What REALLY Triggers IRS Attention in Real Estate Partnerships - From An Onlooker

[Bruce D. Kowal]

After 20+ years in real estate partnerships, here's what actually puts you on the IRS radar (and what doesn't):

REAL Red Flags That Matter:

1. The Partner Complaint Trigger

• Disgruntled partner files Form 8082
• K-1 disputes
• Partnership disputes leading to tax filings
  Real Impact: Instant IRS attention

1. Suspicious Loss Claims

• Losses exceeding investment
• Artificial basis inflation
• Sudden large losses without economic reality
  Example: $100K investment claiming $500K losses

1. Related Party Games

• Circular property flips
• Below-market transfers
• Family partnership schemes without substance
  Watch Out: IRC §267 and §707(b) violations

1. Debt Engineering Red Flags

• Basis inflation schemes
• Artificial guarantee arrangements
• Partner debt shifts near year-end
  Critical: IRC §752 compliance matters!

1. Syndication Reporting Issues

• Missing Form 8918 for reportable transactions
• Inconsistent investor disclosures
• Required registrations skipped

What Doesn't Actually Matter:
(Despite What Your Uncle's CPA Says)

1. Special Allocations

• Normal promote structures
• Standard waterfall provisions
• Typical developer promotes
  Reality: Unless extremely aggressive, IRS rarely cares

1. Technical Documentation

• Minor §704(b) gaps
• Capital account glitches
• Technical allocation language
  Truth: Unless hiding something bigger

1. Property Value Allocations

• Normal basis step-ups
• Typical appreciation splits
• Standard promote calculations

Real World Example:
🏢 100-unit apartment complex
4 partners, $5M deal
Developer promote structure
= Zero IRS interest

Same Deal With Red Flags:
🏢 100-unit apartment complex

• Hidden partner arrangements
• Artificial loss allocations
• Unreported debt shifts
  = IRS Attention

Practical Protection Steps:

1. Basic Documentation
   ✅ Clean operating agreement
   ✅ Economic substance
   ✅ Partner contributions tracked
   (Don't need War & Peace complexity)
2. Economic Reality
   ✅ Allocations match economics
   ✅ Real money movement
   ✅ Actual partner participation
3. Clean Reporting
   ✅ Consistent K-1s
   ✅ Required forms filed
   ✅ Clear communication

The "Sleep Well" Test:
Can you explain your structure to an IRS agent without sweating?

• Normal promote? ✅
• Standard split? ✅
• Real money invested? ✅
  = You're probably fine

What Gets You in Trouble:

• Can't explain structure
• Hidden arrangements
• Too good to be true tax benefits
• Partner disputes

Bottom Line:
IRS cares about substance over form. Real deals with real economics rarely face allocation challenges. Focus on running a clean operation rather than perfect technical compliance.

Pro Tip: Your biggest risk isn't the IRS - it's partners who might complain to the IRS.