LP in Private Real Estate syndication - How to answer K-1 Part II Line K: All investment in Partnership at Risk?

akf3 · ‎September 12, 2021

I've read Partner's Instructions for Schedule K-1 (Form 1065) and various explanations on At-Risk restrictions and am still not 100% clear. My question is not about the At-Risk restriction but whether "all my investment is at-risk"

I am an LP in a Real Estate syndication, where I invested $xxx cash. My K-1 Part II, Line K shows Partner's (my) share of Non-recourse liabilities and Qualified nonrecourse liabilities, presumably for loans taken out by the sponsor to finance the acquisition and development of real estate properties. Line L shows my Beginning and Ending capital accounts.

Turbotax then asks "All Investment in Partnership is at-risk?" - Do I say "yes" because by "All investment..." they mean the $xxx cash that I invested in (ie. partner level) since I can theoretically lose all $xxx if the real estate deal goes south?

What if my share of the nonrecourse and qualified nonrecourse financing amount is greater than my Ending capital account? (my share of nonrecourse liability is $10K, qualified nonrecourse financing $42K, and my ending capital account balance is $45K.). Does that matter?

Turbotax also asks "Some investment in Partnership is not at-risk?" Are they referring to my share of the non-recourse liabilities (since LPs are not liable for such liabilities etc), or referring to some situation where I may have guarantee not to lose my money (unlikely).

I believe the right answer is "yes, all my investment in partnership is at risk" in such case, but I wanted to make sure I didn't misinterpret.

GeorgeDenseff · ‎September 12, 2021

Almost always the answer is that all your investment is at risk.

An amount not at risk exists when there is a part of your investment basis that you are protected from losing. This might occur because: You bought your interest in the business with money that you borrowed through a non-recourse loan. Since you are not personally responsible for the debt, you are considered not at risk for that borrowed amount.

akf3 · ‎September 12, 2021

Thanks. Just to confirm, regarding not-at-risk, when you say "....if you bought your interest in the business with money that you borrowed through a non-recourse loan" --- are you referring to me as the LP borrowing a non-recourse loan? You are not referring to my share of the non-recourse liability reported by the partnership (as reported in in Line K) because they took on a loan that was non-recourse ?

Mike9241 · ‎September 12, 2021

here's a worksheet that you can use form 6198 is a form used to compute any at-risk limitation.

https://tax.thomsonreuters.com/content/dam/ewp-m/documents/tax/en/pdf/other/quickfinder-updates/qpep...

however, more simply, in general if you k-1 is prepared on the tax basis and your capital a/c is positive at the end of the year you're at-risk

only if your tax basis capital account is negative do you have to determine what liabilities can be added back to make the total positive meaning your at-risk

Rick19744 · ‎September 15, 2021

Some additional comments:

As a partner in a partnership you should be tracking your tax basis in your investment. Knowing what your tax basis is, will provide you with the answer as to whether or not you are at-risk. This is also necessary as without understanding your tax basis you will not know whether any losses are deductible or the eventual gain or loss when disposed.
For 2020 tax returns, your K-1 information should be presented on a tax capital basis. In general, this should agree to your tax basis; with the exception of any liabilities that provide you with at-risk (a discussion of liabilities and tax basis is beyond the scope of this discussion).
I would tend to believe that your K-1 item L has been maintained on the tax basis all along and I would think that there would be a notation in an attachment to your K-1.
Hopefully you are maintaining your own tax basis and your figure agrees to the K-1.
If your tax basis is positive, you are at-risk.

*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.

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LP in Private Real Estate syndication - How to answer K-1 Part II Line K: All investment in Partnership at Risk?

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