Sale of Partnership Interest

[S T]

I know there have been a lot of posts, and I have been retrieving, while some great information, I can still not apply to my particular taxpayers.

I have a partnership that 3 partners equal interests so 33.3%. Two partners sold their 33.3 interests, and new partner bought in.

I am good with that, I think. Might have some S 754 and a few issues, but not addressing those right now.

The issue that I can discern, is calculating basis on the two partners that sold their interest. (outside of the partnership) and what to report for their gain. The two partners that liquidated sold to the one remaining partner and a new partner and percentages were re-assigned.

Here are the numbers. At the time of partner distribution for selling their interest, they are equal for each partner so I am only providing the 1/3 info and then can apply to each.

Tax Basis = 117,230
Debt 217,296

total partner basis 1/3 = 334,526

Sale of partnership interest is cash proceeds of 124,167
plus share of debt 217,296

So total received is 341,463

if you subtract basis above - 334,526

then there is a gain of 6,937

this is capital gain, on the partners form 1040 Schedule D ?? long term or can it be assigned to the goodwill factor and receive a lesser cap gain rate? I am not sure how to report?

Seems like I have to report on form 8308 the S1245 and S1250 amounts on the K-1 for the partnership return.

I have partner's 1/3 share of 1245 depreciation of $76,289

I have partner's 1/3 share of 1250 depreciation of $ 59, 027

I simply looked at depreciation schedule and divided by 3.

If I look to the rules, I have 1245 property (equipment depreciation) and 1250 property (leasehold improvements) that I think need to be reported on the K-1 form for the liquidating partners?

On the partners return (which I am also preparing) don't I report the section 1245 depreciation (recapture) and the section 1250 depreciation (recapture) and report accordingly on the partners indivdual return, form 4797 or schedule D. The partner received a small amount in the sale, but don't they recapture their share of the depreciation that adjusted their basis throughout the years.

I have been reading the rules all day and I am so confused as to what the partner has to report for gain or loss. I have (always) Tax Books, I have Quickfinders, I have searched online, I have PPC, so I am exhausted. I have probably also confused everyone else that is reading this post. I am just at a loss!

Can someone simplify this for me?

Sandy

[JON]

"Hot Assets"

are recaptured as ordinary income from the sale of a partnership interest. I do not think this is done on the K-1, but communication to the partner leaving as to the hot asset recapture is necessary. Hot assets include but are not limited to, accrual adjustments if it is a cash basis taxpayer and accerlerated depreciation.

The second problem is does your partnership not terminate if there is a change of 50% ownership? I always hated that. I can remember even keeping a partner in for 1% in the old days. Although the termination sounds terrible I was at a seminar that said keep the partnership number make sure you assign the income correctly to old and new partners and you have terminated the old partnership. Somehow 754, if elected, bothers me on that one.

Good luck.

[S T]

Still confused

Thanks Jon

Yes, I think you are right, probably not reported on the K-1 which would make sense since it was not a redemption or sale of partnership interest to the partnership. In looking at the K-1 rules for the line 9c, etc, it seems I just need to attach the statement to the K-1, and form 8308

I think I have calculated the numbers for S1250 and S1245, using the Reg 1.1(h)

So actually my K-1 form for the partners that sold their interest will have almost nothing on the K-1 form (sale was 1/1/06), just maybe the distributions for the cash out and zero out their capital accounts and mark final.

Yes, I am doing a technical termination which also presents some issues that I am trying to do. Probably will not elect S754

Seems odd. Anyone have any insight?



Sandy

[Bees Knees]

I think you have the correct idea in your post.

TTB, page 20-10 says

Determining gain or loss. The income or loss realized by a partner
upon the sale or exchange of its interest in unrealized receivables
and inventory items is the amount that would have been
allocated to the partner if the partnership had sold all of its property
for cash at FMV in a fully taxable transaction immediately
prior to the partner’s transfer of interest in the partnership.

In other words, you pretend the partnership sells all of its assets at their FMV. Some of the gain is going to be short term capital gain, some of it is going to be long term capital gain, some of it is going to be depreciation recapture, and some of it is going to be ordinary income from the sale of inventory. The gain from the sale of each asset is then allocated to each partner based upon their ownership interest.

Those numbers will not be on the K-1. I would have the partnership issue a separate worksheet to each partner that makes this calculation for each, and in turn attach it to the taxpayer's copy of the 1040 to justify the Schedule D and 4797 amounts.