Partnership buy out

[Max W]

Client invested $300K in a 25% share of a new partnership in 2018.  He was a passive participant.  In 2019, the 3 other partners bought him out for $260K.

Would this be  a  simple cap loss of $40K, or am I missing something?

[Lion EA]

Plus/minus 2018 K-1 items. Did the partnership “close” books at 2019 buyout date or does he get a pro rata share of 2019 Schedule K items?

[jklcpa]

10 hours ago, Max W said:

Client invested $300K in a 25% share of a new partnership in 2018.  He was a passive participant.  In 2019, the 3 other partners bought him out for $260K.

Would this be  a  simple cap loss of $40K, or am I missing something?

It may not be so simple. First, this partner's outside basis will have changed by his share of the partnership activity from 2018 and for 2019 through the date of sale that is allocated to him.  Second, partnership "hot assets" don't get cap gain treatment. Third, did the partnership have debt where this partner was relieved of that responsibility?  

[Max W]

Knowing that partnerships are full of traps and pitfalls I generally steer clear of them, unless it is a small one with a couple of people that usually are underfunded.

There was no Cap Gain.  There was a a short term loss, so I don't see that hot assets are an issue.

There was nothing on the K-1 for either year. In fact the sale was shown as being on Jan 1.  

I am waiting for some more info from the client, so stand by.;)

[jklcpa]

1 hour ago, Max W said:

Knowing that partnerships are full of traps and pitfalls I generally steer clear of them, unless it is a small one with a couple of people that usually are underfunded.

There was no Cap Gain.  There was a a short term loss, so I don't see that hot assets are an issue.

There was nothing on the K-1 for either year. In fact the sale was shown as being on Jan 1.  

I am waiting for some more info from the client, so stand by.;)

I didn't say there was a cap gain. I said cap gain treatment, meaning that all of the transaction may not be eligible for being reported entirely as disposition of a capital asset on the return. When a partner sells his partnership interest to anyone other than the partnership, the partner is entitled to capital gain or loss treatment, except with respect to hot assets.  If there were hot assets, then that is carved out and reported as ordinary income.  In other words, there can still be ordinary income even if there is an overall loss because the tax treatment of the components of the sale is tied to the underlying partnership assets.  

Good luck with the reporting. 

[Max W]

I see that you are a night owl, almost 2:30 AM EDT.

Thanks for your input.