Final K-1, Foreclosure Sale and Treatment of Disposition of Partnership Interest

[Curious One]

I have a K-1 for an LLC where the property had been chronically underperforming for years.  I was told prior to disposition that "the lender indicated that they would be pursuing foreclosure and placing the property into receivership. Since then, they have put a receiver in place and listed the asset for sale." The property has since been sold, with the sponsor reporting that "the foreclosure sale of the property has occurred. The property was sold for $4.56M, well below the loan amount of $6.3M, leaving no equity to be recaptured." The K-1 is marked final.  There are figures included in boxes 9a and 10.  In connection with disposition of partnership interest, TurboTax is indicating that I need to provide information regarding property disposition, specifically the sales price and basis.  The sales price is obvious, other than if I put in the entire amount or my ratable share.  Is the basis figure the outstanding loan amount?  If not, then what do I use?  Anything less than the sales amount will trigger tax liability.  Or maybe I made an input error generating this request for information?

[tagteam]

Please check back later. I will page Champ @Rick19744.

[Rick19744 · Accepted solution]

A number of comments:

• As a partner in a partnership, you should have been maintaining your tax basis in the investment.
• You don't mention prior year(s) activity; have you incurred suspended passive activity losses?
• In answering your specific question, "no" your basis is not tied to any loan.  This is completely separate as the loan is related to the entity level activity.
• If you determine your tax basis, you will need to adjust it for the current year activity on the K-1 (excluding and distributions).  This figure needs to be entered into TT as your "cost basis" as this will be requested through the interview input process.
• Your distribution is your sales price.
• If you have not maintained your tax basis, you may be able to use what is reflected on the K-1 section L.  However, if you do use this, you need to adjust this figure for any distributions reflected in this section.
  • So by way of a simple example, the ending capital (this is technically tax capital) may reflect zero.
  • Add back any distributions
  • Adjust for any "book adjustments" that may be reflected on the other increase / decrease line.
  • This figure then may approximate your tax basis.
• Partnership tax gets complicated very quickly and it may be in your best interest to meet with a tax professional to help you arrive at your tax basis.

[Curious One]

Understood and thank you for the detailed explanation.  By way of additional information, my tax basis is zero.  For the sake of argument, my share of profits is 1%.  So if the sales price is 4.6mn, my ratable share of the sales price would be 46k and my basis would be zero.  When inputting those figures, TT is generating a substantial further refund.  I do have loss carryforwards that can absorb the gain, but I would have thought that would simply leave me in the same position before and after including the sales proceeds.  I appreciate that this may have something to do with netting this gain against release of passive losses.  Can you think of any other obvious reasons?

[Curious One]

@Rick19744

Wondering if you might have some further insights based on the additional information I shared.  If so, most welcome.  Thanks.