I have a quick tax question. We have some multi family properties here in Bryan College Station. We want to add a couple partners so that we can pay off the debt. Would adding partners and diluting our percentage of the partnership cause us to pay any taxes (even though we aren't selling the property)?

Example: So basically our properties are worth 1 million dollars. We still owe the bank 400k. The partnership is currently made up of three people (33%). Say we add two new investors to our partnership. They each contribute 200k to the partnership. We then use that money to pay off all debt. Our share of the partnership would be 20% now that there are 5 equal partners. Would the existing partners have any tax implications for their decreasing share of the partnership?

I'm no tax accountant, but did audit a client back in my public accounting days that had a "change" in partners. My understanding is that if a partner leaves or a new partner joins the partnership, then in essence you have a "new partnership". And, with that comes an adjustment in the tax basis to fair value. You/existing partners may have a taxable event if the fair market value of your properties is higher than the current tax basis.

You'll definitely want to discuss this with your tax accountant since each deal is different. Also, the timing may be critical (i.e. January 1 at the beginning of the year versus December 31 at the end of the year).

Sorry I'm not much help, but wanted to share my initial thoughts.

Thanks. That was helpful. It would only make sense for us to be required to pay taxes. The properties were purchased for almost 400k so there is quite of bit of unrealized gain. If we have to pay taxes then I am kind of hoping the accountant will know a work around or something. I will probably talk to Seidel Schroeder.

You should definitely consult your CPA. If you are reporting this correctly, you likely will have to recognize some of the unrealized appreciation over time through receiving less deductions vis-a-vis your partner through "Section 704(c) allocations". You can also have some issues with "disappearing basis" by debt allocated to the other partner and/or your plan to pay some off of the debt if you have no capital account basis (only debt basis) that could result in gain because a decrease in liabilities is treated as a deemed distribution (see IRC Sec. 752(b)).

This seems to have some good examples / issues you might run in to and could be helpful to have some basic understanding before you talk to your CPA -- http://crlaw.com/news/wp-content/uploads/2012/01/Partnership-Tax-Traps-for-Real-Property-Developers_12-09-09.pdf .