Sale of Land / partnership

[DevM]

I have a client who had taken an extension because he did not have K-1 from partnership(Which is prepare by partner's accountant). The partnership purchased 2 seperate land lots in anticipation of building house and selling it. Some how the dpartnership did not last and split.

My client sold his share of partnership to the other partner with a gain. The gain is showing on K-1 as Ordinary Income. Is this correct..?

Just want to check with the experts.

[joelgilb]

I have a client who had taken an extension because he did not have K-1 from partnership(Which is prepare by partner's accountant). The partnership purchased 2 seperate land lots in anticipation of building house and selling it. Some how the dpartnership did not last and split.

My client sold his share of partnership to the other partner with a gain. The gain is showing on K-1 as Ordinary Income. Is this correct..?

Just want to check with the experts.

Does not sound right. If he sold his interest directly to another partner he should get a K-1 with his prorata share of income from operations. You would then have a gain or loss to report on the sale of the partnership interest based on his "Outside Basis", which will most like be the same as his inside basis/capital account.

[DevM]

Does not sound right. If he sold his interest directly to another partner he should get a K-1 with his prorata share of income from operations. You would then have a gain or loss to report on the sale of the partnership interest based on his "Outside Basis", which will most like be the same as his inside basis/capital account.

Joelgilb,

Forgot to metnion that my client recevied more money than his contribution. Shouldn't that be considered as Capital gains rather than Oridnary Income.?

[RoyDaleOne]

Sound like you hasve hot assets see the IRS audit guide for partnerships.

[jainen]

>>The gain is showing on K-1 as Ordinary Income.<<

What else would it be? The land was inventory.

[kcjenkins]

The land was [is] inventory, but he did not sell the land, he sold his interest in the partnership, which still owns the land. He may or may not have ordinary income, but the sale would most likely have generated a liquidation dividend, if they were the only two partners. The sale of his interest would be a capital gain or loss, but partnership accounting is the most convoluted area in all of tax law, so there is no way to know, from the little detail given, what should have been shown where on the K1.

[DevM]

The land was [is] inventory, but he did not sell the land, he sold his interest in the partnership, which still owns the land. He may or may not have ordinary income, but the sale would most likely have generated a liquidation dividend, if they were the only two partners. The sale of his interest would be a capital gain or loss, but partnership accounting is the most convoluted area in all of tax law, so there is no way to know, from the little detail given, what should have been shown where on the K1.

I apologize for not being clear. The partnership was dissolved and land was sold to partner for book value. My client recevied extra amount than the basis. Is that considered capital gains..?

[jainen]

>>Is that considered capital gains..?<<

No, because the land was not held as a capital asset, but for sale in the ordinary course of business (i.e., inventory). The K-1 is correct.

[RoyDaleOne]

"My client sold his share of partnership to the other partner with a gain."

If this is the way the transaction actually happen, the K-1 is incorrect. There is a conflict between the facts of the transaction as posted and how the K-1 was prepared. Clarification of the facts is needed.

I am inferring that the ordinary income and the withdrawals were on the number lines of the K-1 and not as supplemental information supplied with the L-1.

I am inferring that the partnership had no reportable sales to outside parties to generate the ordinary income. Additional the amount of the withdrawals just happens to be the same as the agreed upon price for the sale of the partnership interest between the parties. If this inferences are correct let me know and I will try and post what I think should have happened.

The other option is that the partnership liquidated the selling partner's interest. If you want, you can let me know that also and I will post what I think should have happened.