Annual how do I enter sale of MLP question

[nexchap · Accepted solution]

@mwh1 You have suspended losses that get reported on Sched E, and the amount is probably very large.  Those losses lower your cost basis, which can be abused by good tax accountants:  the Sched E losses reduce your taxes at Ordinary tax rates, while the offsetting Cap Gain is taxed at Cap Gain rates.  So the IRS requires that the losses be reexamined at sale and where they're not real (e.g., depreciation of an asset well below its market value) be reclassified away from Cap Gain to Form 4797 income.

In the end, you're still taxed on about $11k.  Its just that its at a combination of tax rates, and the $11K is showing up on Sched D, E, and Form 4797.

[mwh1]

Gotcha -- and you're right about schedule e.  Now I can just about push the e-file button.  Couldn't have done it without your guidance!

[Mike9241]

with the K-1 there should have been a sales schedule where the ordinary gain (depreciation recapture on disposal of your interest - labeled as 751 gain or ordinary income gain or some similar wording) is reported. this should also be in box 20AB of the k-1. the IRS gets this info so if you don't report it expect a tax notice. 

You use the sales section in the Turbotax K-1 to report this ordinary income on the sale. report it as sales price.

basis is 0

ordinary income is equal to the sales price.

you do not report the capital gain/loss here

for the capital gain/loss reporting look at the sales schedule. This is reported on from 8949/1099-B and the cost shown is not correct. It's as follows and should be on the supplemental sales schedule: 

a) what you paid originally

b) +/- cumulative adjustments to basis. your preliminary cost basis is a) +/- b) or if there's a column that says cost basis use that

c) to the cost basis you add the ordinary income reported in the other section

d)your capital gain/loss is your sales price less the adjusted cost basis. 

cost basis before ordinary income adjustment - you missed something like the income & losses reported over the years you held it 

1) what you paid

2) + profits/income   - losses/deductions reported for all years of ownership

3) - all distributions received for all years of ownership

-2) and 3) are why the sales schedule reports as the cumulative adjustment to basis.

what no one told you is that most PTPs have depreciable personal property. when you sell your interest that depreciation is recaptured as ordinary income

so yes you now have $84K of ordinary income that will be offset, in part, by any suspended losses of the PTP.

the longer you hold a PTP the more the recapture. This will reduce the capital gain and can even create a capital loss

If you want to check your cost before the ordinary income adjustment look at the ending capital account on your 2022 K-1 schedule L. That should be your tax basis at the end of 2022/start of 2023

to that add profit or subtract loss for 2023 that's also on schedule L and finally subtract the distributions in box 19

[mwh1]

Thanks - I think I've got all that.  

New question - the sales schedule says "gain subject to recapture as ordinary income" should be reported as a negative adjustment in column G of form 8949.   

Column G is currently blank on my form 8949.  Do I need to fix this, and if so, can you tell me how?  

Thanks again.

[maynard7]

If I sell my MLP which has both long-term and short-term gains, do I have to create two separate K-1's on TurboTax or can I somehow combine the long and short-term gains to have only a single K-1 entry?  Thank you.

[nexchap]

@maynard7 Nothing on the K-1 itself is affected by the holding period of the different lots.  If you follow the instructions elsewhere on this thread, your LT/ST Cap Gain/Loss is handled entirely in the 1099-B section.  The only thing that the K-1 Sales section deals with is the Ord Income, which isn't affected by holding period.  Just enter 'various' for the dates when asked.

[entsrgn19]

Maybe I'm missing something, but in the year 2024, if you zoom in to forms view, it says right above the section where you enter your MLP/PTP sales info, "If this is a full or partial disposition of a PTP or MLP that was reported to you on a form 1099-B, enter sales price of zero on line 5 and a basis of zero on line 7 below. Enter the 1099-B transaction on Schedule D, checking the appropriate "Reported on 1099-B" box A or B.

I take that to mean if I follow the above and then enter the 1099-B as it's reported to me, everything should be calculated correctly? 

[Mike9241]

2 things to make sure - we can't see your k-1.  1) on the k-1 worksheet the sales price is not zero if there is section 751 recapture.  If there is an amount for line 20AB on the k-1 (will also be repeated on the supplemental sales schedule), this is the sales price to use on this worksheet. basis is 0 and the gain is entered as ordinary income NOT CAPITAL GAIN

2) you cannot use the tax basis reported on the 1099-B. Brokerages generally use your purchase price which does not reflect the k-1 activity. Your correct tax basis can only be computed using that supplemental sales schedule.  in short, your tax basis is the adjusted tax basis computed using the sales schedule + any section 751 recapture 

[nexchap]

@entsrgn19 Those instructions only work in a couple special cases, and are wrong (and a known bug) in many others.  I believe (hope) TT is getting it fixed for next year.  In the meantime, follow the instructions elsewhere on the site to make sure everything gets into TT correctly.

[entsrgn19]

Yes I did see some of your other answers regarding Section 751 gain. I do have that. Frustrating that the IRS' own forms are saying something else. I ended up following your solution, though I am doing so blindly. 

You say the basis is from the sales schedule. You mean column 6 "cost basis", right? 

What I did was I followed your answer from above, then I input the 1099-B sale as it shows verbatim from the form provided to me, then I subtracted out from the basis (aka I adjusted the basis downward) by column 5 "Cumulative Adjustments to Basis". 

[entsrgn19]

@nexchap This is very misleading "the correct cost on the 1099b is purchase price + adjustments to basis + ord gain. " because there's no example given and typically the cumulative adjustment to basis is a **negative number**. 

Here's my scenario from my Sales Schedule:

Purchase price/initial basis (column 4): $100,087

Cumulative adjustment to basis (column 5): -$12,932

Cost Basis (column 6): $87,155

Gain Subject to Recapture (Column 7): $18,229

It seems based of what you're saying then, "purchase price + adjustment to basis" is just exactly what is reported in column 6 aka COST BASIS. 

So your response might be more clear if you just said your cost basis is the cost basis as reported in Column 6 of the Sales Schedule, "Cost Basis". But that to make TT work correctly, you have to add back in to your basis Column 7 (gains subject to recapture). 

Ergo, my cost basis is exactly the cost basis reported on the Sales Schedule. Let's not overcomplicate it. Now to trick TT if I go the route of the accepted answer in the above post, I also tack on my recaptured gains. Leaving me with a **New** cost basis of  $18,229 +  $87,155 = $105,384

So what is the basis I should report on my 1099?? 

[entsrgn19]

@nexchap Some of your instructions aren't clear because in your summation equation, some of those numbers are negative. A concrete example would be ideal. I tried posting one but It looks to have been automatically deleted because I input dollars amounts? Kind of strange. 

I believe the cost basis is exactly where it says "cost basis" (column 6) on the Sales Schedule. To trick TT, in your example, and if we use the accepted answer above, we also need to add in to the cost basis that of column 7, "gains subject to recapture as ordinary income". 

It's still not clear to me if following @Mike9241 , whether or not my k-1 interview should result in $0 net long term gain, or a loss in the amount of the gains subject to recapture, or what. He does not make it clear what to in put 

[nexchap]

@entsrgn19 Not sure why the previous question was deleted, but "the correct cost on the 1099b is purchase price + adjustments to basis + ord gain " is the formula.  If a number is negative, then you add a negative number.

Using your numbers:

Cumulative adjustment to basis (column 5): -$12,932

Cost Basis (column 6): $87,155

Gain Subject to Recapture (Column 7): $18,229 

Your basis on the 1099B = 87,155  +   -12,932   +    18,229 = $92,452

If you sold for $100,000

• your Sched D would show 100,000 - 92,452 = $7,548
• form 4792 will show the Gain Subj to Recap of 18,229
• so your TOTAL gains on the sale will be $7548 + 18,229 = $25,777

Where does that come from?  The -$12,932 adjustment means that the partnership gave you $12,932 in benefits while you owned it.  Some of that is cash they sent you.  Some of it is deductions on your past tax returns.  And some of it is suspended losses that you'll see show up on Sched E when you complete this years return.

So over the course of your ownership, you received $100,000 in cash plus the $12,932 above, or 112,932 in total.

You paid $87,155 originally

Your total profit is 112,932 - 87,155 = $25,777, exactly the gain your reporting this year on the sale.

[entsrgn19]

@nexchap Alright this is about what I had. I was off a few thousand but thanks to the example I think I have it now. I do understand the cumulative adjustment to basis comes from total distributions + the ordinary business losses reported in Box 1 of each k-1 summed over the life of ownership. 

Thanks! 

Edit: 30,000-foot view I think it would behoove anyone that comes across this forum to understand that they shouldn't be claiming as income a number greater than their reported cap gains from their broker + cumulative adjustments to basis. I think that took me a bit to understand but I see it now. 

[nlavery]

Since there are dozens of sometimes conflicting posts on this complicated subject, could someone please go into some detail and provide a 'definitive' summary of how one should fill out the K-1 questionaire and 1099-B information when disposing of an MLP.   And does anyone know if the 2024 version of TT has 'fixed' the reported 'bugs"?  

Thanks to all who have contributed to discuss valuable discussion.