@luckydogz The Sched E losses partially (or fully) offsetting the Ordinary Income is normal. That's how it should work. The reason can be a bit complicated (for MLPs, its primarily the accounting for depreciation), but consider a simple example:
Pretend partnerships have just been invented in the tax code.
- A smart accountant puts $10,000 into the partnership.
- They create $10,000 in losses (line 1 on the K-1), through accounting gimmicks, bringing basis to 0.
- They sell the partnership for $10,000.
Obviously, this should not affect their taxes. $10,0000 in. $10,000 out. EXCEPT, In this case, they have $10,000 in losses that pop up on Sched E and offset normal, W-2 like, income that's taxed at normal tax rates. And they have a $10,000 Cap Gain (because their basis was reduced to 0) on Sched D, which is taxed at a reduced rate. So they actually reduced their overall tax bill with this "partnership".
So the IRS got smart, and said that the gain on sale would have to be looked at to see how much of it would actually be Cap Gain, and how much of it would be "Recapture as Ordinary Income". That's where all this comes from. So for this hypothetical example, the Sales Schedule would have shown $10,000 as Ordinary Income, and the tax bill would have been a ($10,000) loss on Sched E, a $10,000 Ord Income gain on 4797, and $0 for Sched D
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**Note also, I'm not a Tax Preparer/CPA. Just a volunteer, seasoned, TurboTax user.
Use any advice accordingly!
