Discussion:Partnership Basis

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Discussion Forum Index --> Tax Questions --> Partnership Basis


Mbs653 (talk|edits) said:

3 December 2005
I have a client who owns 10% of a real estate partnership. He has a negative tax basis, according to the K-1. His share of partnership debt is 200,000 more than his tax basis. What would be his basis calculation if he sells his interest. I am of a mind to add the debt to basis as the partnership rules require pro rata debt share to be deducted from the sale price. Does any body have any ideas?

DZCPA (talk|edits) said:

4 December 2005
Use his negative tax basis against the sale price to determine the profit.

Hubert Altman (talk|edits) said:

5 December 2005
I agree with dzcpa

PGattoCPA (talk|edits) said:

7 December 2005
I'll agree with a caveat - do not assume that the tax basis on the K-1 is correct.

It could be inside basis rather than outside basis. It could have been calculated incorrectly in any number of ways. The "GAAP", "Tax", and "704(b)" boxes were new this year and the perparer could have inadvertently checked the Tax box.

I would recalculate the partner's basis before calculating the gain / loss on the dispositoin of his p'ship interest.

Brandenburg Financial Inc (talk|edits) said:

8 December 2005
I agree with PGatto...Last yearI received a k-1 for a RE partnership I have an interest in with a basic of 2k when my basis was actually over 35k.

Tonypa (talk|edits) said:

8 December 2005
I agree with PGatto. Additionally, you should really only use the debt basis when calculating the allowable portion of PAL's and the At-Risk rules.

Vwertgen (talk|edits) said:

8 December 2005
If the taxpayers share of the debt will be subtracted from the sales price, that will give him basis in the debt for purposes of determining gain. But like the others, I would want to separately calculate his tax basis in the partnership interest.

MEJungman (talk|edits) said:

12 December 2005
Schedule K-1 does not give the partner's tax basis in his partnership interest. A partner can never have a negative basis.

Liabilities are added to the partner's tax basis. Then, when the basis is sold, if the partner is relieved of the liabilities (is no longer responsible for them), liabilities are also added to the amount realized.

The "Partner’s capital account analysis" section of the Schedule K-1, shows the basis to the partnership, not to the partner (even if the "tax basis" box is checked - that means the partnership's tax basis). The instructions for Schedule K-1 say, in the section "Basis Rules":

The partnership is not responsible for keeping the information needed to figure the basis of your partnership interest. Although the partnership does provide an analysis of the changes to your capital account in item N of Schedule K-1, that information is based on the partnership's books and records and cannot be used to figure your basis.

You need to calculate the partner's basis using the worksheet provided in the K-1 instructions (here's a link to the worksheet). If the partner has been using the K-1 capital account analysis as his tax basis for the whole time he owned the interest, you should recalculate the basis using the worksheet, starting with the first year he acquired the interest.

The rules in that worksheet require that each year, you add the partner's share of any increases in partnership liabilities. That worksheet also repeatedly instructs you not to adjust [the] basis below zero.

Publication 541 includes instructions on how to calculate gain or loss on the sale of a partnership interest. It instructs you "If the selling partner is relieved of any partnership liabilities, that partner must include the liability relief as part of the amount realized for his or her interest."

Www.cpa1.biz (talk|edits) said:

12 February 2007
If the partnership is not responsible for keeping an individual's partner's basis, who is? The parnter. Does a partner pay an accountant to keep track of this?

Also, when a person gets distributions in excess of the interest into the partnership, you show this on the schedule D as a capital gain. Is there a specific play I put this partnership excess distribution amount or just put it on the Schedule D and call it excess distribution under description. Or is there a flow thru from the K-1, when the interest is sold.

Also, what happens when the person gets less than their interest, is this a capital loss or nothing at all?

Any advice would be great.

Bj

Solomon (talk|edits) said:

12 February 2007
From ATG:

Quick Test for Computing Outside Basis

   The Schedule K-1 does not compute the outside basis.  However, a quick test for outside basis can be done by adding the ending capital account and the liabilities reflected on the Schedule K-1.  This should result in a positive figure.  The results may be distorted when the tax return reflects the book capital accounts at FMV because of the difference in the FMV and adjusted basis.  If the tax return is prepared using the tax capital account basis, which is reflected at adjusted basis, then it is easier to make a better “best guess” estimate because outside basis is also based on adjusted basis.  If the results are a negative figure then there is a potential outside basis problem.

Riley2 (talk|edits) said:

12 February 2007
A negative capital account at the end of the year doesn't necessarily mean that the client has no basis. Remember that if a partner took a distribution in excess of basis in a prior year, he would have recognized a capital gain in the prior year, and his basis would revert to zero -- even though his capital account is negative.

Www.cpa1.biz (talk|edits) said:

12 February 2007
WO,

Sounds confusing. What resources do you know about Solomon, where I can do further research on this. I mean, when someone distributes property years ago to partnership and the basis is different from the FMV, what should be affected here if there is cash distributed greater than the basis(FMV or Basis).

An example: A person has a capital account of 10,000 and gets a cash distribution of 5,000 lowering his capital account to 5,000. Well, what if his basis was 2,000 because he contributed property with a basis of 2,000 and its FMV was 10,000. Does he have a capital gain here(5,000-2,000basis = 3,000)? Also, how was I know that is person's basis was ever $2000? Because I sure could not see this by the partner's books or K-1.

Please advise...

Solomon (talk|edits) said:

12 February 2007
Partnership ATG. www - in your example of a 2K basis and a distribution of 5K, then looks like his basis is reduced to zero and reports 3K capital gain. The person would have to track his own basis if the K-1 was not reported on a tax basis.

Www.cpa1.biz (talk|edits) said:

12 February 2007
Solomon,

Do you advise your clients to show their K-1 on a tax basis? Thanks for the ATG link.

Solomon (talk|edits) said:

12 February 2007
Well, Www, I have been retired several years and am down to one partnership which reports on a tax basis. Still do around 100 1040's and play golf most of the rest of the time. Eat your heart out WesR. :)

CM85 (talk|edits) said:

8 June 2007
If a partner has a large negative capital account maintained on the tax basis and his share of liabilities is smaller than this negative capital account, (a) Is his basis in the partnership 0? (since basis can't be negative)(b) Is his gain limited to the amount realized (including liability relief)or could it be bigger still (because of the "excess" negative capital)? I have seen some discussion of a "phantom gain" in this area, but no concrete examples.

Thanks.

Kevinh5 (talk|edits) said:

8 June 2007
1) his basis may not have any relation to the capital account on the books of the partnership

2) depends on distributions in excess of basis as well as pass-through items.


I would suggest taking a good CPE class in partnership taxation. In my opinion this is the hardest area of taxation.

Riley2 (talk|edits) said:

10 June 2007
CM85, you need to analyze why and when the capital account went negative. For example, if the balance in the capital account was negative $100,000 at the end of 2005 and there were no partnership liaiblities, then it is likely that the client recognized a capital gain on distributions in excess of basis (but not necessarily in 2005). If the capital account subsequently went up to negative $40,000 in 2006, it would most likely follow that the partner's basis should have increased by $60,000 during 2006 -- even though the capital account is negative.

CM85 (talk|edits) said:

11 June 2007
Thanks for the suggestions, Kevinh5 and Riley2.

Npcpa (talk|edits) said:

2 August 2007
I have a question along these lines that I will do my best to explain. We have a partnership with a large note at the bank. The partnership distributes 4 K-1's to other partnerships and S Corps. One of the S Corps has a negative basis. Two of the S Corps (including the one w/ negative basis) have the same two owners that own each 50/50. Both of the owners are personally and severally liable on the debt of the partnership. From our research, the recourse debt creates basis for the S Corp so that it may not have to recognize the capital gains created by the excess distributions (depending on amt). Our question is are both S Corps able to consider the full amount of the recourse debt as additional basis or do they only get to consider their % of the recourse debt in proportion to their share of partnership ownership?

Kevinh5 (talk|edits) said:

2 August 2007
to simplify the question, NP: "Does a partner include only his share of non-recourse debt in basis, or 100% of the debt (giving rise to 6 partners getting a total of 600% basis instead of only the 100% that is out there)?" Is that the question?

Npcpa (talk|edits) said:

2 August 2007
Essentially yes, but we're talking about Recourse basis which is where our problem lies. We know what to do in the case of non-recourse.

FTF65 (talk|edits) said:

August 3, 2007
The S corp is only entitled to 100% of the debt assuming that it or a related party to the S corp bears the economic risk of loss for the debt. The S corp or a related party bears the economic risk of loss if either is required to make payment assuming a hypothetical liquidation of the partnership and the S corp waives any subrogation rights that it might be entitled to. Since you indicate that the the S shareholders are "personally" liable for the debt (i.e., they have guarantees in place), it seems that the shareholders would bear the economic risk of loss; accordingly, the only way to get the debt allocated to the S corp is if the shareholders are considered "related parties" with respect to the S corp. Reg. 1.752-4(b) provides that the the related party rules of Sec. 267(b) apply in making this determination except that "80% or more" should be used instead of "more than 50%" wherever it appears. This means that a shareholder and a corporation are related parties for this purpose only if the shareholder owms more at least 80% of the value of the outsanding stock. Under your facts, the shareholders and the S corporation are not related.

Note: Reg. 1.752-4(b)(2)(iii) provides that persons owning interests (directly or indirectly) in the same partnership are not related persons for this purpose; accordingly, it appears that you cannot aggregate the ownership of the shareholders so that they pass the "80% or more" test.

PLN8981448 (talk|edits) said:

7 August 2007
If a partnership desolves and on the final k-1 the partner gets a

distribution line 19 (A) His begining capital account is $25,000.00 0 contributed during the year decrease of 5000.00 withdrawl/distributions $20,000.00 does he show a loss of the 5000.00 and if so where on his return. We have no copies of prior year k-1's or tax returns would this decrease in basis reflect losses taken in prior years.--PLN8981448 19:55, 6 August 2007 (CDT)

TheTinCook (talk|edits) said:

7 August 2007
If I understand you correctly:

Begining Capital: $25,000

Ending Capital: $0

Net Income(Loss):($5,000)

Distributions: $20,000

The pass through loss (5,000) gets reported on Sch E and then goes on the 1040. It will reduce the partner's basis buy $5,000.

The amount ($20,000 the amount of your distribution) on line 19 (A) is non-taxable return of capital as long as your basis in the partnership is $20,000 or greater and the distribution was not in exchange for any part of your partnership interest.

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