Tax Considerations for Limited Partners Engaging in Acquisition Programs

As limited partnerships look to grow their portfolios, one strategy is to engage in acquisition programs. Acquisitions can provide access to new markets, products, and revenue streams that would otherwise be unavailable. However, if you’d like to get into this, you also need to consider the tax implications of such acquisitions.

In general, acquisitions can trigger several tax implications, including changes to the tax basis of assets, depreciation, and potential changes to the ownership structure.

When an acquisition takes place, the acquiring entity generally takes on the tax basis of the assets that are being acquired. This means that the basis of the assets may be adjusted, which can have an impact on the depreciation and amortization deductions that can be taken in future tax years.

As mentioned in the first point, changes to the tax basis of assets can impact the depreciation and amortization deductions that can be taken in future tax years. This is because the tax basis of assets is used to calculate depreciation and amortization deductions. Thus, this can also be another factor.

Depending on the acquisition’s structure, the limited partnership’s ownership structure may change. For example, if the acquisition involves issuing new partnership interests, the ownership structure may change, which can impact the allocation of tax liabilities and deductions.

If the target company has net operating losses (NOLs), the acquiring limited partnership may be able to use those NOLs to offset future taxable income. However, there are limitations to the use of NOLs, so it is important to understand these limitations and plan accordingly.

In addition to federal taxes, acquisitions may trigger state and local taxes. This is particularly important for limited partnerships that operate in multiple states.

Depending on the structure of the acquisition, transfer taxes may be triggered. For example, if the acquisition involves the transfer of real property, transfer taxes may be assessed.

If the acquisition involves a foreign target company, there may be international tax considerations to consider. These can include issues such as transfer pricing, foreign tax credits, and withholding taxes.

Overall, tax considerations are an essential aspect of any acquisition program for a limited partnership. By carefully considering these implications and planning accordingly, limited partnerships can minimize their tax liabilities and ensure that their acquisitions are financially sound.

K1 refers to a tax form used by partnerships to report each partner’s share of the partnership’s income, deductions, credits, and other items. The K1 form is used to determine each partner’s individual tax liability on their share of the partnership’s income.

Limited partners are typically passive investors in a partnership and are not involved in the day-to-day operations of the business. As such, limited partners may not have significant influence over the partnership’s decisions regarding acquisitions.

However, the K1 form may indirectly affect limited partners’ ability to acquire acquisitions through the tax consequences of the partnership’s income and gains from the acquisition. Depending on the structure of the partnership and the type of acquisition, the partnership may recognize taxable income or gain from the acquisition that flows through to the partners on their K1 forms.

This taxable income or gain may affect a limited partner’s ability to finance future acquisitions or may result in higher tax liabilities for the limited partner. As such, limited partners may consider the potential tax consequences of an acquisition before making a decision to participate in the acquisition or remain invested in the partnership.

Over the years, LP Equity has successfully helped limited partners control exit strategies and liquidate investments. We specialize in acquiring limited partnership interests in partnerships that own and operate real estate in all submarkets including affordable housing, market-rate housing, and commercial property.

Our principals have over 25 years of industry experience and are experts in tax, government regulatory, and partnership issues. We can help you govern these types of transactions and eliminate recapture issues. 

Contact Jay Landen or Adam McNutt at 910-509-7202 to discuss how our acquisition program could benefit you.