LLC Partial Liquidation

The only way that comes to mind to "partially" liquidate a multi-member LLC/Partnership, is if the business sold some of it's business assets. If this is what occurred, then the sale/disposition of the asset is reported in the business assets section of the 1065 Partnership return. Then any distribution of the proceeds from the sale (if any) are reported in the appropriate box of the K-1 of those who received any of those proceeds. Could be box 11 for Other Income, box 10 if it was a Sec 1231 asset type, box 9c for unrecaptured 1250 gain, etc, etc, etc,.

So without knowing the specifics of what was liquidated and how, it's just not possible to provide you a useful response.

did the LLC or redeemed part of your interest or did you sell part of your interest to a different entity.   

the treatment may depend on which happened.

Based on your facts, I have the following comments:

• It appears you sold part of your interest in the LLC, which I am assuming was treated as a partnership (and not an S corp).
• What you don't mention, is whether you sold this partial interest to a current member, a new member or whether the partial interest was redeemed.  This gets to @Anonymous question which was not reflected when I started this response.
• In general, the sale of a partnership interest is considered the sale of a capital asset which generates a capital gain or loss.
• You will need to determine your basis in your LLC interest up to the date of the sale, to determine your gain or loss.
• Depending on what type of assets the LLC holds, your gain or loss may need to be adjusted based on the hot asset provisions of code section 751.  This gets complicated and you will need additional information from the LLC in order to correctly handle this adjustment.  This adjustment will recharacterize your gain from capital to ordinary income.  The overall gain or loss will not change, just the character.
• An example to explain the previous bullet:
  • Overall gain on sale of partial LLC interest is $2,500
  • Your portion of Section 751 hot assets is $500
  • You would need to report $2,000 as a capital gain on the sale on Schedule D and form 8949
  • You would need to report $500 on form 4797 for the ordinary income portion of your partial sale
  • Keep in mind that you can get whip sawed with Section 751.  Lets say you had an overall gain of $1,000 and your portion of Section 751 items was $2,000.  In this case, you would report the $2,000 ordinary gain on form 4797 and then report a capital loss of $1,000 on Schedule D and form 8949.  This nets to the same overall $1,000 gain, just that the character and tax impact changes.
• Depending on who purchased the partial interest there are other tax issues that need to be considered for either the buyer or the LLC.
• Most likely this is something that you may want to consider discussing with a tax professional to get the correct result.

In this case, I cashed out 50% of my interest which was replaced by another investor. In that case, what is the answer?

I sold part to a different entity.

The response is provided in my original response.

You need to determine your basis at date of sale, your overall gain and if Section 751 applies.  All this explained in original response.