Stephen G : Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything that is not clear.
Stephen G : You basis is the FMV of the Publicly Traded LP at the decedent's date of death. However, that would be the basis in the hands of the Estate, and there would be no step-up in basis related to the final 1040 of the decedent. In any event there is no adjustment for non-recourse debt.
Stephen G : Normally, if you're talking about a K-1 for a year end date after the date of death, that activity would belong on a fiduciary return for the estate, unless the investment was jointly held.
Stephen G : Questions?
Stephen G : If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Again, please remember to rate my response. Bonuses, where you think they are warranted, and excellent ratings, are always most appreciated. Thanks again for using JustAnswer.com.You may get a short survey from the site; if it isn't too much trouble I would appreciate it if you would answer it; the survey results are used to rate our performance;
Customer : Where's the answer?
Stephen G : Sorry, let me copy it here; evidently, you didn't receive it.
Customer : ok thanks
Stephen G : Your basis is the FMV of the Publicly Traded LP at the decedent's date of death. However, that would be the basis in the hands of the Estate, and there would be no step-up in basis related to the final 1040 of the decedent. In any event there is no adjustment for non-recourse debt.1:33 PMNormally, if you're talking about a K-1 for a year end date after the date of death, that activity would belong on a fiduciary return for the estate, unless the investment was jointly held.1:35 PMQuestions
Customer : I don't think you understood what I was asking. The K-1 shows ordinary business losses. Normally, they would be suspended/carried forward to a year when there was ordinary income to offset or the LP was sold.
Customer : more.... But the taxpayer died so my understanding is that the IRS allows those losses (along with the carry forward from previous years) to be taken to the extent they exceed the step up in basis.
Customer : more...I know the value at the date of death, but I need to know the basis before the step-up. My question
Stephen G : What is your reference for that?
Customer : For what?
Stephen G : That you can use the step-up in basis on the decedent's final return?
Stephen G : Unused losses expire with the decedent.
Customer : Proseries instructions say that "suspended passive losses will be allowed except to the extent of a step up in basis"
Stephen G : Correct
Stephen G : But not those for a partnership year subsequent to the date of death.
Customer : It's not a year subsequent. It's the final return of the tax year 2012
Stephen G : You would need the decedent's records to determine any unused basis.
Stephen G : When did the decedent die?
Customer : 2012
Stephen G : the date
Customer : 11/28/12
Stephen G : that's his year end for 2012
Customer : Yes
Customer : Wait a minute and I'll give you the facts
Customer : DOD = 11/28/12
Stephen G : If you are dealing with an PTP for calendar year 2012, that K-1 would belong on a fiduciary return.
Stephen G : In any case non-recourse debt does not increase basis.
Customer : Why not?
Stephen G : Because you never have to pay it; you haven't established any "tax basis" in it if it is outstanding. Once you pay it down, if ever, then you would have established basis. That's why it is called non-recourse.
Stephen G : Think of it this way; it's similar to holding common stock; the debt of the company is not an obligation of the shareholders.
Stephen G : With a partnership, the presentation is different, but in practice, it works the same.
Customer : So why do I keep seeing references that say that both recourse and nonrecourse debt increases basis?
Stephen G : I don't know what you're looking at; but if you tell me I can review what you are looking at and figure out what it means.
Customer : when you want it, you can't find it
Stephen G : Perhaps you are looking at comments re the general partner; the same debt could be recourse to a GP and non-recourse to a LP.
Customer : but your stock analogy makes sense
Stephen G : Any, exactly what are you trying to do?
Customer : Ok. like I was saying before....
Stephen G : What is the y/end of the PLP?
Customer : This is the final 2012 income tax return of someone who died in 2012. She got a k-1 for 2012. It shows ordinary losses of $1,700. Contributed capital was 42,000. Non-recourse liability was $29k. Value of the shares held at death = $72k. So, if the share had been sold just prior to death, the losses would have been allowed. When she died, according to my instructions, losses would have been allowed except to the extent of step up in basis. Excluding the non-recourse liability, the step-up is $30k (72-42), so losses are disallowed. With the non-recourse liability factored into the basis, the step up is $1,000, so $700 would be allowed.
Stephen G : First of all, as I stated, the calendar year 2012 K-1 doesn't belong on the 1040.
Stephen G : The losses are only $1,700.?
Customer : Yes. But there are about 10 more K-1's with similar stories.
Customer : Are all the k-1 losses assumed to have been incurred after date of death?
Stephen G : Well, if you are familiar with fiduciary income taxes, and these partnerships were in the name of the decedent alone, you need to be completing a 1041 as well as a 1040.
Customer : Yes, for the period after DOD.
Customer : Partnerships were in the name of a revocable trust.
Stephen G : The way it works isn't based upon when the losses were actually incurred, it is based upon what tax year the partnership year end falls in.
Stephen G : Same thing; the revocable trust became irrevocable at the date of death.
Stephen G : So, now you need a fiduciary return for the revocable (now irrevocable) trust, and all those K-1s will be reflected in the fiduciary return.
Customer : Yes. So, let me get this straight. The LP's that were sold before DOD, those K-1's are still reported on the 1040, correct/
Customer : ?
Customer : And the k-1's that were still held after DOD, those are reported on the 1041 of the Trust return? Correct?
Stephen G : Since you are now dealing with a trust and not an estate, you must use a calendar year.
Stephen G : So your first 1041 will be from 11/29/12 to 12/31/12.
Customer : Yes, done that. But didn't include the k-1's.
Stephen G : Correct; if they were sold prior to DOD they should include activity up to the date of sale.
Customer : ?? The 1040?
Stephen G : Yes, the 1040, I was responding to your question which said 1040.
Stephen G : After DOD K-1s go on 1041
Stephen G : The PTP held on the DOD get the step-up in basis; no separate adjustment for non-recourse debt.
Customer : Ok. Got that. Now back to the suspended losses, for the LP's held after DOD. What happens to them--the 2012 losses as well as the carryforwards from 2011.
Stephen G : The losses for 2012 are taken to the extent of the stepped-up basis. Then the C/F losses for 2011, etc. BECAUSE they were held in the trust which didn't die with the decedent.
Stephen G : If they were held with the decedent, the prior year suspended losses would be lost.
Customer : You got me confused again.
Stephen G : Well, remember initially you didn't tell me you were dealing with a revocable living trust; which becomes irrevocable at the date of death.
Stephen G : What's confusing now?
Customer : Many things.
Stephen G : Well, you'll have to do better than that :]
Customer : The instructions I cited before are for income tax returns. It says that the losses are allowed on the INOOME tax return of the decendent to the except to the extent there is a step up in basis. So why would the k-1's be reported on the income tax return of the decedent if what you say is true about them being reported on the fiduciary return.
Stephen G : Fiduciary returns can get complex pretty quickly when you have a revocable trust that becomes irrevocable; the distribution deduction; timing of beneficiary distributions, all can have a significant impact on the beneficiaries; if you haven't done a lot of these, or ones that aren't straight forward, perhaps you need to get some hands on assistance?
Stephen G : That statement is not inconsistent with anything?
Customer : Beneficiary distributions were not made until 2013, so I'll get help next year. But for now, let's stick with 2012.
Customer : You told me that the k-1's belong on the fiduciary return even before I mentioned that there was a revocable trust.
Stephen G : You have to understand, when someone asks questions we have no idea what their experience or background is unless we ask.
Customer : I get that.
Stephen G : That's true;
Stephen G : The revocable trust has nothing to do with that particular instruction.
Stephen G : What is it that you want to know specifically now?
Customer : But Proseries seems to think that there may be a reason to report k-1's on the income tax return of the decendent. You said not to do that. How is that consistent?
Stephen G : There are many K-1s that would go on the decedent's final return, depending upon the DOD and the y/end of the Partnership;
Stephen G : There are partnerships with other than calendar years for one thing.
Stephen G : But generally not PTP, they tend to be calendar years; at least the ones I've seen.
Customer : I told you the DOD already. I assume that the y/end of the Partnership 12/31/31 because I don't see anything to the contrary. Where does the k-1 get reported?
Stephen G : They would be reported on the 1041 for the trust unless the partnership was sold prior to the date of death, in which case they would be reported on the final 1040.
Customer : And, are the suspended losses carried forward to the fiduciary return? To offset future income, if any? (I know already asked this, but I didn't understand your answer)
Customer : Give me an example of when the K-1 would reported on the decendent's return.
Stephen G : Suspended losses for disposed of partnerships are taken to the extent of basis on the 1040 and the balance, if any, is lost.
Customer : Example with numbers,because I don't understand what your saying.
Customer : Proseries is not referring to disposed partnerships. It is referring to partnerships held at the time of death.
Stephen G : Suspended losses for partnerships still held by the trust are handled the same way that they would always be handled, carried forward to the extent unused, except that you would have a step-up in basis for those partnerships held at the DOD.
Customer : So, they're not lost at death as you said initially.
Stephen G : I don't know what you are referring to with ProSeries software instructions? I think it is the way you are reading it that is getting confused.
Stephen G : As I said, not if they are in a trust; if held individually, they are lost.
Customer : The instructions I gave you at the beginning: "Any unused losses will be allowed except to the extent there is a step up in basis of the partnership interest".
Customer : When the death box is checked, the Proseries allowed the losses that exceed the step up in basis.
Customer : this is quite separate from the box that says the LP was sold
Customer : So, when would someone check that box, if the K-1 for partnerships held at death shouldn't be reported on the 1040?
Stephen G : Examples with numbers? If your tax basis is 20,000. and your loss is 22,000. you can claim 20,000. and 2,000 is either lost if the PTP is sold prior to DOD, or it is C/F if it is still held at 12/31/2012. If there were a step-up to 25,000. (from 20K) then the full 22k would be deducted and you would have a remaining basis of $3,000.
Stephen G : If it allowed them, that is contrary to the instruction you quoted? "allowed EXCEPT to the extent there is a step-up in basis"???
Stephen G : Hold on a minute...............
Stephen G : From IRS Publication 559, page 5.........................
Stephen G : Partnership IncomeThe death of a partner closes the partnership's tax year for that partner. Generally, it does not close the partnership's tax year for the remaining partners. The decedent's distributive share of partnership items must be figured as if the partnership's tax year ended on the date the partner died. To avoid an interim closing of the partnership books, the partners can agree to estimate the decedent's distributive share by prorating the amounts the partner would have included for the entire partnership tax year.On the decedent's final return, include the decedent's distributive share of partnership items for the following periods.1. The partnership's tax year that ended within or with the decedent's final tax year (the year ending on the date of death).2. The period, if any, from the end of the partnership's tax year in (1) to the decedent's date of death.Example. XXXXX XXXXX was a partner in XYZ partnership and reported her income on a tax year ending December 31. The partnership uses a tax year ending June 30. Mary died August 31, 2012, and her estate established its tax year through August 31.The distributive share of partnership items based on the decedent's partnership interest is reported as follows.Final Return for the Decedent—January 1 through August 31, 2012, includes XYZ partnership items from (a) the partnership tax year ending June 30, 2012, and (b) the partnership tax year beginning July 1, 2012, and ending August 31, 2012 (the date of death).Income Tax Return of the Estate—September 1, 2012, through August 31, 2013, includes XYZ partnership items for the period September 1, 2012, through June 30, 2013.
Stephen G : Questions?
Stephen G : With respect to Passive losses and "At risk" investments ie. not non-recourse debt.
Stephen G : Passive activity rules. A passive activity is any trade or business activity in which the taxpayer does not materially participate. To determine material participation, see Publication 925. Rental activities are passive activities regardless of the taxpayer's participation, unless the taxpayer meets certain eligibility requirements.Individuals, estates, and trusts can offset passive activity losses only against passive activity income. Passive activity losses or credits not allowed in one tax year can be carried forward to the next year.If a passive activity interest is transferred because a taxpayer dies, the accumulated unused passive activity losses are allowed as a deduction against the decedent's income in the year of death. Losses are allowed only to the extent they are greater than the excess of the transferee's (recipient of the interest transferred) basis in the property over the decedent's adjusted basis in the property immediately before death. The part of the accumulated losses equal to the CAUTION!Page 6 of 49 Fileid: … tions/P559/2012/A/XML/Cycle03/source 12:06 - 8-Feb-2013The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.Page 6 Publication 559 (2012)excess is not allowed as a deduction for any tax year.Use Form 8582, Passive Activity Loss Limitations, to summarize losses and income from passive activities and to figure the amounts allowed. For more information, see Publication 925.
Stephen G : These are references to the IRS Publications which purports to be in "Plain English", which is all in agreement with what I have told you.
Stephen G : The only difference is that these statements and examples presume that the decedent held these investments in his/her own name, verses holding the title in a trust.
Stephen G : As I said, this is an area that involves understanding not only individual & fiduciary income tax returns but estate tax return and probate accounting requirements also, even if they don't apply to your particular circumstance.
Stephen G : The other twist in your situation is that you are dealing with PTP which do not end their tax years everytime a Limited Partner dies. The example above is included only so you can see that it is the partnership year end that determines which tax return the K-1 belongs in. The IRS example is for a general partnership.
Stephen G : Questions?
Stephen G : Here's another link that you may find informative in regards XXXXX XXXXX:
Stephen G : http://www.forbes.com/sites/baldwin/2010/12/02/tax-guide-to-master-limited-partnerships/
Stephen G : Questions?
Stephen G :
Can I clarify anything further for you?
Stephen G :
If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Again, please remember to rate my response. Bonuses, where you think they are warranted, and excellent ratings, are always most appreciated. Thanks again for using JustAnswer.com.You may get a short survey from the site; if it isn't too much trouble I would appreciate it if you would answer it; the survey results are used to rate our performance;