Discussion:Sale of Partnership Interest w/ Neagtive Capital Account

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Discussion Forum Index --> Tax Questions --> Sale of Partnership Interest w/ Neagtive Capital Account

Nosdivad (talk|edits) said:

19 May 2007
I am selling may limited partnership interest in a real estate LP. I have a negative capital account of $98,000 from prior tax losses and distributions on debt refinancings. My share of the the qualified nonrecourse debt is $208,640. I am being offered $175,000 for my 4.7% interest. What are my tax ramifications? Will all of the gain be capital gain or will I have some ordinary gain because of my negative capital account (which is calculated on the tax basis). I believe I have a $273,000 gain. Is this all capital gain? Thanks.

Kevinh5 (talk|edits) said:

19 May 2007
will you have to make up your negative capital account with part of the money?

Nosdivad (talk|edits) said:

20 May 2007
No I dont't believe it is a requirement per the partnership agreement.

JimS ME (talk|edits) said:

21 May 2007
I would recommend seeking professional tax advice. There is much information that should be considered to answer your question. Your capital account may or not be your "inside" tax basis. You may have suspended losses, or you may have used part of your QND to deduct prior losses, so your "outside" basis may be different from your "inside" basis. I wouldn't venture a guess on your gain without much more detailed information.

JAD (talk|edits) said:

21 May 2007
Agree with Jim. Also, some or all of your gain could be ordinary depending on whether the partnership has hot assets.

Janakpatel (talk|edits) said:

22 May 2007
I believe $273000.00 is a taxable capital gain. This is considered a sale of capital asset.

Achoo (talk|edits) said:

23 May 2007
Agree with Jana. However, only if capital account is tax and not Gaap and it was yours from the start. For example, you kicked in 100,000 at inception and were allocated 198k of losses over the life of investment. In that case your basis equals your capital account.

Hot assets probably not an issue since it is real estate but watch out for Unrecaptured 1250 portion which is taxed at 25%. Will need to get this number from the partnership accountants.

Nosdivad (talk|edits) said:

23 May 2007
Thanks folks. There are no hot assets and no suspended passive loss issues. The capital account is based on tax and not GAAP. I believe my capital account is equal to my outside basis. Sounds like it is all capital gain. I will talk to a tax professional.

Mikelim (talk|edits) said:

3 June 2007
I was about to post the same question, but I think this answers it...similar situation, with different numbers.

- Sale of interest for $120K, with a negative capital account (tax basis) of ($20K). - No hot assets.

Just so I can get my head around it, the gain should be capital in the amount of $140K - he had the benefits of the operating losses, so the gain is the amount received, plus the amount of his negative capital account.

Am I thinking about this correctly?

Mikelim (talk|edits) said:

3 June 2007
One other thing to add to the mix - per his ending K-1 (immediately prior to the sale), he his share of recourse liabilities of the LLC was $51K.

Would this count as an addition to his basis? Meaning, if his capital account was ($20K), and his share of liabilities was $51K, would this mean his basis for purposes of calculating gain on sale would be $31K?

By my knowledge of basis, it should be increased by his share of liabilities assumed by being a partner, correct?

I would hope this to be the case - I'd like to deliver some good news!

Thanks in advance for the help!

Mikelim (talk|edits) said:

12 June 2007
After some further research, I think I am looking at it the wrong way. Proceeds: $120K

Neg. Cap. Account: +$20K <p> Share of Recourse Liabs Forgiven: +$50K <p> Proceeds = $190K. Definitely not what he was thinking, nor I.


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