Outside Publication

Testing a Partnership's Contribution of Appreciated Real Property to Determine Developer or Investor Status, Virginia Tax Review, Vol. 32, No. 4

Spring 2013

The tax code is filled with rules that require extensive interpretation. One example of this is found in the section governing charitable contributions.

Generally, a taxpayer is entitled to a charitable contribution deduction equal to the fair market value of the donation made. In cases where a taxpayer donates appreciated ordinary income property, however, a taxpayer's deduction is limited to his basis in the property donated. Therefore, an issue can arise as to whether donated property is ordinary income property in the hands of the donor. This article discusses the tax consequences to taxpayers attempting to donate appreciated real estate by way of a partnership in which they are partners and determines when the taxpayer is likely to be considered a “developer,” and thus when their deduction will be limited to their basis in the property, and when the taxpayer is likely to be considered an “investor,” and thus receive the full deduction for their donation.

The article explores several specific questions including: what factors do courts consider when determining whether a taxpayer should be treated as a real estate developer as opposed to being treated as a real estate investor; if the donation is made by a partnership, is the partnership or the individual partner tested for developer status; under what circumstances should a taxpayer be treated as a developer with respect to a portion of the property and then be treated as an investor with respect to the remainder of the property; and under what circumstances can a taxpayer who initially held property as a developer change their mind and hold the property as an investor?