COST SEGREGATION
Exiting Partner
When a partner exits a partnership that owns real estate, a cost segregation study can be a strategic tool to manage the tax implications for both the existing partner and the remaining partners. Here are some key considerations:
1. Timing of the Exit
- Before the Exit – Conducting a cost segregation study before a partner exit can provide immediate tax benefits. Accelerating depreciation through the study can generate additional deductions, reducing taxable income and potentially lowering the tax burden for all partners.
- After the Exit – If a partner exits before a cost segregation study is conducted, the remaining partners can still benefit from the study. The exiting partner’s share of the property basis is established at the time of exit, and any subsequent depreciation benefits would only apply to the remaining partners.
2. Allocation of Tax Benefits
- Agreed allocation – Partners should agree on how the tax benefits from the cost segregation study will be allocated. If the study is done before the exit, the exiting partners should receive their share of the depreciation deductions up to the point of their exit.
- Partnership Agreement – A review of the partnership agreement is important, related to the allocation of depreciation and other tax benefits.
3. Impact on Exit Settlement
- Value Adjustment – The results of a cost segregation study can affect the valuation of the property and, consequently, the settlement amount for the exiting partner.
- Tax Basis Adjustments – The exiting partner’s capital account and the remaining partners’ tax basis in the partnership interest may need to be adjusted to reflect the new depreciation schedules.
4. Tax Implications for Exiting Partner
- Recapture Tax – The exiting partner may face depreciation recapture tax on the accelerated depreciation taken up to the point of exit.
- Capital Gains Tax – The exit may trigger capital gains tax on the sale of the partnership interest. The partner should determine how the cost segregation study can influence the gain calculation.