K1 for partnership, property sold but partnership lives on

[Trey]

I am a limited partner in a private real estate partnership.  In 2022, we sold the sole apartment building the partnership owned -- but extended a small two year loan to the buyers to get the deal done.  As such, I have a K1 for a property which sold but the partnership will live on for two more years paying back the small loan.  The K1 is marked as "disposed" but not as "final K1" because we did dispose of the property but the partnership will continue for two more years generating K1s for the loan payments.  Wondering how to handle this in Turbotax.  Should I say partly disposed of and try to figure out capital gains on sale or just treat this as any old K1 from an ongoing partnership. 

The K1 does have positive figures for part 9c of the form "Unrecaptured section 1250 gain" as well as for part 10 of the form "Net section 1231 gain (loss)."  I also have the prior year's tax basis from the prior year's K1.

Welcome any guidance.  Thanks.

[DaveF1006]

To clarify, did you receive any distributions from the dissolved partnership and did these distributions result in a capital gains this year?  if so, then you report that capital gains for this if your distributions exceeded either your stock basis or loan basis for this year. All of this should be reported in the k-1 you received this year.

For future loan payments received, these loan payments may result in a capital gain situation in the year received if your loan basis is less than the loan payment for the year. That will be reported on your next two years of k-1 activity.

To summarize, you will not say the partnership is partly disposed but regard the partnership as an ongoing concern until to receive your final K-1. 

As an FYI, if you do have a capital gains activity to report this year that is indicated on your k-1, you will answer the question that appears in the screenshot I have included below. You will also do this for each loan payment that is distributed to you to determine if you have a capital gains or loss in the next two years.

Next two screens is where you enter details on the capital gain or loss.  Then answer the questions that follow. Please, reach out to me at @DaveF1006 if you have additional questions. 

[Trey]

Dave, 

Thanks for your response.  Much appreciated.  I would like to clarify something with you.  I had three different partnerships get sold last year.  Two were full liquidations and one was the item we just discussed.  On none of the K1s does it spell out capital gains in terms of purchase price, sale price, tax basis, etc.  It appears I'm expected to derive this information.

For example, with the K1 we are discussing now, yes, I definitely had a gain in that they made a distribution that was well above the capital I initially invested--and it was the result of selling the property.  But it is just categorized as part of the distributions.  It isn't earmarked as a capital gain specifically.  I think I'm supposed to somehow calculate the gain (which is separate than other distibutions that were just cash flow payments as rent came in each quarter).

On a separate note, in researching how to account for capital gains in partnerships that issue K1s, I've found that some advocate simply reporting one's basis as the information included in section L "ending capital account" of the K1.  I wonder if you have thoughts on this.  Related to this, can one's basis be less than 0 for tax purposes?  My ending capital account on the item we discussed previosly is less than zero.  But I have read that for capital gain purposes one's basis should never be less than zero.

Finally, this is the first time I've had any partnerships make a sale.  So sorry if my questions aren't very clear.  Trying to get my mind around this.

[Trey]

Dave,

The more I think about this, I'm thinking that possibley I shouldn't report a capital gain at all.  See this screenshot:.  

 The partnership didn't end, nor did I "dispose of a portion of my interest in the partnership" itself.  Yes, I got a payout from the partnership for the sale of the asset owned, but I didn't actually sell a portion of the partnership itself.  I'm thinking I would just adjust my tax basis to reflect the rent payment distributions as well as the distribution of the gain on the asset itself.  But I welcome your thoughts if I'm going astray here.  Tx!

@Rick19744, I've seen your comments as well on K1 questions.  I welcome your take on the above issue if you have time and a willingness.  Thanks.

[Rick19744 · Accepted solution]

Here are my comments on this situation:

• K-1's don't technically have anywhere to reflect that they are "disposed".  You either receive a normal K-1 or you receive a final K-1; or it could be an amended K-1 should something have changed.
• Since you indicate your K-1 is not marked final, this is just a normal K-1.
• You input the information on the K-1 into TT as you would any other year, AND you do not indicate in TT that this is a final K-1.
• Based on your facts, you also did not dispose of any of your partnership interest.  The partnership just sold an asset and is reporting any gain along with any other activity from the partnership.
• A partner is responsible for maintaining their tax basis in their partnership interest.  Hopefully you have maintained this as this is a critical component in partnership tax.
  • Your tax basis begins with your capital investment and is adjusted each year by the applicable lines on the K-1
• While the current K-1 reflects "tax capital" in box L, this is not, in general, the same as your tax basis.
•  You also need to update your tax basis schedule for the applicable lines on the current year K-1. 
• After updating your tax basis for the applicable lines on the K-1, if your tax basis goes negative, you have a capital gain that needs to be reported separately.  Tax basis cannot go below zero.
• Essentially, if your tax basis goes negative, this negative amount is reported on form 8949 which will then flow to schedule D.  Doing this means your tax basis is now zero.

[Trey]

@Rick19744 , this makes perfect sense.  I appreciate your help.

One point of clarification.  You said, "Essentially, if your tax basis goes negative, this negative amount is reported on form 8949 which will then flow to schedule D.  Doing this means your tax basis is now zero."  Does one file form 8949 the year the tax basis goes negative if this isn't a final K1?  Or does one only file form 8949 the same year as one receives the final K1?

Thank you.

[Rick19744 · Accepted solution]

You report the capital gain in any year that your tax basis goes negative; regardless of whether this is the final year or not.

This essentially means that the partner has received more $$ (economic benefit), than the partner invested and paid tax on.

[Trey]

This makes perfect sense. Thank you. I really appreciate your help.

[Rick19744]

You are welcome.

[Trey]

@Rick19744, may I ask how I would enter this gain into TT?  I tried doing it following these instrucutions:

"Yes, if you received a distribution that was more than your adjusted basis, you have taxable income. In most cases, this is a long-term capital gain, which is reported on Schedule D (as a sale with no basis).

To enter this, open your return and search on "investment sales," then use the jump-to link to go to the start of this section.

Choose "Everything Else" and follow the prompts to enter a description (ie: Distribution in Excess of Basis), the amount and the date you received the distribution. Continue to enter a Cost Basis of zero (because you have no remaining basis) and the date you first invested in the company. TurboTax will show a summary page that shows how this will be reported on your return."

This is from this link: https://ttlc.intuit.com/community/business-taxes/discussion/yes-if-you-received-a-distribution-that-...

However, if I follow this guidance and enter the zero cost basis and the distribution in excess of partner basis in that part of the software, I'm concerned that the gain we discussed above won't be coded as "passive activity income"--and therefore won't be offset by passive activity loss carryovers that I have in my return from cost segration studies conducted in prior years for other investments.  I welcome your guidance on how to get this in the software correctly.

[Rick19744]

Just follow the instructions.

This gain is portfolio income and does not offset other passive activity losses.

This gain should be reflected on form 8949 which will then flow to Sch D.

[Trey]

@Rick19744, thanks for your response. 

I would like to clarify something.  When you say "just follow the instructions," are you referring to what I pasted above in this thread?  Specifically, this part?: "Yes, if you received a distribution that was more than your adjusted basis, you have taxable income. In most cases, this is a long-term capital gain, which is reported on Schedule D (as a sale with no basis).

To enter this, open your return and search on "investment sales," then use the jump-to link to go to the start of this section.  Choose "Everything Else" and follow the prompts to enter a description (ie: Distribution in Excess of Basis), the amount and the date you received the distribution. Continue to enter a Cost Basis of zero (because you have no remaining basis) and the date you first invested in the company. TurboTax will show a summary page that shows how this will be reported on your return."

I ask for the clarification because I'm not aware of any other instructions inside Turbotax on how to address this.  Thanks.

[Rick19744 · Accepted solution]

Exactly.

The instructions are taking you to the investment section which will request information to complete the applicable lines of form 8949 which will then flow to Schedule D.