by Paula J. Leicht
Two recent changes in Pennsylvania law made it advantageous to convert a limited partnership which owns real estate (and/or other income-producing assets) to a limited liability company.
A preferred form of ownership for real estate and other income-producing investments prior to January 1, 2016 was the limited partnership which owns the real estate with a limited liability company ("LLC") as the general partner. This vehicle accomplished two purposes: one, it avoided the Pennsylvania capital stock tax which an LLC was subject to; and two, it preserved liability protection for the general partnership interest. This approach involved the creation of two entities, a limited partnership and a limited liability company as the general partner, and the requirement to file two separate tax returns.
Two recent changes in Pennsylvania law now make it possible to convert the limited partnership to an LLC without incurring realty transfer tax liability on the transfer and the second change effective January 1, 2016 repealed the capital stock tax on LLC's. The LLC to serve as general partner may now be dissolved as the unlimited liability protection is obtained through the converted limited partnership.
These two changes now make it possible for real estate investors to convert their limited partnerships into LLCs without having to worry about long-term tax obligations and also to continue to enjoy limited liability protections. With only one entity remaining, the limited partnership that converted to an LLC, only one tax return needs to be filed.
If you have an interest in more information on this subject, please contact our office.