How do I answer questions about a K-1 partnership that ended last year?

[dwritchie1]

I have a K1 from a real estate partnership that ended last year.  I need to know how to handle.   

1. Under the question "Describe partnership disposal"  I assume it should be "complete disposal"  or something else?

2. The question: "Tell us about your sale"  should the answer be  sold partnership interest or Liquidated partnership interest? 

3.  I had final distributions of $1,000 and a beginning  year capital account of $400.  Should my $800 be an ordinary gain or a 1250 gain.  Over the many years there were losses to the partnership some of which were probably depreciation driven.  Suggestions?

[Rick19744 · Accepted solution]

Partnerships are a complicated area.  I will provide some guidance based on your specific questions:

1. Based on your facts, yes you should respond as a complete disposal.
2. Based on your facts, it appears that you should respond that you liquidated your partnership interest.
3. Your last question is where things get a bit messy.  You should have been maintaining a basis schedule of your investment in the partnership.  This begins with your initial capital contribution and is adjusted annually for the applicable items on your K-1.  You should review your K-1 capital account section L.  If this is marked "tax basis" then you might be able to proceed with determining your final gain or loss.  Anything else, you will then need to compute your tax basis.
4. If your Schedule L is marked tax basis you also need to determine what is included in the analysis lines.  Many times a practitioner will include a "plug" to get ending capital to zero.  This plug amount should not be used to determine your ending basis.  If you can determine what this amount is, adjust your tax basis by this amount.  You also need to understand if your liquidating distribution is included in this analysis.
5. Once you are able to determine your true ending capital you will then know your overall gain or loss; if you still have a capital balance remaining then you will have a capital loss.  It's hard to say if you have a gain to report without actually analyzing the capital account analysis section.  Regardless of whether you have a capital gain or loss, both are reported on Sch D and the applicable form 8949.

[karinm1971]

This is very helpful. I have a similar situation. My question is, then once I've determined my overall gain (I do have my annual running basis calculation), where does that get inputted into Turbotax? Currently, TT has [final distribution - basis] as a gain in 8949 part II, AND the K-1's net section 1231 gain on 4797. But the final distribution already includes the 1231 gain, and the result is the gain being reported as income twice.

I was asked for the sale price and entered the final distribution, which does not seem right -- but I don't know otherwise how to treat either the final distribution or the sales price.

Any insights?

Thanks,

Karin

[Rick19744]

Based on your facts, it appears that TT is handling this correctly.

Keep in mind that the Section 1231 gain on the K-1 is gain at the partnership level that is passed out to you.  This also increased your basis by this same amount so no double tax.

Since you indicate that you are maintaining your basis schedule, I assume you have handled this correctly.

The final distribution should be your liquidating distribution, which is essentially your sales price.  This final distribution should not be used in determining your tax basis; no reduction in basis.

[karinm1971]

Rick,

Thank you so much for your reply! Your statement that "this final distribution should not be used in determining your tax basis; no reduction in basis" shows me where my mistake was. I initially used the year's starting basis, which I now see is clearly wrong, and then I thought I should the year's final basis, which is even more wrong (even more repetitive taxing!), and now see that the adjusted basis calculation in the last year does not include the liquidating distribution. When I do it that way, I get what looks right to me.

Thanks again for your help,

Karin

[Rick19744]

You are welcome.

[Justin65]

Hi @Rick19744 

Your replies to others are awesomely helpful.

I have a K-1 with a final liquidating distribution from a limited domestic partnership.  I confirmed from the K-1 notes that Section L is calculated on the tax basis method.  I have no section 1231 gain but I do have a net short term capital loss and a net long term capital gain (lines 8 & 9a).  Given my beginning capital account was $0 and my ending capital account just $3, I'm trying to figure out if my partnership basis for regular gain and AMT gain should be equal to the distribution amount in order to avoid double taxation in Turbotax.

- Justin

[Rick19744 · Accepted solution]

@Justin65 my thoughts / comments follow:

• While you indicate that Section L is on the tax basis, it is always good for partners to maintain their own tax basis schedule as a way to validate the figures in Section L.  If this has not been maintained, you will either have to determine your tax basis or use Section L.
• There is no double tax.  The amounts you indicate that are on lines 8 and 9a should be reflected in Section L on the line "current year income / loss".  These amounts are reported on your 1040, but also increase your tax basis.  This increase in tax basis is what avoids the double tax.
• Based on your limited facts, you started with zero basis, you then add (combine) the amounts on lines 8 and 9a to arrive at your tax basis.  This is now the amount that should be reported on form 8949 as your cost basis (or alternatively when asked by TT if you go through the questions / interview process which is advisable).
• Your liquidating distribution is then reported as your "selling price".
• When entering this information, TT should then reflect a long-term capital loss (assuming it qualifies as long-term) of $3 on form 8949 and Schedule D.
• The partnership is not going to provide the details regarding any difference between regular tax and AMT.  That is why partners should maintain their own tax basis for both; regular and AMT.
• The only way to know if there is a difference is if you kept copies of prior year K-1's and there are figures on line 17; or whatever the applicable line is for the tax year in question.

[Justin65]

@Rick19744 

Thankyou for the assistance!

[Rick19744]

@Justin65 you are welcome.