inherited partnership

[Kram BergGold]

My client inherited 4% of a real estate partnership which owned one building. In 2005 the building was sold and the partnership terminated. He inherited the partnership in 2004 and the FMV was $140,000. The partnership did not make the 754 election so I have to adjust basis. The K-1 shows $200,000 of net section 1231 gain and $33,000 of unrecatured section 1250 gain. I let these numbers flow to 4797 and Schedule D. I ascertained that the adjusted basis was $30,000 so I entered a -$110,000 on Form 4797. So we wind up with $90,000 of gain of which $33,000 is 1250 gain. I was told that when you inherit a partnership you do not eliminate the past depreciation. Have I handled this correctly?

[Roland Slugg]

Additional suggestion

Dear Kram BergGold

Based on the numbers in your post it appears you have the right taxable gain of $90,000, of which $33,000 will be treated as Unrecaptured §1250 Gain.

I believe it's important that you take care in describing the -110,000 offsetting adjustment. You might word it as, "Additional basis in above sale, due to inheritance, not taken into account by partnership that reported the sale." Since it may be impossible to reduce that explanation sufficiently to fit in the space available on F-4797, you may wish to attach a separate explanation. In lieu of all that you may wish to attach F-8082, on which you will be able to explain the reason for the difference in gain more completely, then enter only the correct net gain of $90,000 on F-4797.