Limited partners might find it advantageous to sell their rights with respect to their partnership interest for many reasons, which may, depending on their particular partnership and personal circumstances, include the following:
1. Tax Reasons- A limited partner may have originally invested in the partnership for tax reasons, but instead of tax losses, may find that their interest is now generating substantial 'phantom income' (i.e. taxable income in excess of any cash distributions). For a number of years, they may have been knowingly or unknowingly reaching into their own pocket to pay taxes on phantom income. They may also find that the phantom income burden will worsen in the coming years. At the same time, they may find that the tax recapture has reached a point where a sale is feasible.
2. Estate Planning, Administration and Succession Costs and Concerns- Limited partner interests like these may also be a burden upon an estate for a number of reasons:
In addition, these types of interests can be an ongoing burden to heirs:
3. Alternative Investments- A limited partner may believe that they have better alternative investments that more suit their needs, such as better and/or more predictable annual cash flow, shorter investment horizon and/or better liquidity.
4. Simplification- A limited partner may prefer to simplify their life and their investment portfolio by selling holdings that are small, complex and/or more trouble than they are worth and instead simplifying and consolidating their investments.
5. Liquidity- Limited partnership interests tend to be illiquid and limited partners may not have the ability to sell their interest in the future if and when they have a need for liquidity.