A new client came w/a FLP formed approx. ten years ago. The FLP asset is the h/w personal residence. Since there is no business purpose and no historic accounting detail supporting a FLP, I believe the FLP should be dissolved. QUESTION. Will appreciation on the property over the last ten years create a tax problem. Thank you for your insight.
If the FLP was never a valid entity, how could it create a tax problem? However, title to the residence is in the FLP. The fact that the IRS may challenge the FLP if the taxpayers tried to claim discounts on an estate tax return, doesn't mean the FLP doesn't exist. Is there a mortgage on the house? If so, does the lender know of the FLP? If the loan was made while the house was in the FLP you will need lender approval to dissolve the FLP. Who claimed property tax deductions in each of the years the FLP held the house? Who claimed mortgage interest deductions? Was there a lease to the taxpayers living in the house? Was rent paid? What indications of the entity ownership of the house exist? Was there a partnership agreement? What does it say? Lots of facts need to be looked at.
Just because the IRS would likely challenge (and probably succeed) that the holding of a personal residence in an FLP without a lease, etc., etc. will not qualify for estate tax discounts doesn't mean that the IRS will permit the taxpayers to ignore the fact that the FLP owns the house if the house were sold and the taxpayers attempted to claim a home sale exclusion ($250,000 for an individual and $500,000 joint). If the FLP is dissolved, when does the holding period for determining qualification for the home sale exclusion begin? When the invalid (your argument) FLP was formed? When the house was initially purchased? On distribution from the FLP?
Lots of questions really need to be addressed and more detailed facts looked at.
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