Congressional tax writers introduced bicameral technical corrections legislation on December 6 that would clarify tax provisions enacted in a 2015 bill related to partnership audits and foreign pension funds investing in U.S. real estate. The corrections would give the Internal Revenue Service (IRS) additional flexibility in implementing the new audit regime. Given the large number of partnerships in the apartment industry, these revisions may have a significant impact.
The IRS is currently implementing a series of large-scale changes in the way partnerships are audited. Under present law, the IRS holds individual partners within a partnership responsible for their share of tax liability following an audit. Beginning in 2018, partnerships will be audited at the entity level, and unless they elect to assess partners with an increase in liability, the partnership, not the individual, will be responsible for any additional taxes.
Among other things, the newly proposed bill clarifies the scope of adjustments subject to audit, offers additional options for how partners can remit additional taxes that may be due after an audit and addresses the treatment of tiered partnerships.
The legislation enacted in 2015 also exempted foreign pension funds investing in U.S. real estate from the Foreign Investment in U.S. Real Property Tax Act (FIRPTA). The tax technical corrections bill clarifies that a foreign pension fund includes both government funds established to provide retirement benefits and foreign-based multiemployer plans. It should be noted that even with these adjustments, FIRPTA is a barrier to investment because it taxes foreigners’ gains on the income they earn from operating, and then selling, U.S. real estate and other real property.
The technical corrections bill is not expected to pass during the lame duck session, but will likely serve as a marker for action in 2017.
More information on FIRPTA can be found here.
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