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Real Estate Partnership Restructuring Avoids 30 Years of Tax Recapture

SITUATION: Our real estate client developed an apartment complex with over 700 units in a Chicago suburb at a time when tax laws were more liberal to developers and enabled owners to take major tax deductions. As a result of those deductions over 30 years, a sale of the complex would cause large tax recapture, […]

SITUATION: Our real estate client developed an apartment complex with over 700 units in a Chicago suburb at a time when tax laws were more liberal to developers and enabled owners to take major tax deductions. As a result of those deductions over 30 years, a sale of the complex would cause large tax recapture, which potentially could exceed the proceeds of the sale. Some of the developing partners wanted to cash out their interest while others wanted to be able to reinvest in new real estate investments in order to get a step-up in basis upon death and avoid the recapture.

STRATEGY: With counsel from Lawrence Kamin tax planning attorneys, and using techniques unique to Illinois, we were able to effectively restructure the partnership. The new structure included the redemption of certain interests and a tenant in common agreement enabling each individual partner to determine his or her own personal tax liability. The following year, a sale of the property closed for close to $120 million.

RESULT: After the sale, each individual partner had the freedom to reinvest their proceeds to defer their gain or take their sale proceeds and pay the taxes. For the partners who opted to reinvest their proceeds, Lawrence Kamin attorneys were able to set up exchanges and use the funds to purchase new investment properties for them.

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