IRS filing obligations for tiered real estate partnerships.

• Author: Kosnitzky, Michael

Recent tax changes make using tiered partnerships to hold U.S. real property advantageous. While some may argue against the structure because of the estate tax uncertainties, few will question the Federal income tax benefits it can provide to individual investors who are relatively young and in good health, and who expect not to hold the investment long after the one-year, long-term capital gain holding period.

Regs. Sec. 1.1446-3(a)(2)(ii) changed the withholding regime for foreign investments in U.S. real estate held through a partnership, by allowing the partnership to withhold at the highest tax rate applicable to a particular type of income, instead of at the highest percentage in Secs. 1 and ll. This change is positive for individual foreign investors, who will be taxed at 15%. As a result, the tax benefit has generated substantial interest in using tiered partnerships for investment in U.S. real estate.

Federal filing requirements for tiered partnerships are complex, and the IRS will probably strictly enforce them. They are relatively intricate, particularly for the lower-tier partnership's (LTP's) obligation to reliably associate income with a partner of the upper-tier partnership (UTP).

The exhibit on pp. 582-583 is a checklist that will help a foreign person who invests in U.S. real estate through a domestic LTP and a foreign UTP, to comply with the filing regulations.

Exhibit: Filing obligation checklist for tiered partnerships Filing requirements for LTPs 1. Form 1065 (U.S. Return of Partnership Income) [] File on or before the 15th day of the 4th month following the close of the partnership's tax year (e.g., April 15th). [] Send to: Internal Revenue Service Center, Ogden, UT 84201-0011; see the Form 1065 instructions if total assets are less than $10 million or the partnership's principal business or office is in a foreign county or U.S. possession. 2. Form 8813 (Partnership Withholding Tax Payment Voucher (Section 1446)) [] File with each installment on or before the 15th day of the 4th, 6th, 9th and 12th months of the partnership's tax year (April, June, September and December for a calendar-year partnership). When the date falls on a weekend or a legal holiday, use the next business day. [] Mail the voucher with a check or money order payable to the "United States Treasury." Write the partnership's employer identification number, tax year and "Form 8813" on the check or money order. [] Send to: Internal Revenue Service...