Final K-1 for Rental Real Estate LLC Question

[user17752306785]

I received a final K-1 for an LLC which sold it's only rental property and dissolved in 2025.  My personal K-1 (as a limited domestic partner) includes entries on Line 9c (unrecaptured section 1250 gain) and 10 (net section 1231 gain).  TurboTax allows me to enter these numbers directly (along with partner's share, beginning and ending capital accounts, net income (line 2), and distribution).  Once I check the "final K-1" box, I'm prompted to enter a lot of information on the sale.  I don't have this information nor do I think I need it.  My personal gain, based on my ownership percentage, is reported on the K-1 and was derived from the sales data/basis of the LLC then spread among all the LLC members.  However, TurboTax will not remove errors unless I complete the sales data (which again, I don't have as my percentage of the total gain is reported on the K-1).  I used the "ask an expert" feature and neither of the three different people I spoke with seem to have a clue.  Any idea how I can get past this hurdle?

[Rick19744]

There are two separate  transactions based on your facts:

• There is the entity level transaction(s) which is reflected on your K-1.  This information is input into TT as are all other applicable items on the K-1.  Since there is no tax at the partnership level, these items are passed out to the partners and the tax implications are reflected on the form 1040.
• Then there is the gain / loss at the partner level that needs to be addressed and those are the questions that you are most likely referring to and do not understand.  This is the partners overall gain or loss on the investment in the partnership.
  • As a partner, you should be maintaining a tax basis schedule of your investment in the partnership
  • This begins with your capital investment and is adjusted annually for the applicable items on the K-1.
  • You need to update your tax basis schedule for the applicable items on your final K-1.
  • You then need to input into TT
    • Your proceeds distributed as a result of the "liquidation" of the partnership
    • Your tax basis (cost basis)
    • Any depreciation recapture that might recharacterize what would normally be capital gain into ordinary income.

[user17752306785]

Thank you for the response Rick19744, this is helpful.  To make sure I understand correctly, there are two parts to this:

1) The gain/loss for 2025 during the normal course of business of the LLC, and

2) The gain/loss from the sale of the rental property and dissolution of the LLC.

I believe all of this is reported on my K-1, and I have input it all into TT.  For item 1, my K-1 reports net income in box 2, which I entered in TT.

For background related to item 2, each partner in the LLC made the same initial investment at the same point in time and owned the same percentage over the life of the LLC (and also made the same capital contributions, took the same distributions and depreciation, etc.).  As such, the LLC's accountant calculated the total gain on the sale at the LLC level, then allocated that to each partner equally.  My K-1 directly reports the unrecaptured section 1250 gain (box 9c) and the net section 1231 gain (box 10), as well as the 2025 net income (box 2) and the distribution (box 19).

Based on a memo I received  from the LLC's accountant (which stated what they calculated as the total gain on the sale), they also noted:

• The partnership's 1231 gain is allocated to each partner based on each partner's ownership percentage.
• Each partner will report their share of the 1231 gain on their individual tax returns.
• We expect the 1231 gains to be taxed as 1250 gain as this will be a recapture of depreciation taken over the years.

Am I missing something in thinking the 1231/1250 gains reported directly on the K-1 represent the gains you note that I need to input in TT (last three bullets - proceeds, cost basis, and depreciation recapture)?

[DianeW777]

No, you're not missing anything. Once you enter the K-1, be sure you see a gain on Form 4797 and Schedule D. Keep in mind that the land portion of the sale will be Section 1231 (if applicable) and the building portion of the sale will be Section 1250. As you indicated all figures (net results) are reported on the K-1.

For this reason, it's important the net proceeds do flow to the appropriate location, starting with Form 4797, following to Schedule D and then either a Schedule D worksheet or a Qualified Dividends and Capital Gains Worksheet depending on your tax return.

If you are using TurboTax Desktop you can switch to Forms and review all forms and worksheets. If you are using TurboTax Online you can print your return before you file to review all the details.

You have access to all forms when you choose to print your return in TurboTax Online/Mobile.  However you are required to pay before printing, but do not have to file until you are ready.

• Can I print a copy of my return in TurboTax Online before filing?

It's likely all numbers will flow correctly, however a sale has not always been reported on the K-1 in the past. 

If not, then you can report the sale of your partnership using the information below. Since you have the net profit you can enter only the sales price, date and description. The cost, and depreciation would be zero in your situation. Keep your K-1 and any additional information documents in your tax file.

Sale of Business Property:

1. Income and Expenses at the top
2. Scroll down to Other Business Situations
   • For TurboTax Desktop: Business Income and Expenses > Less Common Business Situations
3. Select Sale of Business Property
4. Select Sales of business or rental property that you haven't already reported.
5. Answer 'Yes' to Do all of the following apply...?
6. Enter your sales information:
   1. Description of the Property (Machine Type)
   2. Sales Price/Sales Expenses 
   3. Date acquired and date sold
   4. Cost
   5. Depreciation

@user17752306785 

[user17752306785]

Thank you for the response, @DianeW777  This is very helpful.  I have the desktop version and looking at the forms, the gain does appear to flow to all of the appropriate locations.  It is shown on Form 4797 (Line 7), Schedule D Tax Worksheet (line 22), and Unrecap 1250 Gain Worksheet (line 18).  My AGI is increased by the amount of the gain and the tax is calculated considering the gain as ordinary income (as it should be since it is recapture of depreciation taken over the years).

The problem comes in when I check the "Final K-1" box.  I then get error messages that require me to enter a lot of sales information.  I do not have these specifics since my portion of the gain is reported directly on my individual K-1.  I entered my best estimation of this information just to see what would happen and it duplicates (and double taxes) the gain.  Is this a glitch in the TurboTax error system?  The only way I can get it to let me file is to uncheck the "Final K-1" box, which is not technically accurate, although I do believe the tax is calculated correctly.

[DianeW777]

Of course. My advice is to file without checking the 'Final K-1' box. It seems clear the  numbers transfer properly. What is most important is an accurate tax return. The actual sale of a partnership can be a separate entry from the final K-1, but not in all cases.

You have the K-1 in your tax file and you should retain it for at least three years from April 15, 2026, since this actually ended the partnership. The partnership itself will notify the IRS about it being the final return.

If the IRS ever wants to see it you would be notified. 

@user17752306785 

[Rick19744]

Please review my previous reply.

You have currently entered the first part of the transaction; this is the gain at the partnership level that is passed out to the partners.

When you mark "final K-1" you now are dealing with the second part of the transaction as previously noted.  This is the gain / loss at the individual level on your investment.  This has nothing to do with the gain at the entity level.

You should have been maintaining your tax basis beginning with your initial capital contribution and adjusting it annually for the applicable items on your K-1.

Now you need to adjust your tax basis for the applicable items on your final K-1.

If your liquidating distribution amount exceeds your tax basis, you will have an overall gain that needs to be reported.

If you liquidating distribution is less than your tax basis, you will have an overall loss that needs to be reported.

Once again, this part of the transaction has nothing to do with the gains and losses that were passed out to you and the other partners on your K-1.

This second part of the transaction is what needs to be addressed or you have not accurately reported the overall transaction.