Outside cost basis and Capital Gain as a LP

[StephenC]

I'm trying to figure out my outside cost basis and capital gain for a Limited Partner in a Real Estate Partnership.

Last year outside cost basis is $140,922
This Includes $169,685 Liabilities.

This year which is Final K1 has
Current year Increase/Decrease -$13,447
Other Increase/Decrease $42,211
Withdrawals & distributions -$1

What is my Cost basis?
What is my Sale Price?
What is my Capital Gain?

Thanks

[Rick19744]

With the limited details provided, this is what I see:

• Prior year basis $140,922
• Reduce that by the liabilities that are no longer considered basis and you get ($28,763)
• Add current year decrease of $13,447 and you get ($42,210)
• Add in other increase of $42,211 and you get $1 tax basis
• Looks like you received $1 in distributions (selling price)
• So $1 tax basis and $1 selling price arrives at a zero gain.
• Enter all this into TT and the above should be reflected on form 8949 and then Schedule D.

[Mike9241]

what are the other increases/decreases? often the preparer will insert plugs to zero out capital in the final year. this may not add to your outside tax basis. If there is no explanation with the k-1, ask the preparer because we have no way of knowing. This could be taxable income of some sort. 

the current year amount should be the net loss reflected in part III

[StephenC]

Thanks Rick for responding.

The debt relief of -$28,763 should that be added to my distribution because it exceeds my remaining outside basis?

Cost Bases = 0

Sales Price = $28,764 ($1 Distribution + $28,763 Excess Debt Relief)

Capital Gain = $28,764

This is the part of confusion for me.  Please confirm

Thanks again

[StephenC]

I used Perplexity and Gemini AI and I received 2 different answers which is also different from Ricks.  This is why I am confused about debt relief when it is a Final K1.  What is the correct way?

Perplexity results:

How Basis and Distributions Work

When you receive a distribution (cash or property) from a partnership, it reduces your outside basis at the time of the distribution.
When you are relieved of partnership liabilities, that also counts as a distribution (deemed cash) and reduces your outside basis.

Here’s the correct order:

1. Adjust your basis for all K-1 items (income, loss, contributions, etc.).

2. Reduce your basis by all distributions (including actual cash and deemed cash from debt relief).

3. If the total distributions exceed your basis, the excess is recognized as a gain.

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Your Numbers, Step-by-Step

Step 1: Adjust Basis for K-1 Items (before distributions)

• Prior year outside basis: $140,922

• • Other increase/decrease: $42,211

• • Current year increase/decrease: $13,447

Subtotal:
$140,922 + $42,211 - $13,447 = $169,686

Step 2: Distributions

• • Cash distribution: $1

• • Debt relief (liabilities go to zero): $169,685

Total distributions: $1 + $169,685 = $169,686

Step 3: Basis After Distributions

• $169,686 (basis before distributions)

• • $169,686 (total distributions)

• = $0

Step 4: Is There a Gain?

• If distributions do not exceed your basis, there is no gain.

• If distributions exceed your basis, the excess is a gain.

In your case:
Distributions ($169,686) equal your basis ($169,686), so no gain is recognized.

---

Key Point:

You do not recognize a $1 gain.

• The $1 cash distribution is already included in the total distributions that reduce your basis.

• You do not subtract it twice.

---

Summary Table

Item Amount

Adjusted Basis (pre-distribution)	$169,686
Debt Relief	$169,685
Cash Distribution	$1
Total Distributions	$169,686
Basis After Distributions	$0
Capital Gain	$0

---

Conclusion

You do not have a capital gain.
Your total distributions (cash + debt relief) exactly equal your outside basis after all K-1 adjustments.

If you have more distributions than basis, the excess is gain. If not, there is no gain.

Gemini Results:

Here's how to approach calculating your outside cost basis, sale price, and capital gain for a limited partner in a real estate partnership, considering the information you've provided:

Understanding the Key Concepts

 * Outside Cost Basis: This represents your basis in your partnership interest. It's an evolving number that starts with your initial investment and is adjusted annually by various items, including your share of partnership income/loss, contributions, distributions, and changes in partnership liabilities.

 * Debt Relief: When a partnership's liabilities decrease, and you are relieved of your share of that debt, it's treated as a deemed cash distribution to you. This reduces your outside basis and can potentially create a taxable gain if it exceeds your basis.

 * Sale Price: For a partnership interest, the "sale price" isn't just the cash you receive. It also includes your share of any partnership liabilities from which you are relieved. This is a crucial point often misunderstood.

 * Capital Gain: This is calculated as your Sale Price minus your Adjusted Outside Cost Basis at the time of sale.

Breaking Down Your Numbers

Let's use the information you've provided:

 * Last Year Outside Cost Basis: $140,922

 * Last Year Liabilities (included in basis): $169,685

This Year (Final K-1):

 * Current Year Increase/Decrease (from ordinary business income/loss, etc.): -$13,447

 * Other Increase/Decrease (often includes separately stated items like depreciation recapture, Section 1231 gains/losses, etc.): $42,211

 * Withdrawals & Distributions: -$1

The Missing Piece: Debt Relief

You mentioned "Last year outside cost basis is $140,922 This Includes $169,685 Liabilities." This indicates that your prior year's basis had your share of partnership liabilities embedded in it.

To determine your debt relief, you need to know your share of partnership liabilities at the end of this year (the final K-1 year). The difference between your share of liabilities at the beginning of the year and at the end of the year is your debt relief or increase.

Since it's a "Final K-1," it's highly likely that your share of liabilities at the end of the year is $0, meaning you are relieved of all your prior share of debt. If your K-1 (specifically, Box K on Schedule K-1 for limited partners, or a statement accompanying the K-1) doesn't explicitly show your ending share of nonrecourse and recourse liabilities, you would typically assume it's zero upon termination or sale of the partnership interest.

Assuming Debt Relief = Last Year's Liabilities ($169,685)

This is a common scenario when a partnership interest is liquidated or sold, and the partner is no longer responsible for any partnership debt.

Calculations

Let's calculate step-by-step:

1. Calculate Your Adjusted Outside Cost Basis (Before Debt Relief)

This is your starting basis, adjusted for the current year's activity excluding the impact of debt relief as a distribution.

 * Last Year Outside Cost Basis: $140,922

 * Add: Other Increase/Decrease: $42,211

 * Subtract: Current Year Increase/Decrease: -$13,447 (this is already a negative number, so we add it)

 * Subtract: Withdrawals & Distributions: -$1 (this is already a negative number, so we add it)

Adjusted Outside Cost Basis (before debt relief distribution) = $140,922 + $42,211 - $13,447 - $1 = $169,685

Wait, this looks familiar! This suggests that the "Current year Increase/Decrease" and "Other Increase/Decrease" along with the withdrawal effectively offset the basis adjustments, bringing it back to what looks like the liability amount. This is a common occurrence as your basis should generally equal your capital account plus your share of liabilities.

2. Determine Your "Deemed Cash Distribution" from Debt Relief

 * Debt Relief (Assumed): $169,685

3. Calculate Your Final Adjusted Outside Cost Basis

Your basis is reduced by the deemed cash distribution from debt relief.

 * Adjusted Outside Cost Basis (before debt relief distribution): $169,685

 * Subtract: Deemed Cash Distribution (Debt Relief): $169,685

Final Adjusted Outside Cost Basis = $169,685 - $169,685 = $0

In a typical scenario, your basis would be reduced to zero, and any debt relief exceeding your basis would generate a gain.

4. Determine Your Sale Price

Your sale price is the sum of any cash received and the amount of debt relief.

 * Cash Received (Withdrawals & Distributions): $1 (This appears to be a cash distribution, not necessarily cash received from a sale. If you received additional cash for the sale of your interest, that would be added here.)

 * Debt Relief: $169,685

Sale Price = Cash Received (from sale, if any) + Debt Relief

Assuming the -$1 is the only cash received related to the liquidation/sale, and it's a net withdrawal:

Sale Price = $1 + $169,685 = $169,686

If the -$1 refers to a prior distribution and you received no additional cash for the termination of your interest, then your sale price would solely be the debt relief. However, "Withdrawals & distributions -$1" strongly suggests a cash component. Let's assume this $1 was the net cash distribution upon final liquidation.

5. Calculate Your Capital Gain (or Loss)

Capital Gain = Sale Price - Final Adjusted Outside Cost Basis

Capital Gain = $169,686 - $0 = $169,686

Summary of Your Answers (Based on Assumptions)

 * What do I do with the debt relief?

   Debt relief of $169,685 is treated as a deemed cash distribution, reducing your outside cost basis. It also forms a part of your "amount realized" (sale price) for calculating capital gain.

 * What is my Cost Basis?

   Your final adjusted outside cost basis before calculating the gain from the deemed distribution is $169,685. After accounting for the debt relief as a distribution, your basis becomes $0.

 * What is my Sale Price?

   Your sale price is the sum of any cash received ($1) and the debt relief ($169,685), totaling $169,686.

 * What is my Capital Gain?

   Your capital gain is your Sale Price ($169,686) minus your Final Adjusted Outside Cost Basis ($0), resulting in a capital gain of $169,686.

Important Considerations and Next Steps

 * K-1 Review: Double-check your final K-1 very carefully.

   * Look for Box K (Partner's share of liabilities) at the beginning and end of the year. This is crucial for confirming the exact amount of debt relief.

   * Review any attached statements for additional details, especially regarding the disposition of your interest.

   * The "Current year Increase/Decrease" and "Other Increase/Decrease" lines can be complex. Ensure you understand what specific items make up those figures (e.g., Section 1231 gain/loss, depreciation recapture, etc., which might be reported separately on Form 4797).

 * Suspended Losses: If you had any suspended passive activity losses from prior years, the disposition of your entire partnership interest would allow you to deduct those losses. This would not affect your capital gain calculation but would affect your overall taxable income.

 * Recapture: A portion of your capital gain might be recharacterized as ordinary income due to depreciation recapture (Section 1250 gain for real estate). This is typically reported on Form 4797. Your K-1 should provide information if this applies.

[Rick19744 · Accepted solution]

The liabilities provided tax basis in order for the allocation(s) to meet the substantial economic effect test, and as such, provided outside debt basis (tax basis).

You have effectively "taken the distribution" by adjusting your tax basis as noted in my original reply (basis going from a positive to a negative in bullet 2 above).

Based on the facts provided, the initial response makes sense.

My response, as noted, is based on the limited details.  The response could change depending on what is flowing through other increase/decrease line.  But as noted, we have no way of knowing.

[Rick19744]

Perplexity arrived at the same end result as my response.

In a forum such as this, getting overly complicated in how you arrive at the end result makes no sense, as long as the end result is correct.

Additionally, Gemini also reflects the $1 sales price noted in my response.

Ai has a long was to go to understand tax law, law in general and generates fake cases that have been submitted to Judges.

Choose wisely.

[Mike9241]

the main issue among us is whether that $42K of other increase/decrease adds to your tax basis. different preparers do things differently, so we have no way of knowing if it does or doesn't.  it could represent some item of income or other item adding to tax basis or merely a plug which wouldn't to zero out the ending capital account. 

Because liabilities add to outside tax basis, losses (inluding those deductible and those that are not) can actually exceed your investment, thus schedule L which is supposed to be on the tax basis can have ending negative capital. liabilities are not included in schedule L. Outside tax basis at the beginning of the year was about $ 141K with liabilities allocated of about $170K which would seem to indicate that beginning capital in schedule L was a negative $29K. Losses (or at least some items in part III are a negative $13K giving you temporarily a negative capital account of about $42K.   That$42K which increases your capital account may or may not add to tax basis. 

according to the k-1 other increases/decreases requires an explanation which may be on line 20 or a supplement.