How to report "disguised sale" of a "part of my interest" in an LLC partnership

[itsmemrak]

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

[Anonymous]

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?

TT and even professional software would have no way to enter such info except to use those boxes on the TT k-1.  what's confusing is the parentheses and then the "-" sign.  i have to assume they're really positive numbers since there can't be negative 1250 gain 

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? 

there are many fields on a K-1 that go nowhere in TT and even pro software. This is one of them. they'll be no harm if you do not enter box 19 info

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.

there should be no need for any other entries in TT for this disguised sale.  if there were it would be in the supplemental info 

[itsmemrak]

Thanks HACKITOFF. My bad... Yes, the Sec 1250 recapture and long term capital gains should be positive as you state given that's income.

Based on your suggestions & my understanding, I did the following for this investment in TT. Would appreciate comments on whether all these seems right. Also have related questions.

Firstly, marked "Disposed of a portion of my interest in partnership during 2019". Then, chose "Sold Partnership Interest". Then provided proper Purchase & Sale Date.

Then for "Regular Gain or Loss" section:

a. Sales Price & Selling Expense - Left these blank (just like one would do in regular sale; given enclosed letter that says disguised sale treated same as regular sale). Question: Correct?

b. Partnership Basis - Using "Partner's Adjusted Basis Worksheet" provided as supplemental info. Question: Which one of the items below (or something else?) apply?

- Adjusted final basis of Partnership's Interest At-risk basis - Line 11 final value (OR)

- Is it the difference between Line 11 (final adjusted basis) & Line 1 (Adjusted basis from preceding year)?

c. 1250 Gain - Filled in the value ($13,223) from enclosed letter per info provided in original post. Question: Correct?

d. Ordinary Gain - Used value from "Ordinary Gain (loss) from Form 4797" provided in Statement A - QBI Pass-Through Entity Reporting (Info reported in accordance with Section 199A-6 Schedule K-1 Line 20, Code Z". Question: Is this correct given the only other gain value provided in enclosed letter is Long Term Capital Gain which I could provide elsewhere in TT questionnaire.

Per your response earlier, I assumed there were values in Boxes 9a and 9c (despite they being empty) and filled in values provided in enclosed letter as part of TT questionnaire. I also skipped the value in Box 19 and didn't use in TT questionnaire (in line with your suggestion & also enclosed letter that states there was no distribution per-se). Question: Is my understanding of your inputs and these actions correct?

In one of the TT questions - Section: Tell Us About your Section 1250 gain: Did your K-1 list any of your unrecaptured Section 1250 gain as coming from "Disposition of an interest in a partnership". Question: There is nothing that is explicitly stated in K-1. But in Item J, Part II (Partner's Share) - the checkbox for "Check if decrease is due to sale or exchange of partnership interest" is marked. And given there was a partial disguised sale, should I answer "Yes" for this question and mark the entire Section 1250 amount as coming from disposition (or) should I answer 'No'?

Question: How do we capture info in TT related to decrease in Item J value - Partner's share of Profit/Loss/Capital which went down given partial disguised sale? The TT questionnaire never asked anything towards this partial [disguised] sale resulting in lowered partnership interest.

Thanks

[Rick19744]

The facts are very limited, but, did you contribute property to this LLC?

If you did, how long ago was it?

[itsmemrak]

Hi CHAMP,

Thanks for the help.

No property contribution. I am one of 100+ investors who contributed cash as an individual limited partner in a LLC partnership. The LLC bought a multi-unit rental property as investment. This was in Q4 2015. In early 2019, a partial sale apparently was negotiated to an existing institutional investor, which is referred to as disguised sale in my original post. All of us investors who sold still continue to own a part which is proportionately reduced compared to prior to sale. Hope this info along with details provided in original post clarifies the situation. Would greatly appreciate any inputs that you might have on the various questions raised in original post and the one in response to HACKITOFF's reply.

Thanks