K1 for a partnership that closed in 2018 notes sch L syndication costs may be deductible as a capital loss. How do I do that?

[scpanish]

I invested in a REIT in 2008 which ended in 2018 (and didn't make much $$).  The K1 Part II section L "Ending capital account" ends up at 0, but there is a note that says "Included in your schedule L is your share of syndication costs which may be deductible as a capital loss" with the amount at nearly $3K.  How do I take advantage of this using TT and how do I know if the amount is indeed deductible?

Also, what is the proper way to indicate to TT H&B or on the IRS forms that the partnership was closed out?  Which type of disposition is correct?

[Rick19744]

A couple of questions:
1) Have you maintained a basis schedule of your investment?
2) Section L of your K-1.  What box is checked?
3) Section L of your K-1.  Is your beginning capital positive or negative?
4) Do you have suspended losses?
5) Do you have an amount reflected in box 19 code A?

[scpanish]

Thanks for the quick response!  This is the first time I have closed out a K1.  Here are answers, as best I can give them:

1) No - but I know the original investment and I have all the K1s.  I presume that is what is tracked in section L of the K1.   I also have the annual accounting statements, somewhere, on file.  I think.

2) GAAP

3) Positive.  Beginning capital = 3080.  Current year increase -3007  Withdrawal/Distrib -73  (that was the final distribution)  Ending capital  0

4) No suspended losses.

5) box 19, code A is the $73 final distribution.

Thanks in advance for the help.  If it's no go so be it.

Steve

[Rick19744 · Accepted solution]

Ok.  Based on your responses:

• Since Section L is GAAP, you need to determine your tax basis in the investment.
• Since Section L is GAAP, my question #3 is moot.
• To determine your tax basis, you start with your original capital contribution.  This beginning amount is adjusted annually by the applicable lines on your K-1.  Below I will include a link to the K-1 instructions that has some guidance on maintaining your basis schedule.
• Once you have determined your basis through the final K-1, add the $3,000 syndication costs to your basis based on the note to your K-1.
• Now you are ready to determine your overall gain or loss.  If you still have a positive basis after adjusting for the final K-1 and liquidating distribution, then this is a long term capital loss.  If your basis is negative, then you have a long term capital gain to the extent of the negative figure.  These amounts are reported on Schedule D and the applicable form 8949.
• Make sure you indicate in the K-1 input area that this is the final K-1.

https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf

The basis discussion and worksheet is on page 3 of the K-1 instructions.

[scpanish]

Thanks Rick.  Very useful.  Kind of annoying that the REIT didn't do the work.  Steve

[Rick19744]

Welcome

[cdrover]

I know this question was for 2018 taxes, but I'm working on my 2019 taxes and had a similar situation.

I don't think your answer was entirely correct. The $3,000 should be treated both as an increase in his tax basis AND as a distribution (tax basis reduction).  Thus, this would not change his tax basis in this investment.  In my situation (K-1 Sch L was Tax) the syndicated costs were used to zero out my capital account on the K-1 - a plugged amount?  Again, different K-1s so appearance may not be the same; however, the treatment as only an increase in partner's basis is wrong (likely resulting in an overstated loss or understated gain).

[Veehb]

I have this same question on my 2020 return.  The K-1 is a final K-1 and the entire investment is written off.  It shows beginning capital account of $26,500 and a current year net loss of $-25,000 and Other decrease of $-1500.  There is no entry on line 19 (Distributions) as there were no distributions.  This is a total write off.  The only help I have is a note attached to the K-1 that shows the -1,500 as an adjustment for syndication costs.  It states that Item L is Beginning Account Method used -- Tax Basis.  There is a footnote the says, "our share of the fund's capitalized syndication costs is: 1500.

You may be entitled too deduct these costs on your tax return.  Please consults your tax advisor.  

I don't have a tax adviser as I use Turbo Tax Deluxe.  If I enter the -25,000 in Turbo Tax as the current year loss and on the next line -1500 other decrease then there is nothing in the rest of the K-1 to document the -1500.  I think the companies account is lazy and doesn't want to tell us how to handle this.  

I'm afraid of an audit from the IRS if I file without more help from the K-1.   Don't want to file an amended return, really messy.  Don't see much help here, as you advice assumes there is an entry in the K-1 to explain the syndication loss.  Without another entry in one of the other boxes, doing the above doesn't write off the 1500 syndication costs.  I'm sure it is legal to do this, but how to do it without an audit from the IRS?

Thanks for your help.  Hope you see this!

[veehbj]

I have this exact same situation and the accountant for the failed limited partnership was too lazy to give me any help on how to handle the syndication costs. Mine is significant ($4245) and I'd like to be able to add  this to the total loss of this investment.  Surely someone reading this can tell us how to use Turbo Tax to account for the syndication costs.  The above  question is a few years old.  I need to file my taxes now (2024 for 2023).  Can someone give us a way to do this.  I've not been able to make Turbo Tax handle this.

Thanks for any help here.

Veehb

[veehbj]

I reviewed all the comments and advice here and decided to take the $4,245 Syndication Costs as part of the loss in this failed limited partnership.  I told Turbotax Premier that the total investment of $75,000 was lost and so had a long term loss of -$75,000.  I went through all the worksheets and found a few error.  I found the hard way that you must enter dates as month/day/year in this format:  12/31/2023 and not as 31 Dec 2023.  There is no error checking in Turbo Tax for date entry, and so Turbo Tax kept giving me a short-term loss as the date was entered wrong. The investment is over eleven years old and so it is a long-term loss.

So I forced the loss to be -$75,000 as it seems that if the investor pays the syndication costs (basically sales commission on the sale of the partnership interest) that they can be subtracted from the basis, allowing the total investment to be a long term loss, which can be carried forward to future years to offset future capital gains. 

I am still getting an error in Turbo Tax on the K-1 entry and I can see no way to find the error or fix it.  Seems like in previous version of Turbo Tax that entries could be overwritten and corrected.  I have an error on the Schedule K-1 At-Rick Limitation Allocation Worksheet for 2023.  The $75,000 loss was shown in the table as both a Portfolio long-term loss and as a Sale of interst long term.  Making the total loss $150,000.  I can see no way to correct this and have looked at every entry in the K-1 and nothing fixes this.   Doesn't seem to affect the K-1, but this is the only error I can find and can't fix it.  I still have error symbols on the K-1 Partner return and two other errors following it, K1P Addl Info and K1P Sec 59e,  I don't see any errors that I can identify in the K-1 itself. 

Sorry for this long entry.  If anyone has a suggestion as to how to get rid of this error on the K-1, I'd appreciate the advice.

Veehb

[Mike9241]

if your askikng about schedule L on the K-1, that's supposed to be tax basis

1065 K-1 instructions

Item L
The partnership must report your beginning capital account and ending capital account for the year using the tax-basis method, including the amount of capital you contributed to the partnership during the year, your share of the partnership's current year net income or loss as computed for tax purposes, any withdrawals and distributions made to you by the partnership, and any other increases or decreases to your capital account determined in a manner generally consistent with figuring the partner's adjusted tax basis in its partnership interest (without regard to partnership liabilities), taking into account the rules and principles of sections 705, 722, 733, and 742. See the Instructions for Form 1065 for more details.
For many reasons, your ending capital account as reported to you by the partnership in item L may not equal the adjusted tax basis in your partnership interest. Generally, this is because a partner's adjusted tax basis in its partnership interest includes the partner's share of partnership liabilities (and capital accounts determined by using the tax-basis method don't). In addition, your partnership may not have all the necessary information
Partner's Inst. for Sch. K-1 (Form 1065) (2023) 13
from you to accurately figure the adjusted tax basis in your partnership interest due to partner-level adjustments. You're responsible for maintaining an annual record of the adjusted tax basis in your partnership interest as determined under the principles and provisions of subchapter K, including, for example, those under sections 705, 722, 733, and 742. Regulations section 1.705-1(a)(1) provides that a partner is required to determine the adjusted basis of its interest in a partnership when necessary to determine its tax liability or that of any other person. For example, a determination is required in ascertaining the extent to which a partner's share of loss is allowed, when there is a sale or exchange of all or part of a partnership interest, and when a partner's entire partnership interest is liquidated. The adjusted basis of a partner's interest in a partnership is determined without regard to any amount shown in the partnership books as the partner's capital, equity, or similar account.

you're saying you invested $75,000. That's your beginning tax basis apparently 11 years ago

any losses or distributions reported on the k-1s during the ensuing 11 years would reduce your tax basis $ for $ while any income items would increase your tax basis

to start 2023 your tax basis assuming the partnership followed IRS rules and used tax basis would be the amount in beginning capital. Current year losses and distributions would reduce that while any income items would increase it. That's your tax basis for capital loss. if this is negative you actually have a capital gain

to use the $75,000, you initially invested as your tax basis would seem totally incorrect since it does not account for the partnership items reported over the past 11 years on the k1s.  Perhaps K-1s were never issued? Then run to a tax pro because in my opinion you have no proof as to your tax basis and thus are probably not entitled to any deduction. Using wrong numbers, if caught, can result in large penalties if the misstatements in your tax liability is large enough. even smaller errors resulting in underpayment are subject to penalties of 5% of the underpayment for the first 5 months and .5% after that and of course interest.

if you have a reportable loss, the way to handle this in Turbotax is to check final k-1 and partnership discontinued in 2023 boxes. Then in the disposition section of the k-1

1) check complete disposition

2) check either abandoned or liquidated interest

3) date dispose 12/31/2023 - any date in 2023 will suffice

4) date acquired xx/xx/ 201x any date that is long term will suffice

5) how acquired  - purchase

6) selling price 0 (line 5)

7) tax basis -  (line 7) see above 

😎 ordinary gain 0 (line 9) 0 must be entered

automatically the loss will appear as long-term on line 11

***

the at-risk form 6198 is only needed if you have current year losses that exceed your tax basis at the beginning of the year.

***

do not repeat reporting the loss on schedule d form 8949. 

[veehbj]

Mike 9241:

Wow!  Thanks for you very helpful reply to my questions.  I appreciate the time you took to help me.

I have rewritten my reply to your message to me yesterday.  Hope this is more readable!

Let me give you a little more background.  I am 82 years old and am a retired engineering manager, (BSEE and MEA).  I have had lots of experience over the years with Limited Partnership, Small Business, and Trust Returns all using Turbo Tax Business over the past 40 plus years.  Turbotax is much easier to use today than it was in the 1980s.  I'm using Turbotax Premier now as it handles my investment income very nicely.  I'm finding it more difficult to understand some complex things at my age. 

I purchased eight limited partnership interests from the same New York stock broker company in 2011 and 2012.  Seven of them have gone out of business leaving me no or very little return.   I have K-1s for each of them from the time I bought them until they were written off.

The partnership included in my 2023 tax return  filed a final K-1 and I'm closing it out with this 2023 tax return.  (I filed an extension in April). I have K-1s for each year since I purchased it.  There has been no business activity in each of these years.  The final K-1 shows in section L of the K-1 Beginning capital of 75,000, Current year net income (loss) of -70,755 and Other decrease  of -4,245 with Ending capital account of 0.00.  The notes on the K-1 list the -70,755 as a long-term capital loss and the -4,245 as "capital account adjustment for syndication costs" (I assume this is the sales costs when I purchased it in 2011).  There is no further help given, other than "Please consult your tax advisor". 

The information I've seen online indicates that syndication costs can be written off as part of the loss when a limited partnership is closed.  

I would like to enter the -4,245 as a loss and to take a total loss of -75,000 for 2023 .   I've spent time with the Partner's Instructions for Schedule K-1 (Form 1065) and don't see how to take this additional loss.  Can you suggest how to account for syndication costs in Turbotax Premier?  The instructions for the "Worksheet for Adjusting the Basis of a Partner's Interest in the Partnership" are not very helpful.  I don't see any of the entries in the worksheet to decrease a partner's interest that are applicable.   I can made an entry to increase a partners' basis by making it negative and it creates a loss, but not sure that is the right way to do this. I made "Other increases to basis" negative and added an explanation that it was "syndication costs"and that created a reduction in basis.  But, I'm not sure that is right.   Do you have a suggestion as to how to account for the loss from syndication costs?

Thanks again for your help with this.  I see that several others have had similar questions about closing out limited partnerships with syndication costs.  I'm sure other are appreciating your help with this!  I just rewrote and shortened this entry.  Hope it is easier to read now.

veehbj