Final K1 tax computation Schedule D vs 4797

[t4tax19]

I received a 'Final K1' with following details:

Part 3, Box 2 (Net rental real estate income): 10000

Part 3, Box 10 (Net section 1231 gain): 100000

In TT, I selected the following answers

Describe the Partnership: "This partnership ended in 2021."

Describe Partnership Disposal: "Complete disposition"

Tell Us About Your Sale: "Sold Partnership Interest"

Sale Information:

   Sale Price: 110000 (from final distribution)

   Partnership Basis: 45000 (50000 initial capital - 5000 prior distributions received)

This seems to be resulting in double counting.

a. On 'Schedule D' Part 2 long term gains: 65000 (110000 - 45000)

b. On 4797 line 10: 65000 (from a above)

     On 4797 line 11: 100000 (from k1 Part 3, Box 10)

     resulting in 4797 line 15: 165000

Capital gains seem to be double counted  in 4797 (once from K1, and once from 8949) resulting in overall gains roughly 2x of the net income I generated from this.

What am I missing?

[PatriciaV]

The final distribution you received is NOT the sales price, if you did indeed sell your partnership interest. If the partnership dissolved and you didn't receive payment from a third party (or another partner) for your interest, indicate that you disposed of the investment, but not by selling it. If you were paid by a third party, then the amount you received for your interest would be the sales price.

If you received a final distribution that was reported on your final K-1, your ending adjusted basis should be reduced by that distribution. The calculation would be:

• Initial Contribution
• Less: Total Distributions
• Plus or Minus Net income/loss allocated to you since inception
• = Final adjusted basis

The IRS provides a Worksheet for Adjusting the Basis of a Partner's Interest in the Partnership to help you make this calculation correctly.

If you received total distributions that exceed your adjusted cost basis, any amount over your basis is taxed at the ordinary income tax rate and is not capital gain.

Please note that the Capital Account Analysis that appears on Schedule K-1 is not necessarily your true investment basis. Be sure you include the net income information from your final K-1 when completing the IRS worksheet.

[t4tax19]

Thanks, I am wondering now if I should be selecting 'Disposition was not via a sale' in 'Describe Partnership Disposal' question.

I didn't do anything specific to 'sell' the partnership: The partnership managed real estate, and sent me a 'Final' K-1.

[PatriciaV]

Since you did not sell your interest to a third party, you should be selecting "Disposition not via a sale" or "Complete disposition." Either one will finalize this investment.

[t4tax19]

There seem to be huge differences in "Disposition not via a sale" vs "Complete disposition"

For "Disposition not via a sale" it only asks for sale date, and does not ask for Sale information.

On Schedule D, line 10 is empty, and line 11 reflects K-1 details which populates form 4797.

For "Complete disposition" followed by "Sold Partnership Interest" in the next screen, it asks for Sale information.

These details are then transferred to Schedule D line 10, and aggregated along with details on 4797.

This results in 'double counting'

In both cases, prior year depreciation etc. are ignored and the profits are treated as capital gains.

[PatriciaV]

Since you received no sales proceeds, it's appropriate to choose "Disposition not from a sale." You may have a capital gain or loss, depending if you still have basis in the investment after reporting the final income/loss and distribution. But do not enter any "sales" information, because you did not sell your interest.

[t4tax19]

To be super clear here, 

a. I received a 'final K1' from an LLC managing real estate.

b. The LLC sold the real estate, and I received extra distributions due to the sale 

c. This distribution is included in the K1

If I chose "Disposition not from a sale", looks like form 4797 captures K1 details, and its taxed as long term gains. It completely ignores any prior year cost basis adjustments.

Is this the right way?

[PatriciaV]

Yes, this is the correct way to enter your K-1 and report the disposition of your investment. However, closely review the information you have entered for your basis. Use the IRS worksheet mentioned above to calculate your final basis after including the current K-1. You may have a long-term gain or loss, depending on the amount of your basis in the investment at the time of dissolution.

[t4tax19]

Thanks a lot of clarifying this. Couple of follow ups:

a. The challenge is that TT doesn't provide a way to enter the basis if I select "Disposition not from a sale": does this need to be carrier over to next year?

b. In the IRS worksheet, is line 4a copied over from K1, part III line 2 (Net rental real estate income)

[PatriciaV]

1 - You'll need to update your basis at the beginning of the Schedule K-1 interview. Look for the page "Enter Capital Account Information." You can enter your own numbers here, rather than the Capital Account Analysis from the K-1. Bottom line: make sure the Ending Capital Account matches the final adjusted basis you have calculated.

2 - Line 4a would be the total business income reported to you. If the primary business function was rental real estate, then this would be the net income from that activity.

The essential function of the worksheet is to organize the items that affect your basis. As long as you add income and gains, and subtract deductions and losses, you should be fine.

[vigneshj]

Did you resolve this issue? I have a similar problem as I posted here

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/final-k1-schedule-d-c...