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On the Rise and Fall of Limited Partnerships

Taking A Historical Look at this Investment Vehicle

By Dr. David Edward Marcinko MBA CMP™



Back in the 1980s – a time I am loathe admitting that I remember well – limited partnerships (LPs) were all the rage and often touted as the investment vehicle of the future; especially to tax-averse physicians and high income medical professionals and investors.

Oil and gas and real estate LPs dominated the market. But, there were also cattle feeding, master recording disks, equipment and aircraft leasing, and cable TV investments. The LP heyday was 1983 through 1989, and most early LPs were private or non-publicly traded.

Popularity Rising

Why were they so popular? LPs provided the benefits of direct ownership (income potential and tax benefits) without management responsibility and personal liability. Losses were limited to one’s original investment. Brokerage firms pushed them hard, paying their sales representatives [financial advisors?] the highest commissions and often characterizing these risky investments as “safe” and a “means of capital preservation.”

Early ’80s

In the early 80s, investors could use depreciation, interest, and investment tax credits to offset not only LP income but ordinary income from salary and other investments. This was a huge incentive for high income earning doctors. In 1981, the Tax Act allowed accelerated depreciation for real estate, and non-recourse debt was treated as depreciable cost (partners bore no risk of economic loss). Soon, the IRS began to attack LPs. Both real estate and oil and gas values declined. LPs soon became illiquid investments, producing little or no return.

’86 Tax Act

Then came the Tax Reform Act of 1986 (TRA), which brought with it “at risk” limitations to real estate tax shelters and the new passive loss provisions. LP sales then spiraled downward. The ’86 Tax Law provided that limited partners could not increase their basis in the LP for their share of partnership debt unless they were personally liable for repayment or if the lender had an interest other than as a creditor (unless “qualified non-recourse debt” was used).


In the ’90s, investors either hung on to – or sold – their LP investments in the secondary market. Investors were subject to substantial discounts upon sale and they had to recapture tax benefits previously received (including those from non-recourse financing).


Simply abandoning these investments did not avoid unfavorable tax consequences, such as the decrease in a partner’s share of partnership liabilities being treated as a cash distribution. Capital gains were recognized to the extent that a partner’s share of partnership liabilities exceeds the adjusted basis of the partner’s interest.

Note: “What Happened to Limited Partnerships?” Lee Knight and Ray Knight Journal of Accountancy, July 1997, pp. 37–42, American Institute of Certified Public Accountants.


And so, your thoughts and comments on this ME-P are appreciated. Were you burned by LPs back in the day, or have a LP story to tell us? Please opine. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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