Changing profit/loss % in a partnership

[ILLMAS]

TP along with his kids own a rental property in a partnership, when the property was orginally purchases each person put equal share of captial, every year the expenses exceed the income and the TP always puts in money out his pocket to cover expenses. At the end of the year, everyone gets a K-1 with a loss, TP wants to change the percentage of profit/loss, because he sold another property in 2012 that has a gain, his kids really don't benefit from the loss like he would. Would there be an issue changing the profit/loss percentage and leaving the capital as is?

Thanks

MAS

[BulldogTom]

Yeah, changing the percentages so that one person can take a loss that he is not entitled to per the partnership agreement comes very close to tax evasion. I think I would have a problem with that.

Tom

Hollister, CA

[ILLMAS]

Good point!!! Thanks

[BulldogTom]

Think about it. How about if one of your clients said "I have a kid that I can't use on my tax return, can I let my business partner put my kid on his tax return?". It is the same concept. The partnership agreement spells out the flow of profits and losses to the partners. You can't just change it because it would work out better tax wise for the partners.

However, if the partners wanted to revisit the partnership return and for some type of valuable consideration sell a part of the partnership to another partner so that in future years he can take advantage of the percieved benefits of more ownership, then they can do that. But the partnership agreement is the rule for how profits and losses are allocated to the partners.

Tom

Hollister, CA

[jainen]

>>change the percentage of profit/loss, because he sold another property in 2012 that has a gain<<

They can change the partnership agreement, but it has to make economic sense within the partnership, not because of some unrelated tax motivation. Generally one partner wouldn't take more of the loss without being compensated by the other partners in some way.

[PapaJoe]

One partner is putting more money into the partnership each year to cover the expenses. Shouldn't he get a bigger share of the loss?

[jainen]

>>Shouldn't he get a bigger share of the loss?<<

No, not necessarily, especially if he is already deducting Unreimbursed Partnership Expenses. What does the partnership agreement say? Other partners may not feel such expenses are necessary, or constitute additional equity. Maybe they even resent him wasting money on things that could be fixed in person, or maybe somebody else wants more equity for handling tenant problems.

So mas has a big conflict of interest in the original post. Who exactly is the client--the partner, the entity, or the family?

[BulldogTom]

One partner is putting more money into the partnership each year to cover the expenses. Shouldn't he get a bigger share of the loss?

Not unless the partnership agreement says so. Like if the agreement says the profits and losses are based on percentage of capital in the ps at the end of the year. It all comes down to what the agreement says.

Tom

Hollister, CA

[ILLMAS]

TP is the father of the kids, he runs the show pretty much, kids are not involved at all and don't have passive income to offset r/e losses anyway. TP 100% manages the property, negotiates leases, pays the bills, is 100% responsible for the loan etc... and makes all decisions.

[jainen]

>>kids are not involved at all... <<

...except for their equity stake, which just happens to be the only relevant issue here. Read the partnership agreement!

[ILLMAS]

Correct the operating agreement states differently, TP will be advice to take a look at the operating agreement. Thanks everyone for your input very much appreciated, all good points.