3 way partnership 2 partners with basis 1 no basis

[Pacun]

Three LLC member-managers own collectively one residential rental property (and this constitutes the entire ownership interest of the LLC) that has for the last two years produced passive activity losses. Only two of the members have reported these losses, the third awaiting hoped-for capital gain on the sale of the property (since he has no other passive activity income with which to match this).

The sale of the property then generates a loss. May the non-basis member declare any losses, including those of the last two years? If no, how do the two basis-holding members report the losses now permanently disallowed by the third, if any?

[kcjenkins]

I don't really understand the question as stated. When the property was sold, did they liquidate the LLC? If so, then yes, the loss would qualify to be taken. But I don't get that last sentence at all? All the members would report their share of the loss.

[Pacun]

Yes, after the sale, the LLC was liquidated. What I feel is that the person with no money invested, no work performed for the LLC will get a loss. This person never had any investment at risk neither was liable for any debts of the LLC since the LLC did't owed anyone.

This is the situation, LLC was created by the 3 members, everybody agreed 3 ways for losses and profits. When there was time to buy the first property, only 2 members had money to puchase the property. To even up, the other member was going to invest heavier on the next property that the LLC was going to purchase but since the real estate market came down, there was no second purchase. The rental property had 15K loss for the last 2 years, each member got 5K loss. The previous preparer claimed losses for the two members with basis on the ONE property, and carried the loss (didn't claim any loss whatsoever in 2007 and 2008) for the basisless member, hoping that the property was going to generate a profit when sold. To me, he would still qualified to take 3K passive losses since he had other passive income. When the property was sold in November 2009, there was a 12K loss and each member got 4K loss.

Am I correct to assume that the basisless partner should use 3K passive losses for 2007, 2008, 2009, 2010 and 2K loss in 2011? AND the same is true for the other two members? As always, when I am going to amend a return prepared by another person, I always want opinions from this forum.

[OldJack]

A partner can only deduct losses up to his/her tax basis. Therefore, the basisless partner has no deduction for any year. Other partners cannot deduct any portion of the basisless partners share unless the partnership agreement had previously been modified to distribute profit or loss in some different manner.