Taxation of the Income Beneficiaries. The Fund's "distributable net income" ("DNI") generally will be equal to the excess of all rental payments received by the Fund from CCS plus income earned, less depreciation reserved and expenses paid (including Fund operating expenses). As a general rule, income beneficiaries of a trust are taxed on DNI (which generally excludes capital gains) to the extent that such income is required to be or is actually distributed to them. The Fund expects to invest most of its assets in real property. Tax benefits in the form of straight-line depreciation deductions spread over forty years will partially offset the net rental income from the Building or other real estate contributed to the Fund. Prior to the Fund reaching a significant portion of its funding goal of $3,000,000, it is possible that depreciation deductions could exceed net distributable income. As stated above, taxable income will first be computed at the trust or Fund level. Since the Fund will account separately for depreciation, the income beneficiaries will report separately on their federal income tax returns their respective shares of (a) Fund income, before depreciation, and (b) depreciation (net of the amount retained by the Fund for its depreciation reserve). Under current Regulations, rental income from real estate will qualify as income from a "passive activity." Once the Fund reaches a significant portion of its funding goal of $3,000,000, the Fund is not expected to generate net losses for federal income tax purposes for any subsequent year in the period covered by the Financial Forecast. If the Fund generates net losses in any year (because depreciation deductions exceed net taxable income), it appears that such losses will flow through to the income beneficiaries. The use of such net losses to offset other income of the income beneficiaries likely would be subject to a number of strict limitations, including the passive loss rules outlined below. Whether and to what extent the use of such losses will be permitted will depend on several factors, including the individual circumstances of each income beneficiary's situation. However, as a general rule, income beneficiaries should not expect to use any such net losses to offset other income. If the Fund were to produce depreciation deductions in excess of net taxable income and if the IRS were to adopt rules in the future requiring the Fund to net depreciation and net taxable income (rather than pass the two through separately as discussed ...
