Partnership 1065 - Disposition of property

[Branden]

Situation: Sister & Brother own a Farm together. The Farm has 3 tracts of land (call it Tract 1, 2 & 3). The sister is buying out the brother's share of Tract 2 & 3. The non-depreciable tracts 2 & 3 had a combined cost basis of $400,000, and the sister pays fair market value of $250,000 to buyout the brother. *The fair market value for tract 2 & 3 was $500,000.
I have the sale recorded in the 4562, which then flows to create the form 4797 creating a total gain of $100,000. On the M-2 I have it reflected as a Distribution of Property reducing the partners' capital accounts by $400,000, and then each partner is showing a gain of $50,000 in Part III, Box 10 for Net section 1231 gain.
Does that sound like it is recorded properly?
Or should the gain of $50,000 be reflected in box 19c Distributions of Property, and then reflect the sale transaction on the brother's personal 1040?

[kathyc2]

Is the sister buying the tracts from the partnership and now she will personally own them? Or, are the tracts staying in the partnership and sister is buying some of brothers ownership percentage?

[Branden]

The sister is buying the tracts from the partnership, and she will own them in a single-member LLC. Tract 1 is staying in the partnership and the ownership percentages are staying the same as well.
*For clarification, when I was referencing the gain of $50,000 in Part III, box 10....I was referring to the K-1.

*My understanding is that the sister will have cost basis in the LLC on SCH E of her 1040 return of: 1/2 tract 2 - inherited at 100,000, then 1/2 tract 2 - bought from brother at 125,0000, and 1/2 tract 3 - inherited at 100,000, then 1/2 tract 3 - bought from brother at 125,000.

[kathyc2]

First off, get it out of your head that she is buying from the brother. She is buying from the partnership.

Partnership books should have a credit of 400K to land and 100K to gain on sale. In a "normal" sale, the debit would be 500K to cash. However, it sounds like she paid brother directly, which would make your debit 250K sister draw account and 250K brother draw account.

Partnership will have a 100K gain and if 50/50 ownership each will have a gain of 50K on the K1 and each K1 will show distributions of 250K.

Her basis in the properties that she 100% owns is 500K.