/E so fixated on receiving tax losses
When they should be focusing on structuring away earned income?



You only really need tax losses if you are trying to offset taxable income, right?

So why not just get rid of the income sources?



Obviously, its not that simple, but hear me out.


~75% of the syndicators and GP’s I talk to receive some form of acquisition fee for their services and often times use part (or all) of those fees to to re-invest into the deal.

What is tough about that is that the fee was taxable, but the taxpayer just invested the fee so they don’t have the cash left over to pay the tax.

Instead, what if the portion that they reinvested was actually re-structured to be paid out on the back end as a GP catchup in the waterfall instead of on the front end as a fee? If the GP didn’t need the funds and was going to invest them anyway, wouldn’t this be a no-brainer?

There is obviously a lot to this since the GP would want to avoid a scenario where the receipt of the partnership interest that entitled them to the GP catchup wouldn’t be taxable on day one.

That’s why you need a CPA that understands IRC Sec. 707, 83, and Rev Proc. 93-27 and 2001-43.

If done properly, the GP could defer income recognition to the back end and also convert it from taxable ordinary income into long term capital gains.

The catch here is that the GP needs to be willing to stomach the risk that the payout is now dependent on the performance of the asset. If the deal goes south, the GP won’t get any of the acquisition fee that they would have gotten otherwise. But hey, I know a million LPs that would actually see this as a positive and potentially agree to a higher fee knowing its only payable out of the projects upside!

Let me know your thoughts below. I included a snip from "Understanding Partnership and LLC Taxation" that is relevant to the discussion.