Final K-1 in TurboTax when there are multiple entries Box 1 and Box 2

[aggiewol]

Hi, I have a couple of questions for some partnerships I received a “final K-1” for this year that have had to create two entries as separate K-1s, one for Box 1 income, and one for Box 2 over the past few years.  What I have done is put only Box 1 income and nothing else in the first K-1 entry, and Box 2 + everything else in the second K-1 entry.  I have also entered them in TT as “partnership_xyz” and “partnership_xyz_for box 2” to help keep things clear.  In the final year, should I change the name so they match 100% to help TT merge these?

When I close the first K-1, I am marking a $0 "sale price" and $0 basis, and focusing on the closing the second K-1 entry to put the actual sale distribution and basis amounts. It does ask for Ordinary Gain in the closing screen--what typically would go there? I'm assuming that's not Box 1 income. It also asks for 1250 Gain--is that across the entire lifetime, or just in the final year?

[ThomasM125]

For the most part, your gain will be capital gain. Ordinary gain would be from depreciation recapture which could come about if there was a gain on assets sold. Section 1250 gain would also be from the sale of assets but would be the gain less depreciation recaptured.

If the K-1 does not reference anything for that then you would leave those entries blank.

The 1250 Gain would be just for the final year, assuming that is the year the assets were sold.

It is fine to report no sale action on the first K-1 entry. 

[S8NpTl]

A clarification as I have the same situation:

When you say report no sale action on first K-1 entry, do you mean to put $0 for basis and sale price as the original poster proposed above? Or leave them blank? As far as I can tell TT complains if you leave blank for sale information (which you are prompted to enter if you checked the "sold or disposed interest in my partnership" checkbox). 

I assuming here that you have to check the "Final K-1" and "sold or disposed interest" checkboxes in schedule K-1 for both the box 1 and box 2 K-1 forms. Unless it's ok to put all info on one of the K-1 and just leave blank everything for other K-1, even the final/sold/discontinued checkboxes?

[aggiewol]

@S8NpTlyes, that was my plan to mark $0 sale $0 basis and hopefully that frees up any suspended losses.  I think the concern for marking as not a sale but complete disposition is that I have heard this does not actually free up suspended losses, creating a new problem. 

TurboTax makes this unnecessarily complicated by forcing us to do multiple entries when a K-1 has box 1/2/3 income.  They really have to fix this.

[aggiewol]

thanks @ThomasM125. Just to clarify, does it seem like the right approach in TT to generally have one K-1 with only box 1 income, and a separate K-1 for box 2 + all the other boxes?  That's typically been my approach, so all those other numbers such as 1250 gain, 1231/etc are all only being entered on of the K-1s.

[ThomasM125]

You have to enter several K-1 schedules when you have different types of income because the income appears on different schedules on the tax return. Also, you have to link the deductions and other information listed on the K-1 schedule to the income to which it pertains.

So, you need to make sure you report income and other amounts associated with that income on the correct K-1 schedule. 

[aggiewol]

Thanks, @ThomasM125 !  One last thing here as I have heard conflicting things on this.  In TT when I mark a K-1 as final and closed via sale...it asks for the sale price, which I mark as whatever the final distribution was for the partnership (in my case, $30,011).  I am going through the adjusted basis calculations, and I am finding that after the years of income, losses, and distributions, my final year (pre-distribution) adjusted basis is $30,065.  It makes a quite big difference in my tax load if I reduce the $30,065 by the final distribution...as this is freeing up many more losses.  However, I'm not sure if I am allowed to count the final distribution as something which reduces the basis (because I already marked it as the sale price).  Do you know how TT is treating "sale price" and whether I should in fact still reduce the basis by the final distribution?

Thanks in advance for all your help.

[ThomasM125]

A liquidating distribution would be considered a sale of partnership interest, so you need to report the distribution as the sale amount and the basis before the distribution as the cost to calculate your capital gain or loss.

[aggiewol]

Thanks @ThomasM125 !  I have input it in this way, all set there.

One last question--my understanding is that in adjusting basis, net 1231 (box 10) gains will increase the basis, but unrecaptured 1250 gain (box 9c) should not be included in basis additions because it's just a character of net 1231 gains.  Is the same true of long term capital gains (box 9a) that it should be ignored in basis addition?  Or should I factor it in? 

Also, was the prior assumption I have that box 9c (unrecaptured 1250 gain) be excluded as a basis addition?

Thank you!

[ThomasM125]

A long term capital gain would be included in your income for tax purposes, so that would represent an increase to your basis. It is separate from a section 1231 gain. Section 1231 and 1250 gains are from the sale of business assets, a capital gain is not. However, the sale of business assets can generate capital gains or losses, but business assets are not capital assets. 

The unrecaptured section 1250 gain is the portion of your business asset sale gain that is taxed at ordinary tax rates, but up to a maximum of 25%. This is so because it represents depreciation that was taken on the asset in prior periods. Since the depreciation was deducted from ordinary income, if you sell the asset at a gain, you have to pay tax at ordinary rates (up to 25%) on the gain, as opposed to using capital gain rates.

The unrecaptured section 1250 gain is thus already reflected in the other gains reported, so you don't add it to your basis.

[littleplacecalledaspen2]

I also have entries in boxes 1 & 2 of my K-1.  From what I can tell going through this thread of comments, nobody has explicitly stated the details of which entries should be reported with the box 1 (ordinary business income) K-1 and which entries should be reported with the box 2 (net rental real estate) k-1 .  For the first K-1, I entered the amount from box 1 (ordinary business income), and then I went through the rest of the K-1 and entered all of the information from the other boxes that I could.  For the second K-1, I entered the amount from box 2 (net rental real estate income), and then I did not add any additional info into the rest of the second k-1, because it has all already been entered into the other K-1, linked to box 1 (ordinary business income).  Is this correct?

[DaveF1006]

This is correct. The K-1 was issued by the same business entity so the second K-1 is only a continuation of the first K-1.  This is all treated as one K-1 for reporting purposes.