What's the minimum percentage allowed for partnership interest in a Limited Partnership?

Thanks for this info. I'm curious - if we do a 99.5% and 0.5% split, could this potentially trigger any "substantial economic effect" issues with the IRS? I've heard something about partnership allocations needing to have economic substance beyond just tax benefits.

You've raised an important point about substantial economic effect. Partnership allocations must have substantial economic effect beyond tax benefits to be respected by the IRS. With a 99.5/0.5 split, you need to ensure the allocation reflects economic reality. The allocation should be consistent with the partners' capital contributions, service contributions, or other economic factors. If the 0.5% partner contributes proportionally less capital or services, the allocation is more likely to be respected. Document the business purpose for your allocation structure thoroughly in your partnership agreement.

How exactly does this service work? Does it actually review the full partnership agreement or just answer general questions? My attorney drafted one but I'm not convinced he understands all the tax implications.

I'm skeptical about AI tools for legal documents. Wouldn't an actual tax attorney be better? My concern is these tools might miss state-specific requirements that could come back to bite you.

The service analyzes your complete partnership agreement and identifies tax issues specific to your situation. It goes through all the clauses and flags potential problems with both federal and state tax implications. It's much more thorough than I expected. As for using a tax attorney, I actually had my attorney review the agreement first, but he missed several tax issues that the AI caught. The tool specifically identified allocation provisions that wouldn't satisfy the substantial economic effect test. I ended up having my attorney revise based on those findings.

Wait, this actually works? I thought the IRS phone system was basically impossible to navigate. How much does it cost to use this service?

This sounds too good to be true. I've literally spent days trying to get through to the IRS. Are you sure you're not just advertising this service?

It absolutely works - I was connected to an IRS agent in about 20 minutes after trying for weeks on my own. The system basically holds your place in line so you don't have to stay on the phone yourself. I'm not affiliated with them at all, just sharing what worked for me after the frustration of trying to get through myself. I was skeptical too until I tried it. The IRS agent I spoke with was actually super helpful once I finally got connected and gave me specific guidance about partnership allocation rules.

Could you elaborate on this? I'm about to become a 1.2% limited partner in a real estate deal and was counting on using the losses against other income. What's the minimum percentage needed to avoid these limitations?

The issue isn't actually the percentage itself but how it relates to your investment amount. The IRS looks at whether you have "material participation" in the partnership, which is determined by several tests like hours worked rather than ownership percentage. For real estate specifically, there's a special rule that allows you to deduct up to $25,000 in losses against non-passive income if you "actively participate" and your adjusted gross income is under $100,000 (phases out up to $150,000). But this requires at least 10% ownership AND regular management decisions - so your 1.2% wouldn't qualify regardless of your involvement level.

Thanks for bringing up the state perspective! How would California determine if it's a "valid" partnership? Would proper documentation of partnership formalities be enough, or do they look at other factors?

California looks at several factors beyond just documentation to determine if a true partnership exists. They examine whether partners actually share in profits/losses, have mutual rights and obligations, and whether the minority partner has any meaningful role or just passive investment. With a 99.5/0.5 split, they'd scrutinize whether the 0.5% partner has any actual partnership rights - like voting on major decisions, access to books/records, or ability to bind the partnership. If the limited partner is purely passive with no partnership functions, California might treat it more like a loan or investment contract rather than a true partnership interest. The key is ensuring your partnership agreement gives the limited partner some meaningful rights and that you actually follow those provisions in practice, not just on paper.

This is really helpful information about the at-risk rules! I'm just getting started with understanding partnership taxation and this adds another layer of complexity I wasn't aware of. So if I understand correctly, even if the partnership agreement allocates losses proportionally, a limited partner with minimal investment and no personal guarantees might not be able to actually use those losses on their tax return? This seems like it could make very small partnership interests less attractive from a tax planning perspective than they initially appear. Would this at-risk limitation apply even if the limited partner later increases their capital contribution, or is it calculated annually based on their risk at the end of each tax year?