I disposed of a major bust of a PTP only to have the final K-1 tell me I made money on it??? Please help!

[C Dog 99]

I'm hoping someone here can wake me up from this nightmare. Or just put me out of my misery...

4 years ago I made the dumb mistake of buying a PTP through my broker thinking it was a stock with great dividends.  Oops.  Four K-1s later, after dutifully entering all the data into TT Premier and paying whatever taxes it told me to pay while the PTP price tanked, I decided to finally get rid of all the units of this disaster in 2020.  I was excited to end this ignorant chapter of my life.  Oh no, the PTP wasn't done with me yet.  Here's a summary of my situation.  Does this sound right????

- I invested ~30K in the PTP

- I only received 1805 in distributions total, the last of which occurred in 2018

- Each year TT had me paying taxes on the Box 3 rental income, Box 5 interest income, and Box 9a Net Long Term Capital Gain income, even though I never saw a penny of this income, all the while Box 1 ordinary income was racking up losses

- By 2020 I have accumulated about 73K of passive ordinary losses and about 5K of section 1231 losses, and paid taxes on about 6600 of never received rental income, 160 of never received interest income, and 140 of never received capital gain income

- I dumped all the units for about 4K, so looking at a 26K long term capital loss just on face value of the trade

Then I get my sales schedule with the K-1 and it gets worse:

- It says my adjusted cost basis is -80K (an adjustment of -110K)!  So my total gain is 84K?

- It says that my ordinary income to be recaptured is +87K!  That's more than the losses I have accumulated can cancel out.  Where was all this income the past four years? Where is it now? 

- After filling in the blanks on the sales schedule I get a total gain of 84K, ordinary gain of 87K and capital gain (loss) of -3K.  After using up all my passive ordinary losses that still leaves me with 9K in ordinary income to pay tax on and just a 3K capital loss.

I just want to take my 26K long term capital loss, and be able to deduct about 7K of the income that I never saw but already paid tax on because of this investment.

So before asking any specific questions I just have to know, am I missing something??  Does any of this sound right?? This investment has at no time made any money and yet I've been paying taxes on it, and will pay more taxes on it even after I got rid of it! 

Thank you to anyone that can enlighten me because I'm in a pretty dark place right now!

[Mike9241]

the PTP should have provided you with a sales schedule that will allow you to compute the capital gain/loss on disposition.  sadly only $3,000 of net capital loss can be used in a year.   we can't see what you entered each year from the k-1.  ordinary loss on line 1 would be netted with rental income on line 2 (and any other items of passive gain or loss.  if the net is a loss for the year that loss is not deductible (you needed to check the PTP box on the K-1).  then the loss from that year is carried forward to next year and any net passive loss for the following years would be accumulated and be deductible in the year 2020 when you made a full disposition.  you must check the box for full disposition.  you also have to enter some sales info.  the 1099-B does not have your correct tax basis that can only come from the PTP sales schedule after taking into account any ordinary income on disposition. Your tax basis would be the amount in the column labeled cost basis + the column labeled something like "gain subject to recapture as ordinary income"

on the k-1 sales schedule enter on line 5 the gain subject to recapture as ordinary income, line 7 basis = 0

line 9 the same amount as on line 5. this will flow to form 4797 line 10.

[C Dog 99]

Thank you for the reply.  I'm working with those numbers right now.

First I should say that TurboTax never let me cancel out my Box 3 income with Box 1 losses.  In fact, it wouldn't even let me enter those two boxes in the same K-1 entry - it made me create two separate K-1 entries. One for ordinary business income, and another for other net rental income.  The "ordinary" K-1 kept racking up losses, and the "rental" K-1 kept generating "income" that I never received, but payed actual taxes on.

I did receive the final K-1 and Sales Schedule from the PTP, and as you said my tax basis *should* be the amount in the column labeled cost basis plus the column labeled "gain subject to recapture as ordinary income". In my case I get: -80K + 87K = 7K.  But I sold all my units for 4K, leaving me with only a 3K loss!

Now the one thing I do know for sure based on my bank account is that I definitely lost 26K with this investment, along with losses associated with paying taxes on income I never received.  When I deduct my 78K worth of carryover losses from the 87K recaptured ordinary income on my sales schedule, I'm still left with 9K of imaginary income that I have to pay taxes on.  This is where I'm lost.  According to Sales Schedules and TurboTax even after disposing of my units at a loss and never receiving any income, I somehow have 9K of gain to pay tax on with only 3K of capital losses.  Something isn't right and I can't figure it out.

Thank you so much for your help!

[ksb2]

One thing that you should be able to do is carry forward you losses indefinitely to offset you taxable gains.  You will also be able to write off a 3K loss each year against ordinary income .  If you do not have gains to offset with the losses, you carry them forward to the following year.  It is to your advantage to offset short term losses against short term gains and long term losses against long term gains for maximum savings.

As indicated in another reply, Turbo Tax makes you separate your K-1 forms into separate K-1s if there are more than one input in boxes 1, 2 or 3. that will produce a Turbo Tax error message.  This is the first year that Turbo Tax asks a question in the interview about this, but it would be nice if Turbo Tax could fix this error and allow an input as received on the K-1 forms from the PTPs. 

Also, if you have any 20Z entry, find my reply to several others concerning how to handle this issue so as to avoid getting a Turbo Tax error message and allow you to complete your taxes. The entries required will be on a separate schedule A or supplemental information along with your K-1 from the PTP.

The main reason why PTP's issue a K-1 is that they pass along the tax responsibility to the Limited Partners, so that they do not have to pay corporate taxes as a corporation.  In return, they must pay out 90% of their profits to investors.to qualify as a PTC (BDC, REIT or otherwise) .  So when you see high yield, be aware that you will be paying the taxes which will either true return.  If it is a ruturn of capital, it will lower your cost basis.  If it also lowers the NAV  of your holding, it is actually diluting your investment, if however the NAV is increasing than you investment is increasing in value.

Hopefully this insight is somewhat helpful to  gain a better understanding of PTPs

Hope this is somewhat helpful.