Operating Agreement Tax Glossary
Key terms every sponsor, investor, and CPA should know when reviewing operating agreements for tax provisions.
What Is a Target Capital Account?
An allocation method where income and losses are assigned to bring each partner's capital account to what they'd receive if the partnership liquidated today. The most common approach in modern real estate deals.
Learn more →What Is Deficit Restoration Obligation (DRO)?
A partner's promise to pay back any negative capital account balance when the partnership winds down. It lets the partnership allocate more losses to that partner beyond what they contributed.
Learn more →What Is Qualified Income Offset (QIO)?
A safety-net provision that allocates income to any partner whose capital account unexpectedly goes negative. It's the alternative to a DRO and is common for LP investors who don't want open-ended liability.
Learn more →What Is a Minimum Gain Chargeback?
A required provision that forces partners to recognize income when nonrecourse debt decreases, clawing back prior deductions they received from debt-financed losses. Every leveraged real estate operating agreement needs it.
Learn more →What Is a Safe Harbor Allocation Language?
The specific provisions the IRS requires for partnership allocations to be respected as written. If your operating agreement includes all three Safe Harbor components, the IRS accepts your allocations without challenge.
Learn more →What Is a Profits Interest?
A partnership interest that gives the holder a share of future profits and appreciation but no claim to existing capital. It's how sponsors and fund managers receive their promote or carried interest without triggering immediate tax.
Learn more →What Is a Nonrecourse Deductions?
Partnership deductions generated by debt that no partner is personally liable for. In real estate, most mortgage debt is nonrecourse, so these deductions are the main way partners get tax losses from leveraged properties.
Learn more →What Is a Guaranteed Payment?
A payment to a partner for services or capital use that is fixed regardless of whether the partnership makes money. Unlike distributions, guaranteed payments are deductible by the partnership and taxed as ordinary income to the partner.
Learn more →What Is a Unreimbursed Partner Expense (UPE)?
An expense a partner pays out of pocket on behalf of the partnership and never gets reimbursed for. Without the right language in your operating agreement, that partner loses the deduction entirely.
Learn more →What Is a a Section 754 Election?
A partnership election that adjusts asset basis when an interest is sold or transferred. Without it, a buyer inherits the seller's old depreciated basis instead of getting a step-up to match their purchase price.
Learn more →Check Your Operating Agreement
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