The IRS and Treasury Department have just issued final regulations under Section 752, fundamentally changing how partnerships allocate recourse liabilities among partners. Effective for liabilities incurred or assumed on or after December 2, 2024, these new rules refine the concept of economic risk of loss (EROL) and provide critical clarity for partners in complex business structures. If you’re a high-net-worth investor, business owner, or real estate professional involved in partnerships, here’s what you need to know.
Key Changes in the Final Regulations
1. Proportionality Rule for Overlapping Economic Risk of Loss (EROL)
Under the new regulations, when multiple partners bear EROL for the same liability, a proportionality rule applies. Instead of allocating 100% of the liability to multiple partners, the IRS now mandates a fractional allocation:
Each partner’s share = (Partner’s EROL for the liability) ÷ (Total EROL across all partners) × Total liability
This prevents double-counting and ensures a more equitable distribution of liability among partners.
2. New Guidance for Tiered Partnership Structures
If you’re involved in a tiered partnership structure—where one partnership (LTP) is owned by another (UTP)—the new regulations clarify liability allocation:
Liabilities are assigned to the UTP only to the extent that the UTP or its partners bear EROL.
If an individual partner of the UTP directly bears EROL, the liability must be allocated to that partner instead of being trapped at the upper-tier level.
This change prevents artificial liability shifting between partnership levels and ensures accurate tax treatment.
3. Refinements to Related-Party Rules
Previously, related-party rules could result in unintended liability allocations. The final regulations now introduce exceptions to constructive ownership rules, ensuring that partners aren’t allocated liability just because they’re related to someone who actually bears EROL.
For example:
If a related party assumes EROL for multiple partners, liability is divided among those partners proportionally based on their profit interests.
Some constructive ownership rules have been relaxed to prevent unintended liability allocations based on mere familial or business relationships.
Why This Matters for High-Income Investors and Business Owners
If you’re operating at a high level—running multi-million-dollar partnerships, structuring complex deals, or leveraging debt-financed investments—these changes will significantly impact how you manage tax liability and partnership risk. Misallocating liability can lead to unintended tax exposure, triggering IRS audits, loss of deductions, or recharacterization of liabilities.
How to Prepare for the New Rules
With these regulations taking effect for liabilities incurred on or after December 2, 2024, now is the time to take action:
Review partnership agreements to ensure liability allocation aligns with the new rules.
Reevaluate tiered structures to optimize liability placement and avoid artificial allocations.
Engage in proactive tax planning with specialized advisors to mitigate potential exposure.
Consider restructuring existing liabilities before the effective date to take advantage of pre-regulation rules where beneficial.
Partner with Experts for Strategic Tax Planning
Navigating these regulatory changes requires in-depth expertise. At Neil Jesani Advisors, our team of CPAs, tax attorneys, and financial strategists specialize in high-stakes tax optimization for business owners and high-net-worth individuals.
If your partnerships involve significant liabilities, don’t wait until 2025 to assess the impact—schedule a strategy call today to ensure compliance, minimize tax exposure, and optimize liability allocation.
Book a consultation now to stay ahead of these IRS changes and maximize your tax advantages.
