Hi - I received my K-1 from LLC along with a letter explaining aspects of the disguised sale. I am seeking help to properly capture the right info from K-1 and enclosed letter received, in relevant fields of Turbo Tax.
(a) The enclosed letter with K-1 states the following to account for income from disguised sale:
"A disguised sale is treated the same way as an actual sale for US federal income tax purposes…….Below is the breakdown of depreciation recapture and long-term capital gain:
Section 1250 Depreciation Recapture (-$13,223)
Long Term Capital Gain (-$20,277)
Please also note that the amount of taxable income you must report and cash you received will not be the same.”
Note: There is no amount mentioned in Boxes 9a [Net long term Capital Gain (loss)] and 9c [Unrecaptured Section 1250 gain] in Part III of K-1.
Note: In Part II Section J of K-1, I do have Ending Value of Partner’s Share less than Beginning Value rightly so given disguised sale. I also have proper values provided in Section L (Capital Account: Tax Basis method) of Part II. I also have detailed supplemental info in the form of “Partner’s Adjusted Basis Worksheet”.
(b) The enclosed letter with K-1 also states the following:
“Unlike prior years, you will not have a distribution indicated anywhere on the K-1. The disguised sale is NOT considered a distribution from the partnership but rather proceeds from the sale of a portion of your interest in BlahBlah LLC. Accordingly, no distribution is reflected on the K-1.”
Note: But interestingly, Box 19 in Part III of K-1 does have $33,500 with code A (for cash received). This apparently contradicts what is stated in the enclosed letter – i.e. last sentence cited in the paragraph above.
My Comments/Questions
Presume that I have to select that I had a partial sale for this LLC in Turbo Tax, similar to what we will do for a regular (not disguised) sale of full/partial interest.
Question 1: Given that I have no values in Boxes 9a and 9c in Part III of K-1, how do I account for the income from disguised sale (the split values in item a. above)? Should I assume those values to have been in Boxes 9a & 9c? If not, how to handle?
Question 2: Should I ignore the value in Box 19 and not fill it as such in Turbo Tax questionnaire about various boxes in K-1? If not, how else to account for this scenario?
Question 3: Can you please clarify how to account for filling the various fields in Turbo Tax related to partial sale of interest in the LLC partnership? Ex. Sale Price (which is usually 0 for full sale in relation to Final K-1); etc.
Thanks
