Business Glossary

limited partnership income that arises from debt restructuring and creates taxability without generating cash flow. Phantom income typically occurs in a tax shelter created prior to the tax reform act of 1986 where real estate properties, having declined in market value, are refinanced; income arises from portions of the debt that are forgiven and recaptured.

income represented by ownership of a security considered taxable to the holder, even though no cash is received. This may occur when the issuer keeps part of cash flow from the security to cover the labor and other out-of-pocket costs, or when investors purchase residual cash flows from overcollateralization or excess cash flow from mortgage principal and interest payments. Real Estate Mortgage Investment Conduit (REMIC) , which issue securities from a trust, were designed to overcome this problem.

likely to result when leveraged real estate is sold because, during the ownership period, more depreciation was claimed than was paid to amortize the mortgage. The excess of the mortgage relieved in a sale over the adjusted tax basis represents taxable gain. In this instance, however, no cash is released, yet tax is still paid. The taxable income is called phantom income because the investor receives no cash.