SIE Understanding Products and Their Risks Question 74: Answer and Explanation

Question: 74

Which of the following is true of real estate limited partnerships and Tenant in Common transactions?

• A. Both file a Certificate of Limited Partnership with the state.
• B. Both allow ownership interest transfer with permission of the general partner.
• C. Both involve no personal liability.
• D. Both provide the pass-through tax advantage.

Correct Answer: D

Explanation:

D: Choice D is correct because both allow real estate owners to coordinate with other similar owners to qualify for the "pass-through" tax treatment of financial results. Both are considered securities. Choice A is incorrect because limited partnerships file a Certificate of Limited Partnership with the state. In contrast, a Tenant in Common (TIC) relationship is of limited duration, and no such filing is made, even though for tax reasons, it may be a limited liability company or partnership. A TIC participant receives a deed as documentation of possession. Choice B is incorrect because only the limited partnership allows transfer of ownership with permission of the general partner. In a TIC transaction, the lender reviews each possible mortgage participant for approval. Choice C is incorrect because TIC participants are each required to provide needed funds, according to their percentage of participation. Limited partners may have no personal risk unless they participate in management decisions.