2017 Essential Tax and Wealth Planning Guide

Ω 今 Tax implications of fund investing Investment fund attributes 2017 Essential Tax and Wealth Planning Guide | Tax implications of fund investing 58 Introduction What is an investment fund? Types of investment funds and income tax characteristics • Marketable securities Hedge funds • Private equity/venture capital Publicly traded partnerships Real estate funds . Fund of funds Investment fund attributes • Trader versus investor . . entities Passive versus non-passive income Separately stated activity (including PTPs) Qualified small business stock (QSBS) Unrelated business taxable income • State tax reporting Conclusion Resources If a taxpayer invests in a PEF or a REF and the taxpayer receives a current year tax estimate, consideration should be given regarding whether any loss estimates are currently deductible or whether they may be passive and the deduction is limited to the extent of projected passive income. Furthermore, to the extent you borrow to acquire an interest in a PEF or REF, you should evaluate whether the interest expense may be subject to the passive loss rules as well. Separately-stated activities-non PTPs Many PEFS and REFS separately state the income and losses of each of their underlying passive activities. A taxpayer may decide to separately state the passive income and losses from a passive activity as it is reported on the Schedule K-1 or group two or more activities of similar nature together. By separately stating each passive activity, the investor may deduct any current or carryforward passive losses in a year of complete disposition of that activity. If all investments from a fund are grouped together, all the investments are treated as a single passive activity, which could potentially defer the deduction of carryforward and current year passive losses until the disposition of the last investment in the fund. By separately stating each passive activity, the investor may deduct any current or carryforward passive losses in a year of complete disposition of that activity. Separately stated activities-PTPS PTPs are unique because the passive activity limitations discussed above are applied separately on a PTP-by-PTP basis. Thus, a net passive loss from one PTP may not be utilized to offset passive income from another PTP or any other passive source. Rather, a passive loss from a PTP is suspended and carried forward to offset income in a future year from that same PTP. If the partner's entire interest in the PTP is completely disposed of in a fully taxable transaction to an unrelated party, any unused losses are fully deductible in the year of disposition. Care should be given when a taxpayer invests in a FOF that then invests in PTPs. Typically, the FOF will list the activity of each underlying PTP investment separately. Upon review of the underlying Schedule K-1, it may be determined that the taxpayer indirectly invested in the same PTP through multiple investment vehicles. To the extent this occurs, the taxpayer must aggregate the income and losses allocated from the various partnership investments as it relates to that specific PTP investment. If one of the FOFS disposes of that underlying PTP investment but the other FOF does not dispose of its investment in the same PTP, the taxpayer cannot deduct the suspended passive losses from the PTP that the first FOF disposed of. Rather, the suspended losses must be aggregated with the losses related to the PTP investment that is still held and may be recognized when the other PTP FOF disposes of the underlying PTP investment. <弓 ☑ |||| A

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