How to file Schedule K1 for an LLC property sale

[sanjay-acharya]

So my situation is, we were a 5 partner LLC that owned a property. We sold the property in 2022 for a gain and dissolved the LLC. The LLC filed the partnership Form 1065 that includes gross sales price, cost basis, depreciation, adjusted basis, total gain. The same form has Schedule K1 for each partner with information present in Section J (Partner's share of profit, loss, and capital), Section L (Partner's Capital Account Analysis), Part III (Net rental real estate income, Unrecaptured section 1250 gain, Net section 1231 gain & Distributions. After filing the tax form, the LLC gave each partner the respective schedule K1 including our basis and sale gain after tax. 

Now when I try to file my individual tax Schedule K1 using TT what do I fill in for the following,

1. Enter Sale information. 

    Do I need to enter sale details (Sale Price, Selling Expense, Partnership Basis, Ordinary Gain, 1250 Gain) for my share? If I enter this information, my taxes go up and if I do not enter they go down (of course in both cases I enter Sec 1250 gain). The reason why I ask is because the LLC filed taxes and I assumed they would have paid taxes on any property sale gains (which this property had) before giving us the Schedule K1. 

2. I entered my  Schedule K1 details as per the form I received. But correct me if  am not supposed to enter.

Thanks.

[Critter-3]

In the K-1 entry section you will simply indicate this is a final K-1 form  and enter the K-1 as printed... end of story.

Partnership returns do not usually pay any taxes so contact the person who completed the 1065 and ask them what happened  to any withholding or pre payments on the sale.  

[sanjay-acharya]

just entering data for the K1 was sufficient before. But in 2022 the partnership was liquidated and individual basis + sale gain was returned to the partners. When I indicate in TT the partnership was liquidated, I have to enter Sale details. So from your statement looks like I have to enter the Sale details including Schedule K1 so that the sale gain is taxed as the partnership does not pay taxes. 

[Critter-3]

You did not sell your portion of the partnership ... the partnership was closed.  Liquidation of the assets by virtue of them being divided among the partners will be incorporated into the basis adjustments not reported as a sale.   The sale of the assets would have been reflected in the K-1 information.  Please upgrade for LIVE help or seek local professional help.  

[Mike9241 · Accepted solution]

the sale gain should already be on the k-1 lines 9a 9c and maybe line 10. to enter the sale info in the disposal section would then result in you double reporting the gain on sale.

in the disposal section the only thing that should be reflected is any gain or loss on the termination of the partnership. to do this you need to know your tax basis.

if the k-1 is marked final your ending capital in part II section L would normally be zero.

]f not then it's likely the partnership retained some of the sales proceeds to cover contingencies in which case you don't complete the disposal section this year. 

The following is a generalization since there is no access to your k-1. 

if the k-1 was done according to the iRS instructions Part II Section L

Beginning Capital Account normally should be your tax basis at the beginning of the year (there can be exceptions to this)

Current Year Net Income (Loss) should be the net of the various income and expense lines in Part III (FYI 9a includes 9c)

Other Increases (Decreases) normally would be zero

Withdrawals and Distributions should normally match 19a. It's unlikely there is anything for 19b or c.

the net of these is your ending tax basis which if it's a final K-1 should be zero the same as shown for Ending Capital.

so if it's a final K-1 and tax basis is zero then in the disposal section you enter zero for sales price and zero for cost. this should result in the k-1 not rolling over in 2023 and any suspended passive losses being allowed.

If the partnership sold property in a state with a personal income tax and you are a non-resident of that state, some of the money indicated as a distribution (19a) might actually be state income tax withholding. this should be shown on the k-1 for that state. 

[sanjay-acharya]

Mike appreciate your detailed message. 

> the sale gain should already be on the k-1 lines 9a 9c and maybe line 10. to enter the sale info in the disposal section would then result in you double reporting the gain on sale.

* That’s correct. I have amounts in the sections for Part III,
- 9c : Unrecaptured section 1250 gain
- 10 : Net section 1231 gain
- 2 (few hundreds loss)

> if the k-1 is marked final your ending capital in part II section L would normally be zero.

* Yes that's correct the K1 is marked final. The beginning year has some capital (Say $C) but ending capital is 0. In the same section there is "Current year net income" (Say $NI) and also some measly loss (Say $Loss) and a withdrawal/distribution amount ($DIST)
So Ending capital is $C+$NI-$Loss-$DIST = $0

> Current Year Net Income (Loss) should be the net of the various income and expense lines in Part III (FYI 9a includes 9c)

* There are gain amounts in 9c & 10 as mentioned above.

> Withdrawals and Distributions should normally match 19a. It's unlikely there is anything for 19b or c. the net of these is your ending tax basis which if it's a final K-1 should be zero the same as shown for Ending Capital.

* Correct, only section 19A has a distribution amount and that matches the withdrawal/distribution in section L.

    Since its the final K1 and tax basis is 0 (based on your explanation and since section L ending capital account shows 0), what I intend to do is,

1. Fill in the Sale information as follows,
    Sale Price = 0
    Selling Expense = 0
    Partnership basis = 0
    Ordinary gain = 0 (There is no ordinary gain listed in Schedule K1)
    1250 Gain = $X (Since I have 1250 Gain in Schedule K1 section Part III - 9c

    And fill in the Schedule K1 details as per the form.

You think this makes sense?

Since you mentioned entering sale info in the disposal section would result in double reporting the gain, I tried to just experiment with it and entered sale information. That certainly resulted in doubling the gain in Form 8582. Nasty!!! I reverted back to entering sale info as per your recommendation and now form 8582 shows the right gain amount.

[Mike9241 · Accepted solution]

9c is included (a subset of line 10)  on line 10 so do not include it in the disposal section 

line 10 flows to form  4797 part 1 line 2 this is reduced by any amount on part 1 line 8

the net then flows to schedule D line 11a (part of long-term capital gains)

line 9c flows to schedule D line 19.         

the reason is the excess of the 1231 gain over the 1250 gain is taxed as long-term gain while the1250 portion is taxed at the 1250 rates which can be as high as 25% 

in other words line 12 in the disposal section should be zero.

[sanjay-acharya]

Incredible Mike. The flow you mentioned above makes sense now, as seen in my return.  I now have left the "Enter Sale Information" section blank. Thanks a bunch. Hope this thread is useful for many others.