Tax Reform And Organizational Forms For Holding Investment

In the tax environment following the Economic Recovery Tax Act of 1981, partnership ownership of real estate dominated corporate ownership. This dominance was evidenced by the rapid growth of public as well as private syndications using the partnership form during the 5 years preceding enactment of the Tax Reform Act of 1986 (TRA). It is concluded that the post-TRA tax law provides incentive for real estate investments with sizable tax shelter benefits to be held in corporate form. The simulation results suggest that a number of plausible situations exist under post-TRA tax law in which, considering tax factors alone, the corporation may be the value-maximizing organizational form for owning investment real estate. Corporate dominance is possible for highly levered depreciable real estate investments in which a substantial proportion of the aftertax cash flows are reinvested in additional real estate. The simulation results also suggest that the cost of double taxation of corporate income for typically levered real estate investments has decreased.