Capital Gain (1065 K-1 Capital)

[ILLMAS]

TP was in a partnership and other partners were covering her share of the pie, partnership was dissolved TP capital account was negative $12K (increased by $12K to arrive at zero).  Would the $12K be a capital gain to the TP since she was getting a deduction in the past?

Thanks

 

MAS

[Abby Normal]

If losses were deducted, she must have had debt basis at the time. Was there any debt relief at dissolution? If the other partners didn't ask her to put in cash to bring her capital account up to zero, then I'd say she probably does have a 12k capital gain.

[ILLMAS]

"If the other partners didn't ask her to put in cash to bring her capital account up to zero, then I'd say she probably does have a 12k capital gain. "

This is exactly what happened and here is my next question, how do go about reporting it on Sch D?  I cannot find where to enter in ATX.

[OldJack]

Well... maybe and maybe not.  she has an outside basis to consider.  Partnership losses would not have been deductible if she didn't have outside basis and she may have outside basis.  That book basis on the partnership may be immaterial.  Partnership agreement and Outside basis rules.

[Randall]

20 hours ago, OldJack said:

Well... maybe and maybe not.  she has an outside basis to consider.  Partnership losses would not have been deductible if she didn't have outside basis and she may have outside basis.  That book basis on the partnership may be immaterial.  Partnership agreement and Outside basis rules.

I'm wondering how she can have capital gain.  Did the partnership just make a book entry to even the capital accounts?  I don't see how that would make her have a capital gain.  Was the capital gain reported on her K-1?  I'm not sure I'm following what actually took place at the partnership level and what the source of a capital gain was.

[Abby Normal]

On 8/5/2016 at 6:00 PM, ILLMAS said:

"If the other partners didn't ask her to put in cash to bring her capital account up to zero, then I'd say she probably does have a 12k capital gain. "

This is exactly what happened and here is my next question, how do go about reporting it on Sch D?  I cannot find where to enter in ATX.

Just put it on 8949 like the sale of any capital asset. 12K proceeds and zero basis.

[OldJack]

7 hours ago, Randall said:

I'm wondering how she can have capital gain.  Did the partnership just make a book entry to even the capital accounts?  I don't see how that would make her have a capital gain.  Was the capital gain reported on her K-1?  I'm not sure I'm following what actually took place at the partnership level and what the source of a capital gain was.

More details are needed.  I don't think there is any capital gain.  If you are thinking this partner has been relieved of a liability you are not thinking correct.  All general partners are fully liable for all partnership debt even after termination of the partnership.  He may still be personally liable to banks or other partners.  Just because there is a negative book capital account does not mean there is a liability, it could simply be from partnership losses that were not allowed by the partners individual tax return due to outside partner basis.  If he made a contribution to the negative account (to make zero) it would not be a taxable event but would simply increase his outside tax basis.   It could be that all partners have an equal negative capital account from losses of non-recourse loans.  This is partnership accounting not corporate accounting.  Remember a partnership is nothing more than two or more sole proprietorships.  A negative equity account of a sole proprietorship does not create a capital gain for the owner. 

[Abby Normal]

You don't usually get something for nothing.

[ILLMAS]

I will get as much details as I can from the TP, I was going based on the information the other partners told the TP I am working with, I will take all the above comments and find out what really happened.  

Thanks

[OldJack]

21 hours ago, Abby Normal said:

You don't usually get something for nothing.

And just what do you think this partner got?  It appears he lost all of his investment.

[Abby Normal]

He got to deduct 12k in losses. Probably used debt basis.

[OldJack]

Do you know what he deducted on his 1040?