Abandonment vs sale of real estate limited partnership

[Zane]

Taxpayer is owner of 1% of limited partnership (real estate). Partner's tax capital account is $ -200,000. Liabilities of the L.P. are also greater than the real estate assets. General Partner will purchase taxpayer's interest for $10; or taxpayer can abandon his interest (with permission of General Partner.) Taxpayer has no obligation for any of the liabilities of the L.P.
1. If taxpayer sells his interest to General Partner for $10, taxpayer has taxable gain of $200,000 to bring his tax capital account up to zero ??? Capital Gain or Ordinary Income ????
2. If taxpayer abandons his interest for no compensation, is the nature, or amount, of gain any different from selling his interest ???

[rbynaker]

You might consider punting on this one and referring your client to someone more knowledgeable in partnerships.

In my experience, the capital section of the K-1 is not worth the paper it's printed on. What's relevant for your client for tax purposes is their outside basis. That's your Step 1. If you have TTB Deluxe edition, start reading on 20-12 and you'll need to download the Partner's Adjusted Basis Worksheet from the /tools section of the TTB site.

I suspect you and your client will need to do a lot of digging. If they're not keeping a basis workpaper then they'll need to go back to the initial investment and recreate a basis worksheet for each year. There's no negative basis. Things that would create a negative capital account might be losses/deductions in excess of basis (which should be suspended and not reach your client's 1040 bottom line) or distributions in excess of basis (which are treated as taxable gains on Sch D of your client's 1040).

Rick