K1: Confusion and HELP NEEDED

[Anonymous]

Hello - here is the situation:

I have been an LP in real estate project for 5 years. Every year I was getting ordinary income losses which I have been making as carryovers to utilize them at project completion. In 2021 - for some reason, I got a distribution in Box 19 (without LT or ST gain). My CPA decided to have it as LT gain, and I paid taxes on this amount. In 2022, I got LT capital gains, for which I paid taxes.

For the last (FINAL) year of the K1 project, I got the final K1, which overstates my last gains by the distribution amount from 2021. In reality I have a "double tax pay" situation as I already paid tax for 2021 distribution (which I did not get actual cash for) and now have to pay this amount again. Obviously, there is something wrong.

Can you advise:

1) Do I need to fix 1040 for 2021 now? It seems I should have not paid tax on the distribution amount as K1 did not have any ST or LT gain and there was an ordinary income loss which I carried forward?

2) To make things easy - can 2023 K1 be fixed/adjusted instead to account for my 2021 payment and reduce gains to make it correct i.e. total amount of gain that I need to cover over the project's life until disposition?

Thank you.

[Spino]

In short, yes, you have to file an amended return for 2021 to correct an error, including reporting a gain when there was a non-taxable distribution.

And no, we can't just adjust 2023 to make up for a mistake in 2021. If we could, rich people with expensive accountants would do this all day long to the detriment of tax collection :-). Of course, instead they're busy doing other things....

Each tax year stands on its own, with allowed carryovers being very carefully defined and limited.

[Mike9241]

the tax consequences depend on facts we don't have. Did you manually not deduct the losses shown on the k-1 for all those years or did you let Turbotax determine the deductibility based on being an LP without active participation?  Those losses reduced your outside tax basis regardless of deductibility. Thus if your tax basis went negative with the distribution that's a taxable LTCG to the extent of a negative tax basis. in that case your CPA was correct and your tax basis at the start of 2022 would be zero. The 2022 tax basis would go up by any income but not down by any loss since your tax basis is already zero from the end of 2021.

in 2023 your tax basis would go up by any  2023 income any 2022 loss would now be allowed to the extent of income but evidently you got no cash in 2023.  Thus you have tax basis for which you got nothing so you take a capital loss on termination of the partnership. so in the end you don't pay tax on the K-1 report gain for 2023

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now let's assume the distribution in 2021 did not create a negative tax basis (yes you'll need to amend 2021). then any 2022 loss would reduce any remaining tax basis and income would increase it.   2023 income would also increase your tax basis. Thus you would have a positive tax basis for which you received nothing in the 2023 liquidation. thus again you have a capital loss on termination.  this gets reported by checking the proper boxes for the k-1 as you go through then Turbotax will ask about termination information. the loss would flow to schedule D. so in the end you don't get double taxed on the 2021 distribution.