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An investor owns a piece of income-producing real estate worth $100 million. It's fully depreciated, so the tax basis is zero. That means a potential (and unacceptable) $15 million capital-gains tax.
1. Instead of an outright sale, the owner forms a partnership with a buyer.
2. The owner contributes the real estate to the partnership. The buyer contributes cash or other property.
3. The partnership borrows $95 million from a bank using the property as collateral. (The seller must retain some interest in the partnership, hence the extra $5 million.)
4. The partnership distributes the $95 million in cash to the seller.
Note: The $95 million is viewed as a loan secured by the property contributed by the seller instead of proceeds from a sale. For tax purposes, the seller is not technically a seller, and so any potential tax bill is deferred.
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