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In this situation with the negative capital account, you would recognize a gain in the amount of $718,000. Added to that would be the forgiveness of liability of $1.5 million and then on top of that, the $338,000 received.
This would be $2,556,000
This should be a capital gain, as well.
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Since it's qualified non-recourse financing....wouldn't his basis increase by that amount and then be reduced by the 718,000 in losses? which leaves a 782,000 basis? That's the part I was confused on. Since the negative basis came from him taking the losses due to the debt basis.
The possibility exists he could have more tax in year one than cash received from the buyout.
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Can you explain the character of income? I thought since he was selling his interest it would be subject to cpaital gains. Would there be recapture?