Sale of Partnership Interest

[Dave T]

A relatively new client sold his interest in a partnership at the beginning of 2019. 

His adjusted basis in the partnership, per the K-1 provided by another CPA, shows as zero.  He had never contributed any capital and was brought in due to his knowledge of some very high tech equipment.   The K-1 also shows that the partnership had been carrying some disallowed losses.

I know his basis can't go below zero but I have two questions; would any proceeds he receives be considered long term capital gain ( he has had this several years ) and do these loses then get distributed to the remaining partners?

I've never encountered this before so any help would be appreciated.

Thank you

Dave T

 

 

 

[Abby Normal]

K1s don't show basis, they show capital, unless the K1 has supplemental schedules showing the basis calculations.

The amount he was paid is a long-term capital gain, to the extent it exceeds basis.

The losses allocated to him are his. The capital gain does increase his at-risk amount, but it does not increase his basis, so the losses are probably not deductible.

https://www.thetaxadviser.com/issues/2012/mar/clinic-story-04.html

If there was any income in the final year, that would increase his basis and you could deduct losses to that extent, assuming there were no other items affecting basis. ATX has a basis worksheet form in the 1040.

[Dave T]

Thanks Abby.

I should have been more specific in that it was the supplemental schedule that showed his zero basis and that it was disallowed loses that had been being carried  forward.

He sold his share at the very beginning of 2019 .

Thanks again.

 

 

 

[Lee B]

 

This situation was probably handled incorrectly in the year he received his Partnership Interest for his expertise,

which should have been recorded as SE Income equal to the value of the Partnership Interest at the time he received it.