IRS Filing Obligations for Tiered Real Estate Partnerships

Recent tax changes make using tiered partnerships to hold U.S. real property advantageous. While some may argue against the structure because of the estate tax uncertainties, few will question the Federal income tax benefits it can provide to individual investors who are relatively young and in good health, and who expect not to hold the investment long after the one-year, long-term capital gain holding period.

Regs. Sec. 1.1446-3(a)(2)(ii) changed the withholding regime for foreign investments in U.S. real estate held through a partnership, by allowing the partnership to withhold at the highest tax rate applicable to a particular type of income, instead of at the highest percentage in Secs. 1 and 11. This change is positive for individual foreign investors, who will be taxed at 15%. As a result, the tax benefit has generated substantial interest in using tiered partnerships for investment in U.S. real estate.

Federal filing requirements for tiered partnerships are complex, and the IRS will probably strictly enforce them. They are relatively intricate, particularly for the lower-tier partnership’s (LTP’s) obligation to reliably associate income with a partner of the upper-tier partnership (UTP).

The exhibit is a checklist that will help a foreign person who invests in U.S. real estate through a domestic LTP and a foreign UTP, to comply with the filing regulations.

From Michael Kosnitzky, Esq., Boies, Schiller & Flexner LLP, Miami, FL (Not affiliated with DFK International). The author gratefully ack-nowledges the help of Ivan Mitev.