Business & farm

StephenC · ‎May 25, 2025

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:

Adjust your basis for all K-1 items (income, loss, contributions, etc.).
Reduce your basis by all distributions (including actual cash and deemed cash from debt relief).
If the total distributions exceed your basis, the excess is recognized as a gain.

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.