Am I the crazy one? Or do other CPA’s just blindly allocate depreciation to GP’s?

[Dylan Brown]

I have seen so many instances of GP’s receiving substantial allocations of depreciation on their K-1 without having contributed capital.

To me, allocating $1M of depreciation losses to a pool of co-GP’s when they are only on the hook to loose their $100k in cash contributions if the deal goes south goes against the most fundamental partnership tax law.

Even if its agreed on in the LLC agreement and all the other investors are willing to give up their depreciation, I don't see how that is actually substantiated by tax law.

It all comes back to Treasury. Reg. 1.704-1(b)(2).

Substantial Economic Effect.

It is as clear now as it was 25 years ago. Happy to share 

a little bit right out of the partnership taxation textbook for all those curious enough to learn more about the nuance of allocating depreciation to GP partners.

To sum the law up as simply as I possibly can - tax losses must be allocated in a manner such that if those losses materialized and became actual losses of cash, the economic loss would match the tax loss. Therefore, if you are a GP with a $100k co-invest, you likely can't receive more than $100k of losses in most cases since your LPs would bear the burden of the remaining losses (and therefore receive the tax loss allocation).

Remember, just because your OA says it and your attorney gave it the green light, doesn’t mean that your tax return will reflect it.

Make sure your CPA knows this stuff.