Partnership Distribution / Negative Capital Account / 731 Gain ?

[LuckyLefty8]

Hi there,

Looking for some help on the following fact pattern:

- 2 person partnership, 50/50 split on everything

- Partner B begins year with $5K tax capital account

- Partnership loses $30K in 2019

- Partner B also took random distributions totalling $40K in 2019

- Partner A kept putting money in and pulling it back out throughout entire year to keep operation going

- After calculating above ($5,000 starting minus $15,000 share of loss minus $40,000 distributions) the ending capital account would be NEGATIVE $50,000.  

So it is my understanding that Partner B has to pay tax on the distributions that exceed his basis.  So does he pay tax on the $40,000?  Is this $40,000 taxed at LTCG or STCG rates?  

Thank you in advance!

[M-MTax]

Usually taxed at long term CG rates.

[DavidS127]

To report a distribution in excess of your basis:

1. Search for "1099b" and use the "Jump to 1099b" to enter the sale of your investment property.
2. Click "Add more sales" and answer "No" to the question about if you will receive a 1099-B (wording may be a little different in TurboTax Online, e.g., "type it in myself" instead of import).
3. For the "What type of investment did you sell" dropdown, choose "Everything else".
4. For "how you acquired", choose "Other Method" if none of the others apply.

You distribution in excess of the basis is the net proceeds.  The date of sale is the date the distribution was made.  The cost basis is zero.  The date of acquisition is the date your partnership interest was acquired.