Schedule K-1 for a terminated partnership

[alex400]

For a couple of years, I owned a percentage of a partnership created to pursue litigation. During that time, the partnership spent its funds on legal costs. None of those costs were deductible for me due to 'passive activity' limitations.

Finally, the partnership was dissolved and the remaining funds were distributed among the owners. I was under the impression that all suspended losses would be deductible because it is the final year. And yet, they are not (at least when selecting the most obvious choices in TurboTax).

The only way to make those losses deductible is by checking box 1a in Part II (Disposition of Partnership Interest), selecting option (1) 'Check if sold partnership interest,' and entering '0' on lines 5, 6, and 7 (Sale price, Selling expense, and Basis of partnership interest).

In reality, however, the partnership was terminated and had zero assets once the funds were distributed; nothing was actually 'sold.'

Is this the correct way to handle this situation?

[RobertB4444 · Accepted solution]

Yes.  In your case your interest was sold for no dollars.  But a sale is what it is categorized as.

[Mike9241]

the other option is to list the liquidating distribution as the sales price in the disposition sunsection. Your basis would be computed before that distribution. The two should be equal, so no gain/loss will be zero

you might want to read this

https://legalclarity.org/tax-treatment-of-a-liquidating-distribution-from-a-partnership/