Partnership Basis

[WhiteOleander]

I am trying to run something through my mind for next week.

I have a client that is a Gen. Partner in a real estate partnership. (approx. 8-9%) He came in this week and said he had received $50,000 from this partnership and they told him it is a return of his principal and would not be taxable.

I am not sure about this. On the 2005 K-1 it shows approx 135,000 negative capital acct. (all numbers are ficticious) It also shows non recourse loans of approx 350,000.

I was reading that the non recourse loans can increase his basis, but not his at-risk basis. I looked at the prior years. And I cannot find anything that would increase his basis to be different from the K-1.

I tried to call the CPA that handles this on Wed. But, they were out for the holiday. So, I will call them next week.

I would like to know if there is a way that this disbursement is non taxable. Have I missed something or not read the basis rules correctly?

[outwest]

Well how about this..

1) assuming the partnership agreement has the standard restoration of negative capital accounts provision, taking money out of the partnership is like borrowing from any other lender. Taking out a loan does not create taxable income. He'll either get less cash on liquidation of the partnership to repay the loan or may even have to pay it back in.

2) the partnership may have sold a property for a 2006 gain, so the capital account as of TODAY may reflect a larger profit. For instance, if his share of the gain was $200K, he may of had a plus $65K capital account from which the distribution was made. So the distribution itself is not taxable but of course the $200k gain will come out on the 2006 K-1 and THAT will be taxable. Possible tip of the iceberg thing to find out for him.

There are a couple of scenarios that may account for the tax free comment.

Doug

[WhiteOleander]

OK. Thanks.

I can see how that could happen. Maybe the CPA can tell me what is going on.

[Armando Beaujolais]

I am trying to run something through my mind for next week.

I have a client that is a Gen. Partner in a real estate partnership. (approx. 8-9%) He came in this week and said he had received $50,000 from this partnership and they told him it is a return of his principal and would not be taxable.

I am not sure about this. On the 2005 K-1 it shows approx 135,000 negative capital acct. (all numbers are ficticious) It also shows non recourse loans of approx 350,000.

I was reading that the non recourse loans can increase his basis, but not his at-risk basis. I looked at the prior years. And I cannot find anything that would increase his basis to be different from the K-1.

I tried to call the CPA that handles this on Wed. But, they were out for the holiday. So, I will call them next week.

I would like to know if there is a way that this disbursement is non taxable. Have I missed something or not read the basis rules correctly?

Qualified nonrecourse financing does increase at-risk basis. Key term "qualified." See TTB page 7-12.

[WhiteOleander]

Qualified nonrecourse financing does increase at-risk basis. Key term "qualified." See TTB page 7-12.

Oh thanks. It is listed as qualified non recourse. That really does change things.
(I'm at home and will have to read my Tax Book next monday when I get back to office.)