The information is ambiguous.
Do you mean you are preparing the 1065 for the partnership and you, as a former partner, are issuing yourself a K-1 or that you received a K-1 (which should be a final K-1) that is reporting capital gain? Either way, if you sold your entire interest, you need to know your outside basis which, hopefully, you have been tracking.
Thank you for responding.
As the bookkeeper, I provided a trial balance as of the effective date of the minority interests buyout to the tax preparer who prepared and filed a partial year 1065. The K1 from that return shows a small amount of basis, which I checked to previous records.
The problem I'm having is with my 1040. I entered all the other income information (e.g. W2s, 1099s, other K1s, etc) and took note of the tax due/refund. I then entered the proceeds of the buyout and the basis and took note of the tax due. The differential on tax due with capital gain & basis entered is somewhat higher than the 15% rate that I expected (it's closer to 20%) on the capital gain, given my taxable income.
These are the screens:
1. Select the Type of Partner: Limited Partner or Other LLC Manager
2. Describe the Partnership : Checked only "Disposed of a portion of my interest in partnership during 2018"
3. Tell Us About Your Sale : Checked "Sold Partnership Interest"
4. Enter Sales Dates : Entered Purchase Date and Sale Date, which are at least 5 years apart.
5. Enter Sale Information
- Entered the buyout proceeds under Sale Price
- Entered the amount of Partnership Basis under both Regular Gain or Loss and AMT Gain or Loss
- Tried entering the gain under both Ordinary Gain or 1250 Gain. Sale or similar result.
6. Entered the amounts in the respective boxes from the K1, including the buyout proceeds in box 19.
Your help will be greatly appreciated.
I am not sure I completely understand your issue.
If you are using a desktop version of TurboTax, did you check your Qualified Dividends and Capital Gains Worksheet? The capital gains tax rates are 0%, 15%, and 20% and if your income is $479,001 or more (if married filing jointly), you will be taxed at the 20% rate.
There are many issues here and this is a difficult area to respond to on a forum such as this. I will provide some commentary:
- Not sure why a partial year return was completed. The technical termination rules no longer apply and when they did, you needed to have a sale or exchange of 50% or more of the interest. Regardless, these rules no longer apply and a partial year return should not have been completed. This assumes the partnership return is for 2018.
- The gain could have put you in a higher tax bracket causing the capital gains tax rate to be higher. Take a look at the 1040 instructions page 40. Here you will find the capital gains tax rate worksheet and you can work through the tax to see if TT computation is correct.
- Also, depending on the type of assets held, some of your gain may need to be taxed as ordinary income. This will be applicable if the partnership held depreciable assets. These rules are known as "hot assets" rules and will convert capital gain into ordinary income.
- Depending on the $$ involved, you may want to meet with a tax professional.
Thank you for responding.
* As part of a complicated deal involving a portfolio of such partnerships, I believe that the combined majority partnership interests were sold to another entity and those majority partners had interests in the new investment holding entity. Hence, the more than 50% sale of partnership interests in a partnership that otherwise continues to operate as before. Regardless of whether or not it was required, the partial year return, from which my K1 issued, was filed by a competent tax preparing public accounting firm.
* My income (even with the buyout payment) is below the level indicated on line 15 of the capital gains worksheet on page 40 of the 1040 instructions.
* The partnership did indeed own depreciable (fixed and personal) assets.
* I was hoping that something needed to be changed in the way I entered the capital gain in Turbotax (or even that Turbotax couldn't correctly handle this situation) before approaching a tax professional.
The tax professional, who also was involved in preparing the partial year 1065 of the partnership, says that the hot assets in IRC section 751 does not apply to this buyout.
Well, make sure you keep the email from the "competent tax professional" so you can refer to this individual should you win the audit lottery and get challenged on this.
In a sale of a partnership interest hot assets includes section 1245 depreciation recapture; which would be your share of this.
It may be small, but it does apply.
Just to confirm
Are you saying that there would be a section 1245 depreciation recapture even if the partnership itself does not sell any assets and only the partnership interests are being transferred or sold under the buyout?
If a partner sells or exchanges his or her interest in a partnership, the sale is treated as a sale or exchange of a capital asset under Code Section 741..But, under Code Section 751, ordinary income treatment applies on the sale or exchange of a partnership interest to amounts received that are attributable to the partnership's unrealized receivables and inventory (sometimes called “section 751 property” or “hot assets”). . This ordinary income treatment is intended to reduce opportunities for tax avoidance that could arise from a partner's sale of a partnership interest in order to get capital gain on the sale of the interest instead of the ordinary income that would result from sale of the underlying assets by the partnership. For this reason, Code Section 751 is sometimes called the “collapsible partnership” rule.
This real estate lessor partnership paid each of the minority interest partners a redemption (liquidation?) payment and they released their partnership interest. The partnership paid what I previously described as a buyout payment to the minority partners. The payment didn't come from the other (majority) partners or third parties.
Does that change anything that you've said about the gain being ordinary v capital?
But in all honesty, I am sure there are thousands of taxpayers that have had this exact scenario and did not obtain or were not provided with the necessary Section 751 information.
The original point, was to clarify that the information you were told was not accurate. Most likely not material to your tax situation. If you are not able to get the information, just keep that documentation, complete your return with what you have and move forward.