Final K1 Calculated Partnership Basis Same As Distributions/Selling Price

[NicDor]

When I crunch the numbers using the methods presented in previous forum posts, I get a capital gain of -0-;.  Cost basis same as Final distributions/liquidation price resulting in capital gains of zero.  But this can't be right because this should show significant gains.  The original investment amount was $25k.  I need help understanding what I'm doing wrong.  Thanks in advance.

Final K1 box checked

Part II

Box L  

Beginning capital account -282

Current year net income    34,389

Withdrawals and Dist        34,107

Ending Capital Account    0

Part III

line 2         2,850  Net rental real estate income

line 9C       5,978  Unrecaptured section 1250 gain

line 10      31,789  Net section 1231 gain

line 18W        250 Other deductions (DEBT FINANCED DISTRIBUTION INT)

line 19A    34,107  Distributions

line 20N      1,302  BUSINESS INT EXPENSE INCL IN RENTAL REAL ESTATE INCOME

The final partnership cost basis = -282 + 2,850 + 31,789 -250 = 34107

But box 19A distributions which should be the sale price is also 34107

subtracting there is a net capital gain of -0-

[Anonymous_]

@Rick19744 ?

[Rick19744]

While we don't have the history, based on the information presented, this makes sense.

As a partner in a partnership, you need to maintain a tax basis schedule.  This is your cost / investment in the partnership.  This begins with your capital contribution and is adjusted each year for the applicable boxes on your K-1.

A few years ago the IRS mandated that the capital account on the K-1 be reported on the tax basis.  While this may not be exactly the same as your tax basis, in most cases it is.

• Your tax basis begins with the (282)
• Next you factor in the current year activity that impacts your tax basis; this is the $34,389
  • $2,850+$31,789-$250
• Combine the $34,389 with the beginning negative $282 you arrive at your tax basis of $34,107.  This is the amount you report in TT as your cost basis.
• The distribution amount of $34,107 is your selling price which nets to zero.
• As you can tell from above, while the partnership passed through losses to absorb your initial capital contribution, there was a gain from what ever was sold at the partnership level represented by the amount on line 10 (and the rental income).  You will pay tax on both of these amounts on your current tax return.  While you pay tax on these two amounts, both of these amounts, as noted above, increase your tax basis.
• In summary, based on the facts presented, this makes sense.

[alex1907]

You're touching on an important and common observation in partnership liquidations. In a complete liquidation, the final Schedule K-1 does indeed show an ending capital account of zero, which means that over the years your basis has been adjusted by income, losses, and distributions until nothing remains. In other words, your adjusted (tax) basis has been fully "used up" by the time you receive your final distribution.

Here's the key point:

• Tax Basis Adjustments Over Time:
  Your tax basis starts with your initial investment and is increased by income items and decreased by losses, distributions, and certain other adjustments (like syndication expenses, if applicable). These adjustments accumulate over the years.

• Liquidation Outcome:
  When the partnership is liquidated, the final distribution you receive is intended to return your remaining basis. If the final distribution exactly equals your adjusted basis, then your recognized gain or loss on the liquidation will be zero—because there's no excess received over (or shortfall compared to) your basis.

• Your Observation is Correct, Generally:
  Yes, if the final K-1 shows that your ending capital account is zero and the final distribution equals the final adjusted basis, then for tax reporting purposes your "sale price" equals your cost basis, and you report no additional gain or loss.