Limited Partnerships and Real Estate Investment Trusts
Limited partnerships (LPs) were a heavily used form of investment vehicle prior to 1987, when their attractiveness was restricted by the Tax Reform Act of 1986 (TRA 86). Specifically, a series of tax statutes known as the passive loss rules significantly curtailed the use of limited partnerships to pass through tax losses to investors in excess of their amount of capital invested in the partnership. As a result, such terms as a 10-to-1 tax writeoff appeared in investment terminology, meaning that a limited partnership received $10 of tax losses for every $1 of capital invested in the limited partnership. Obviously, this was a tax abuse (not to mention a distortion of investment principles), so Congress acted to correct the situation in TRA 86. Since that time, investors in limited partnerships have been investing in LPs based on the economic potential of the assets positioned in the partnership entity. Typically, these assets consist of either real estate, energy, or natural resources.