Discussion:Sale of Partnership Interest - Big $

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Discussion Forum Index --> Advanced Tax Questions --> Sale of Partnership Interest - Big $


Discussion Forum Index --> Tax Questions --> Sale of Partnership Interest - Big $

Jeff-Ohio (talk|edits) said:

22 April 2011
Very wealthy client made a huge transaction in 2010.

Client sold his 31% interest in a partnership that owns an apartment building for $8MM.

I know there are some complexities in dealing with the partnership transaction (i.e. 754, etc.), but I believe that should be reflected on the K-1 (prepared by E&Y) and it has me confused.

I have two pieces of information. I have the settlement statement showing the Sale price of $8MM, less settlement charges, resulting in $7,405,416 due to my client.

On the 2010 final K-1, it has me confused:

There are 2 K-1s because he owned 4% and 27%. Dealing with just the larger K-1 (27%), I have the current year rental loss of ($3,601), some interest and then a $2,354,500 distribution.

Client's capital account shows $287K Beg, current year increase of $2,067,715 and then the $2,354,000 distribution to wipe it out.

On the 2nd page, it shows the total loss of ($3,239 - net on int. etc) PLUS this $2,070,931 'adjustment to other increases due to transfers/withdrawals' for the total current year increase (above) of $2,067,715.

Then it shows the distribution of $2,354,400.

At first glance, I expected to see 'something' on the 'net long-term cap. gain' line.

However, after researching the issue, I believe this is a schedule D item, sales price, less cost = cap gain.

My other question is - depreciation recapture - does this come into play?

Sorry for the long post and hopefully it’s not too confusing – just a little stumped at the treatment.

Marcilio (talk|edits) said:

22 April 2011
Giving us the lines on which the numbers appear would be most helpful.

Jeff-Ohio (talk|edits) said:

22 April 2011
I left the office without it, but will be happy to on Monday.

I can tell you that other than a small loss and some interest, the $2.3 million distribution to wipe out his capital is the only material number.

The client said he was told that he would have to recapture 31% of the $3MM In A/Depn.

On the sale of interest? The building did not sell.

Worries me because EY are the consultants.

I've spent the entire day researching. Yellow box and all.

Jeff-Ohio (talk|edits) said:

22 April 2011
Maybe I'm making this too difficult.

If the sale is $7.5mm (net) and I have one ending distribution of $2.3 and another one of $500k, those are probably my costs or approx $4.7MM LT CG.

Then Depn recapture? I'd love to prove them wrong!

Doug M (talk|edits) said:

22 April 2011
Jeff--two thoughts. Dep'n recapture is an issue, as you must look inside the partnership to determine your clients portion of the depn recapture as some of this gain will be taxed at the section 1250 rate.

The second is basis. Since it appears he sold his partnership interest, his K-1 basis figures should show his basis in the property, assuming his capital account as shown on the K-1 is kept on a tax basis.

Jeff-Ohio (talk|edits) said:

22 April 2011
Yes Doug. Tax basis and thanks.

Using round numbers, he sells his 31% for $8 million.

He has distributions to zero out his capital account of $3 million n

He has a $5 million LT cap gain.

Then, at 12/31/2010, accumulated Depn was $3 million.

31% of $3 million is taxed as a 1250 gain / ordinary rates (or as you say- the highest rate).

On Point? Or is a portion of the $5 million gain subject to 1250?

Leaving something out? 754?

Getting more confident with partnership tax, but still need a little 'smack' as Kevin would say.

Jeff-Ohio (talk|edits) said:

23 April 2011
Two pieces I believe I neglected was his share of the liabilities and the potential 1245 property (equip).

Sales price $8M Plus share of liab $1M Less basis $3M Less share of liab $1m Equals $5M LT CG

Then total accum depreciation (building) $3M x 31% ownership = $930K 1250 gain

$500K A/D equip x 31% = $155k 1245 gain.

Confirmed?

Harry Boscoe (talk|edits) said:

23 April 2011
Jeff, what kind of "depreciation recapture" are you getting ready to stick on this guy? In almost all recent sales of depreciated real estate there's *no* Section 1250 recapture. However, there may be a large "unrecaptured section 1250 gain" in this transaction. Check out some resources and make sure you understand the difference between these two types of gain - where they come from *and* where they go. With numbers this large, the difference in tax between the two could resemble the size of your fee...

Jeff-Ohio (talk|edits) said:

23 April 2011
Yes Harry - I get it - It's real estate and only the portion of depreciation in excess of straight-line depreciation is subject to recapture. Since straight-line is the method of depreciation, there is usually no recapture of depreciation. The "Unrecaptured 1250 gain" would be the 31% of the depreciation taken to date.

Harry Boscoe (talk|edits) said:

23 April 2011
Suggestion: Read the IRS's audit outline here.

N.B.: The part about Form 8308.

Reminder: The "recapture" provisions [as well as Section 751] most often characterize taxable gain *that's already there*, rather than adding more gain...

Doug M (talk|edits) said:

23 April 2011
Jeff-any dep'n (not just excess over SL) that was taken on the portion of the real property he had an interest in is section 1250 subject to recapture. And as Harry pointed out, it does not increase the gain, it takes the existing gain and puts it into two different buckets for taxation purposes. The section 1245 recapture can be argued to be nil.

RoyDaleOne (talk|edits) said:

23 April 2011
As with some of posts on this forum the complete facts are not posted, and now for the important part, become to complicated to absorb or answer in this forum.

I highly suggest you get help with this situation.

The appliances are worth today what the appliances where when purchased?

There is no land?

Where is the allocation of the selling price to the various components sold, land, building, etc?

Sorry, just too complicated to answer.

Jeff-Ohio (talk|edits) said:

23 April 2011
Harry - We did not prepare the 1065 - I am only in receipt of the K-1, prepared by E&Y. The 8308 is not with the 1065 and I will request it Monday.

Let's just take a basic example of a sale of partnership interest.

Let's assume Harry sells his interest in an apartment building partnership for $8MM.

Let's also say that on his final K-1 (he was a 30% member in the partnership), the capital account shows a distribution of $3MM to 'zero' out the capital account. Sale of $8MM less his distrbution (or tax basis) would equate to a $5MM capital gain.

Next, let's assume the building was the only asset on the books. A/D at 12/31/2010 was $3MM and the building had been depreciated by the SL method of DEPN.

Harry would have unrecaptured 1250 gain of $900,000.

My question as Doug pointed out - the two bucket aspect - is the $900K one bucket at ordinary rates and then $4.1MM the LT gain portion taxed at LT capital gain rates?

This would 'not increase the gain', but separate the gain into two parts, which makes sense to me.

DEPN while Harry was a member reduced his basis in the partnership, therefore we need to recoup a portion of the previous deductions via the 1250 gain on sale.

Hot or cold?

RoyDaleOne (talk|edits) said:

23 April 2011
Wrong, wrong, wrong.

Spell Czech (talk|edits) said:

23 April 2011
Jeff: You should not ask anyone about the missing Form 8308. Trust me.

Jeff-Ohio (talk|edits) said:

23 April 2011
Roy- can you please give me an example with the above facts that would be correct, correct, correct

Jeff-Ohio (talk|edits) said:

23 April 2011
Educate the forum.

SC - why? Isn't it required and subject to a fine?

Spell Czech (talk|edits) said:

23 April 2011
I think the penalty for failure to provide Form 8308 is *very* likely to be on the same order of magnitude as the hourly billing rate for *anybody* who posts to this forum.

Is it...

$15?

$35?

$50?

$100?

$150?

$200???

Jeff-Ohio (talk|edits) said:

23 April 2011
$50...I believe.

Ok. I'll reread everything I read this weekend, but I'm frustrated because it doesn't seem that complicated.

I made a wrong turn when I got to the 1250 gain.

Would love to hear how the experts would handle.

Seems like everyone is a little timid, which is fine.

Partnership tax is tough....however, the transaction I'm dealing with doesn't seem that intense.

Dennis (talk|edits) said:

23 April 2011
$50 an hour...♫ I hope not.

Purpose of Form. Form 8308 is filed by a partnership to report the sale or exchange by a partner of all or part of a partnership interest where any money or other property received in exchange for the interest is attributable to unrealized receivables or inventory items (that is, where there has been a section 751(a) exchange).

Spell Czech (talk|edits) said:

23 April 2011
Section 751 is where Doug M. would have us go, isn't it? As if this thread hasn't got enough distractions already.... [Little whistle glyph here ♫ ]

Jeff-Ohio (talk|edits) said:

24 April 2011
$50 an hour or $50 per partnership and another $50 for each transferee. It's late, but I think that's it.

Back to the true situation. Can anyone take a stab at the result?

Step by step - keys assume no A/R and no inventory.

Interest is sold for $8M. Ending capital is $3M. Right then there is s $5M CG.

Next 1250 and 1245.

Assume $3 million of a/d. All straight line. 31% interest.

Jeff-Ohio (talk|edits) said:

24 April 2011
On September 11, 2007, FTF65 said:
"DFM - check out Reg. 1.1(h)-1(b)(3)(ii). This section generally provides that when a partnership interest that has been held for more than a year is sold or exchanged, the selling partner must pick up their allocable share (including sec. 704(c) remedial allocations) of the partnership's total unrecaptured 1250 gain. The partnership's total unrecaptured 1250 gain is computed as if the partnership hypothetically disposed of all its section 1250 property in a fully-taxable transaction for cash equal to the FMV of the assets immediately before the transfer of the partnership interest. The amount of the partner's "residual" gain from the sale of their interest is computed by subtracting their share of the hypothetical unrecaptured 1250 gain from their total gain/loss on sale. This can produce some unexpected results. For example, assume a partner with long-term basis of $10k sells their interest for $20k. Also assume that the partner's allocable share of the partnership's unrecaptured 1250 gain is $20k. These facts result in the selling partner having unrecaptured 1250 gain of $20k and a long-term capital loss of $10k.
The last sentence of Reg. 1.1(h)-1(b)(3)(ii) is also worth mentioning. This sentence provides that the above "recapture" rules do not apply to redemptions of partnership interests. This means that a redeemed partner does not have to recognize their allocable share of the partnership's unrecaptured 1250 gain. Accordingly, assuming the same facts as the above example, the selling partner would have $10k of long-term capital gain.
Reg. 1.1(h)-1(e) provides that reporting rules similar to those under Reg. 1.751-1(a)(3) shall apply to sales or exchanges of partnership interests in which the selling partners recognize section 1250 capital gain [presumably this also applies to unrecaptured 1250 gain(?)]."


I thought this is what I did by taking the sale price, less outside basis = CG (bucket 1)

Bucket two is 31% of the depreciation taken to date (all 1250) - bucket 2 - ordinary gain.

Does not add to overall gain, but seperate

Spell Czech (talk|edits) said:

24 April 2011
It's getting easier now.

No §1250 gain: straight-line depreciation on the building makes the excess of actual over straight-line zero.

No §1245 gain: just stipulate that the market value of the depreciated personal property is not greater than its adjusted basis, one asset at a time <<surprise!

$5M is the total gain, whether or not we add the selling partner's share of partnership liabilities into his amount realized and his basis.

$930K of unrecaptured section 1250 gain [$3M times 31%] is part of the $5M total gain.

Be sure to read Reg § 1.1(h)-1 and decide whether or not it applies here. It's a mind-blower.

How did we treat the $2,070,931 bump-up in the selling partner's capital account, the one in the original facts?

And now make a list of the assumptions that have been made to get to this "answer"....

Jeff-Ohio (talk|edits) said:

24 April 2011
Thanks SC-

I'll do that and I'll also get the K-1 facts tomorrow.

I knew I wasn't wrong, wrong, wrong....maybe right, wrong, right

Thanks again.

Spell Czech (talk|edits) said:

24 April 2011
That's why we're here; that's why we're here.

RoyDaleOne (talk|edits) said:

24 April 2011
http://www.taxschool.illinois.edu/merch/2010llc.html

RoyDaleOne (talk|edits) said:

24 April 2011
1. Obtain the trial balance for partnership - at the time of sale.

2. Take 31% of the trial balance and create your client's share of the partnership assets and liabilities. 3. Now record the sale of 31%.

Take the view that aggregate view of the partnership.

I do not get ordinary income from depreciation of the building when I do the computation.

If, you would offer to pay a fee I would do the work for you.

One of the ways to answer questions on this forum is to provide hints and comments. It is my understanding it is not a place to get your work done for free.

The K-1 information is almost useless for figuring the gain from the sale of the partnership interest.

Buy the book from the link above. I did.

Spell Czech (talk|edits) said:

24 April 2011
I'm happy to note that it looks like Jeff used the yellow box!

Jeff-Ohio (talk|edits) said:

24 April 2011
Thanks SC - trust me - I have spent AT LEAST 10 hours researching this transaction and learning more about partnership tax - I think where the 'yellow' box is confusing is that some questions (and responses) are incorrect - that leaves the researcher questioning his tentantive conclusion.

Roy - Trust that I'm not asking to have the work done for me, but merely asking if I was on the right track. 'Wrong, wrong, wrong' does little to help the situation, at least in my eyes.

In any event, I will buy the book (or one similar) and the same wth S-corps - two of the most difficult subjects in the tax field.

I will sit down with the information I have tomorrow (Lamb and ham are calling my name) and revisit this thread.

I do thank you ALL OF YOU for the insight - hopefully tomorrow I will have all of the details, including the balance sheet, trial balance and K-1 distribution.

RoyDaleOne (talk|edits) said:

24 April 2011
Sorry about my attitude, however, the firm you work for should have provided you training in this area.

Besides this really is a E&Y problem the instructions to the Partnership Forms require the partnership to provide all the necessary information for a partner to prepare his return.

The reason I suggest that book is it has "real" examples, meaning t/b's before and after, etc.

Snowbird (talk|edits) said:

24 April 2011
I have been lurking in the background following this thread, learning and enjoying. Plus, doing a little more research. Too much time on my hands ... waiting for a transmission to be replaced in a Motorhome so we can go back north.

Anyway, how much more convoluted can the IRS get? As I understand the Reg's in Sec. 1.751-1, depreciation recapture under Section 1245 and 1250 is considered an unrealized receivable so that it fits into Code sec 751. As a commentary I read said: "One of the most overlooked, yet common, unrealized receivables." I bet so.

The University of Illinois Tax School (referenced above) has good material that is used by other schools. They also have very good CPE and tax update seminars. A plug for the home state school.

What have I learned from this? If someone brings me a partnership sale, I am telling them that I am go fishing! Speaking of fishing, caught a 5 lb bass, yesterday. Not big by Florida standards, but still a nice fish.

Snowbird 16:28, 24 April 2011 (UTC)

Dennis (talk|edits) said:

24 April 2011
I remember when we did this in depth a couple of years ago this article was considered the most illustrative.

Jeff-Ohio (talk|edits) said:

24 April 2011
Dennis - thanks. Now my head really hurts.

Roy- no hard feelings my friend. You got frustrated at my frustration. However, my firm providing guidance isn't happening. I'll bet 90% of CPAs do not know how to properly handle this transaction. I need to learn it through research if it takes me days, months or years.

We are fortunate to have some of the best in the business on this forum and most have chimed in.

This thread will certainly help the next person looking for insight.

Tomorrow, I'm going to revisit the agreement, the balance sheet, the Depn schedule and the K-1.

Then, compose my thoughts and bounce what I hope is a relatively sane conclusion off of you, SC and rest of the experts.

Snowbird- congrats on your catch. I agree with you. I'd like to just the sale less his capital account and call it even.

Jeff-Ohio (talk|edits) said:

25 April 2011
The k-1 really was the start of my confusion. Do you think EY was trying to be slick by not actually calculating the gain because they felt pressure? This is how it reads (as in my first post).
$287K Beg balance
$2,067,715 current year increase

$2,354,000 distribution (to wipe it out)

There is a small few thousand dollar loss and a little interest. That's it.

On the 2nd page, it shows the total loss of ($3,239 - includes interest)

PLUS this $2,070,931 'adjustment to other increases due to transfers/withdrawals' for the total current year increase (above) of $2,067,715.

Never seen anything like it.

Then it shows the distribution of $2,354,400.

RoyDaleOne (talk|edits) said:

25 April 2011
The article Dennis linked is very good.

Note it starts with an analysis of the balance sheet.

Good luck. Let us know.

Jeff-Ohio (talk|edits) said:

25 April 2011
Today, I received the formal package and outline of the completed sale.

Here's what 'really' happened:

The PARTNERSHIP sold for $8,000,000.

My client's portion is 31% or $2,480,000. Step #1

Step 2

Accumulated Depreciation of the building at 4/30/2010 (sale date) was $3,037,278.

Accumulated Deprecaition of the rest of the assets was $633,003.

Grand total DEPN = $3,670,281.

31% of $3,670,281 = $1,137,787.11 - unrecap. 1250 gain

My true stumbling block wight now is dealing with a client that can't remember and a CPA firm that will not return a phone call. I'm left holding 2 K-1s. One for 27% and one for 4% = 31%.

Here's exactly how the 27% K-1 reads:

L.2 R/E LOSS -$3,601 L.5 INTEREST $461 L.8 -59.00 L.9A -40 L.18A -23

19 DISTRIBUTION $2,354,400

BEG CAPITAL $286,685 CURRENT YEAR INCREASE $2,067,715 ??? W/D $2,354,400 END CAPITAL $0

Question - have you even seen anything like this? I can't even determine his basis the way this is shown - Is it the $286,685 +/- current year activity and forget this crazy current year increase amount?

Dennis (talk|edits) said:

25 April 2011
Better question might be have you ever seen anything that was not like this...♫ There are a variety of ways client could have picked up an additional 4% partnership interest that logically would suggest separate accounting. Were you not around when it happened? Did you just not care enough to find out the first time you saw it? Basis is kept on the accountant's work papers, not on the entity k-1. Note the passive loss for the current year. How many others have there been? You most likely have recognized §1250 gain, not unrecaptured §1250 gain. You also likely have §1245 gain depending on the nature of the "Accumulated Depreciation of the rest of the assets".

Two things to try. Does client personally know any of the other partners? Perhaps you can talk to one of their accountants. Web search the name of the partnership. You never know...♫

Jeff-Ohio (talk|edits) said:

25 April 2011
Dennis - you nailed it - No, I wasn't around. Brand spankin new client.

My qeustion really was the current year decrease amount appears to come out the blue.

I took each K-1 seperately. If I take the beginning capital +/- the current year decreases without the distribution, I have ending capital amount of $283,446 and $67,895, respectively. Then, if I aggregate the two distribution amounts I have $2,703,200.

The net sale was $2,295,679, which (in my eyes) is $407,521 LESS than the total distribution. Or in other words, the distribution was in excess of the sale price. WHICH leads me to beleive that yes, I'm missing information.

I beleive I have an unrecaptured 1250 gain on the building ($3,037,278 x.31) and then a Section 1245 gain on the rest of the assets (633,033).

Jeff-Ohio (talk|edits) said:

25 April 2011
So, I just spoke with the accountnat who has NOT kept the basis on the partnership. She stated' I just do the day to day activity'.

Therefore, all I have to go by is the K-1 - as incorrect as it may be, there are no records.

My first concern is getting the overall capital gain on the sale correct. But, to me it appears the sale price is less than the total distribution.

I do know that this partnership had $200,000 in income for 2009 - passive losses were nil.

Jeff-Ohio (talk|edits) said:

25 April 2011
Below is my summary and request for additional information:

If I truly have nothing to go by other than the K-1 (which reflects the above), what would you reccomend me doing?

I know I have a capital gain - but the distributions per the K-1 are greater than the sale price - that's question #1 - how can this be?

I also know I have unrecap 1250 gain from the building and possible a 1245 gain from the 'other assets'.

Forget the trial balance - I'll never get a hold of it and it was probley closed out.

So, I need: Basis in partnership

Capital accounts show distributions in the amount of $2,703,200; yet sale was $2,295,679

Depreciation on building (unrecap. 1250 gain) appears to be $1,137,787 (31% of $3,037,278)

I need an asset listing for the additional $633,003 in depreciation for ‘other items’ more than likely causing a 1245 gain.

Form 8308 (Do I ask/require them to fill this out) is filed by a partnership to report the sale or exchange by a partner - where is it??

Jeff-Ohio (talk|edits) said:

25 April 2011
HEY! In re-reading and re-reading - wouldn't the 1065, if propoerly prepared, show any 1245 or 1250 recapture on Schedule K and then it would flow through to the members' K-1?


Why am I stuck trying to do the leg work when this is really E&Y's responsibility as the preparer's of the partnership return!

Dennis (talk|edits) said:

26 April 2011
"The PARTNERSHIP sold for $8,000,000." If the assets were sold gain would show on the k-1. If the partnership interests are sold respective gains are recognized through a deemed, not actual sale.

Jeff-Ohio (talk|edits) said:

26 April 2011
Thanks Dennis -

Talking with the preparer of the partnership return today....hopefully, I'll get the info that I need.

Jeff-Ohio (talk|edits) said:

26 April 2011
I really think this would be rather easy, if I could figure out WHY they have the $2+MM in distributions and the offsetting 'adjustment/w/d' notation on the 2nd page of the K-1.

Harry Boscoe (talk|edits) said:

26 April 2011
"...the offsetting 'adjustment/w/d' notation...."

D'ya think the preparers could have "booked" the step up to the *purchaser's* capital accounts on the wrong tax return?

Do you "step up then terminate" or do you "terminate and then contribute including a step up"? We await the preparer's explanation with eagerness.

Jeff-Ohio (talk|edits) said:

26 April 2011
Hey Harry - Thanks for responding. I appreciate it.

I truly haven't the slightest clue. I've left three messages and an email. I think they are concerned.

How do you have roughly a $3,000 loss, a tiny bit of interest and then blow $2MM as an 'other adjustment'.

Taxpayer has two K-1s, one for 27% and the other for 4% interest. If I add the two distributions amounts together, it's more than the sale price per the agreement.

So....I'm clueless. How to here something soon because my client is starting to apply pressure.

Jeff-Ohio (talk|edits) said:

27 April 2011
I've now been asked to explain a scenario (like the one above) to the rest of the team because no one is sure how this is treated:

Let's say I own 10% interest in a partnership and each year I have $100,000 in income.

In year 10, when I have a million dollars in basis, I sell MY INTEREST in the partnership to Harry for $2 million.

Let's also say the accumulated depreciation at the time of sale was $5,000,000.

Do you agree that I have a $1 million capital gain of which $500,000 (10% of $5M) will be unrecaptured section 1250 gain? So, my 'two buckets' will be a $500K capital gain and a $500K unrecaptured section 1250 gain?

Harry Boscoe (talk|edits) said:

27 April 2011
Holy Mackerel. Who asked you to explain this and why? Get a charge number from them. I hope it's "Staff Instruction - In-House". Was it Client, Partner, Senior Staff, or Junior Staff that asked you?

RE: Your latest question, "Do you agree...?" No, I don't agree. You need more facts, e.g., what's the taxable gain on the *land* and what's the taxable gain on the *building*?

Jeff-Ohio (talk|edits) said:

27 April 2011
Just me -

Sale of partnership interest.

Disregard building and land sale....are the other points accurate?

Ckenefick (talk|edits) said:

27 April 2011
I don't agree either. And I haven't commented on this post previously because it's screwy as hell. By the way, just as there is a notification rule for sales of partnership interests that involve hot assets, a similar notification rule applies when collectibles are involved or when unrecaptured Sec 1250 gain is involved. Here, the partnership is required to notify the selling partner. See Reg. Sec. 1.1(h)-1(e). Note that there is no prescribed IRS Form or format for making this notificaiton. What I'm getting at, and what Harry is getting at, is that it's the partnership's job to make this calculation.

And the calculation is certainly not based on accumulated depreciation alone, as Harry states. It's based on the assumption that all of the entity's depreciable real estate is sold for FMV and that the seller is allocated the appropriate amount of resulting unrecaptured Sec 1250 gain. This deemed transaction is deemed to occur immediately before the sale of the partnership interest.

I recommend you read the regs under Sec 1.1(h).

RoyDaleOne (talk|edits) said:

27 April 2011
1. Follow Dennis link to the very nice article.

2. Print out the article.

3. Replace the number in the example with your numbers for your client.

4. For training purpose just use the numbers in the example.

Harry Boscoe (talk|edits) said:

27 April 2011
On the sale of the partnership interest you will *not* get correct "buckets" unless you know - or assume - something about the market value of the land and the market value of the building. The *lesser* of the gain on the building or the depreciation taken is subject to the "unrecaptured section 1250 gain" rules. You need to know or at least guess at the theoretical hypothetical "as if" taxable gain on the land and the building, separately, if you're gonna get correct "buckets" for the gain from the sale of the partnership interest.

Harry Boscoe (talk|edits) said:

27 April 2011
I think the point of the "very nice article" that's been linked to is to contrast the sale of an interest and the redemption of an interest. Don't get sidetracked by that *higher* level of sophistication, please don't.

Ckenefick (talk|edits) said:

27 April 2011
Exactly, and how the hell are you going to know all of this if you merely prepare the guy's 1040? You won't. That's why the regs put the burden on the partnership to provide the information/notification.

Ckenefick (talk|edits) said:

27 April 2011
Maybe. I didn't read the article, but there is no unrecaptured Sec 1250 look-through on a redemption.

Jeff-Ohio (talk|edits) said:

27 April 2011
CK - suggest reading the article

It's pretty good and I forgot it was posted.

In addition, I did address the issue and am well aware of the obligation of the preparer's of the tax return and realize it's screwy as hell.

We have some extremely shady presentation, exihibited by the K-1. Today, I found out that the CPAs that prepared the tax return represented the purchaser, not my client and they also made him (my client) sign a form releasing them from any harm.

To put it bluntly, there is NO WAY I am going to come up with the information I need. Plain and simple - I am going to have to take a 'best guess' using my client's accountant.

What I will have is 'hopefully' a trial balance at the time of sale, my client's basis in the partnership, the depreciation schedule and the sale agreement. That's it.

Jeff-Ohio (talk|edits) said:

27 April 2011
http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&rgn=div8&view=text&node=26:1.0.1.1.1.0.1.5&idno=26

another

Ckenefick (talk|edits) said:

27 April 2011
It's somewhat difficult to follow all of this without looking at the documents.

Did the client receive any cash or property distributions? Is the "withdrawal/distributions" amount on the K1 capital rec the same as Box 19 on the K1?

Did the client make any capital contributions?

Could it be that a fractional interest in the property was distributed and client actually sold an interest in real estate?

Can you get a copy of the complete 1065?

E&Y's a pretty big firm. Not sure why they can't provide the information. Has your client asked them for the information?

Jeff-Ohio (talk|edits) said:

2 May 2011
After weeks of making an attempt to unravel this mess, we have been unsuccessful communicating with the preparers of the 1065. The attorneys are now involved, so this will be a lengthy proceess.

What I was able to identify, with the help of CKenefick and discussions with the attorney, is that this was structured as a 'redemption' vs a 'sale'.

CK actually called this from the beginning which amazes me because my thoughts were scattered. He was a huge help and doesn't get nearly the recognition he deserves. CK- I thank you.

Another professional who I hope continues to support others is Spell Czech.

These two guys should be on top of the leaderboard, as their advice and knowledge is invaluable.

The good news after all of this is not only did I learn quite a bit about redemptions vs sale including S1250 unrecap gains, disguise sales, S1250 vs 1245 and the way the capital gains portion is treated, my client will save a slew of tax.

I need to find out EXACTLY what he received in cash and hopefully be able to rely on a basis calculation.

Tis all for now.

p.s. Roy - I ordered the book you referenced last week. Hopefully I get it shortly.

There should be a Star system by usernames where members can award karma for solid responses. The yellow box search really does no good if you rely on a question that received a bogus answer. Doesn't happen often, but it does happen.

CK and SC ~. Thanks again.

COGS (talk|edits) said:

13 November 2012
Has anyone seen a good example of the adjustments to the partership's books? In particular when the retiring partner picks up say 31% of the prior depreciation to use the facts in this thread, does that amount get carved out of the AD on the books? That is what I would think, but I don't see examples on this aspect of this question. And yes, CKenefick is AWESOME!!

RoyDaleOne (talk|edits) said:

13 November 2012
http://www.taxschool.illinois.edu/merch/2011llc.html

I remember the book above, however, I have seen others.

Ckenefick (talk|edits) said:

13 November 2012
Has anyone seen a good example of the adjustments to the partership's books? In particular when the retiring partner picks up say 31% of the prior depreciation to use the facts in this thread, does that amount get carved out of the AD on the books?

Back up and tells us the facts in your situation, to refresh our memories and so we don't have to read everything above.

COGS (talk|edits) said:

13 November 2012
Chris, It is a sale of a partnership interest. But as this discussion focused on the 1250 gain to be reported by the retireing partner, I wanted to examine the entry on the partnership's books. Specifically when you make your debit to the building and land in the 754 entry, do you make a debit to AD equal to the amount of 1250 gain picked up by the retired partner. I found another discussion on this topic and it does not seem to conclude with a precise degree of clarity. http://www.taxalmanac.org/index.php/Discussion:Sale_of_Apartment_Building_held_in_Partnership

For example, in that thread Dennis, who is also an awesome commentor, stated:

"The provision regarding step up on death is kind of a recognition equivilant...remember there is no distinction drawn bewteen sale and inheritance. The journal entries have been giving me fits because apparently accumulated depreciation stays on the books. In its simplest terms, the §754 adjustment is the difference bewteen transferor's book capital and transferor's capital restated at fmv. This seems to mean that all previous 754 adjustments and their related depreciation stay on the books as well. Must make for a funny set of financials. GAAP"

But this does not make sense in my mind and I am thinking there must be a debit to AD in the amount of recapture picked up when the retired partner leaves and picks up his share of past depreciation.


Thank you!!!!

Ckenefick (talk|edits) said:

14 November 2012
See the -1 reg of 743, Section j.

COGS (talk|edits) said:

14 November 2012
Chris, I hate to be dense but since this is about building a knowledge base for others I want to go a little further. I think this is the verbage you are referencing:

(b)Determination of adjustment.— In the case of the transfer of an interest in a partnership, either by sale or exchange or as a result of the death of a partner, a partnership that has an election under section 754 in effect—


(1) Increases the adjusted basis of partnership propertyItalic text by the excess of the transferee's basis for the transferred partnership interest over the transferee's share of the adjusted basis to the partnership of the partnership's property;

So, that is the answer? Property is property and etched in stone no debit to AD for the amount of recognized 1250 gain? A debit to AD would increase basis just as much as a debit to the property itself.

Again thank you and sorry if I am being dense.

Ckenefick (talk|edits) said:

14 November 2012
Right, you don't want to mess around with any of the depreciation calc's (original cost, A/D, method, life, etc.) associated with the "old" asset. Everything here stays the same. The "new" asset (i.e. the step-up) is treated as newly acquired property. Moreover, under 743, the basis adjustment only applies to the new partner in this case.

COGS (talk|edits) said:

14 November 2012
Thank you! So the net effect is depreciation being recaptured twice. Once when the departing parter is bought out and then again should the property sell down the road since all that AD is on the books still.

Ckenefick (talk|edits) said:

14 November 2012
Not quite. If the partnership sells the property, ordinary/1231/capital...whatever gain will pass thru to the partners that exist at the time of the sale. If full gain passes through, the partner that has the extra basis from the 754 election has lower net gain, so no duplication in such a case. Now, if a 754 election is not made...

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