Tax

Have a Tax Question? Ask a Tax Expert

Ask an Expert,
Get an Answer ASAP!

Tax

I have a 2 partner (M & E) partnership 50/50. In this final

Customer Question
year M will be distributed...
I have a 2 partner (M & E) partnership 50/50. In this final year M will be distributed cash of $16,900 and rental property of $440,000 (NBV) with a related mortgage of $510,000. M will end up with a positive equity balance of $143,100 and E will end up with a negative equity balance of $143,100. I believe E will need to report a LTCG of $143,100. Normally M would continue on with the basis on the rental of $440,000 where the partnership left off. What I don't know is how to treat the positive equity balance of M on his taxes. Does he have a LTCL or does his equity balance get added to the NBV for a new basis going forward of $583,100?
JA: The Accountant will know how to help. Is there anything else the Accountant should be aware of?
Customer: No
Submitted: 1 year ago.Category: Tax
Show More
Show Less
Ask Your Own Tax Question
Answered in 16 minutes by:
7/26/2016
Tax Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 1 year ago
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 482
Experience: Former IRS Revenue Agent
Verified

Dear Accountant,

For some reason the partnership allows the current or final year partners' bases to become one with +143,000 and one with -143,000. Then, the partnership is automatically dissolved because there is a one 100% owner and the other to be 0%.

Provided that the above is true, let me answer your question on Partner E.

Partner E's outside basis needs to be calculated from year one. It is not assumed that s/he has a long term capital gain. This calculation needs to be done from year 0 and 1.

As to Partner M, his/her basis needs to be calculated from year 0 and 1, too. The conclusion cannot and should not be drawn based on the last year activity. With this year's information, s/he is actually with a loss. That is a liability of 510,000 minus the rental property value of 440,000. That is minus, -70,000. S/he got a liability. Then, this amount is somehow compensated with cash of 16,9000, which brings his/her negative distribution to -53,100.

So, Partner M got a negative -53,000 in the form of mortgage liability. From surface, as we can see here and now, there is no gain for him/her.

Please feel free to follow up with question. Otherwise, I am ready to be evaluated by you for your satisfaction with my answer to your question.

Regards,

Fiona Chen, MPA, PH.D., CPA, ABV, CFF, CITP

Ask Your Own Tax Question
Customer reply replied 1 year ago
There is no difference between book equity basis and outside basis. E has accumulated the large negative equity balance due his share of prior years operating losses. This pass through was allowed due to his share of the recourse debt. Since he recognize the losses in prior years I believe he has LTCG on his final negative balance. I don't know if M can claim a LTCL or if he needs to increase his basis in the rental property.
Tax Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 1 year ago

Dear Accountant,

In terms of Partner E,

If both partners were 50/50, their beginning bases should be the same for this year. Which apparently is not the case.

But let us assume the past does not matter and by the end of the year, Partner E has a -143,000 basis in the business, this closed partnership. If he has taken all the rental loss in his tax return, what made you think that he has a long-term capital gain for this year?

He did not get anything. A negative basis does not turn around to become a long-term capital gain. Do I miss any information here?

For example, each year I lost 20,000 in my business. By the end of 6 years, I have flow through loss accumulated 120,000. Yes, my basis is negative in this business, and the flow through makes me recognized losses on my personal tax return accumulative 120,000 in six years. Where do I have a gain to start with, long or short term?

Regards,

Fiona

Ask Your Own Tax Question
Customer reply replied 1 year ago
Per IRC 465 losses taken under the at-risk rules due to the recourse debt need to recognized as income when the negative capital account is not paid back to the partnership at termination.
Tax Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 1 year ago

Dear Accountant,

1) Do you mean like half of the 53,000 mortgage loan forgiven he got this year?

Debt forgiven needs to be reported in the current year as the regular income. It cannot be carried over to the future or next year. It is not long term.

2) We should never allow the partner become negative in basis in comparison to other partners. If that becomes the case, normally, the other partners will allow this partner to recognize more income to let him/her come back above the 0 level. Otherwise, this person is out. There is no such partner any more.

3) As to this case, if there was any debt forgiven he had before, in that particular year, he should have recognize regular income.

4) Basis calculation is important in terms of outside basis. When a person (partner) has distribution or debt forgiven causing him to have more than his basis, s/he needs to recognize regular income in the current year. These type of items cannot be carried over.

5) Dividends has the concept of long and short term capital gain. Partnership and S Corporation activities flow through are current year regular income/loss as recognized through Schedule E on the first page of Form 1040.

Regards,

Fiona

Ask Your Own Tax Question
Customer reply replied 1 year ago
The mortgage company has not forgiven any of the debt. Partner M will be assuming the debit. Both the debt and the rental property are being distributed to M through his equity account. Over the years M has contributed money to support the bank account and E has not contributed any additional cash. Again due to the at risk rules E has been able to recognize losses in excess of his basis. Unless you have some thoughts we are just going agree to disagree.
Tax Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 1 year ago

Dear Accountant,

What are we disagreeing? The long term capital gain? There is no long-term capital gain unless the partnership is sold. For example, if the partnership is not ended this year, will Partner E continue to carry his/her negative basis to next year?

If from one year to next, in the past, the two partners' contributions and distributions and bases have been different, they were not 50/50 partners long time ago.

At the end of each year, when the individual partners reporting their income, on their own 1040, the K-1's bases need to be reported based on the partner's own bases. Therefore, there would be gain reported if the partner's distribution and debt forgiven make him/her have regular income.

This needs to be a yearly event and cannot be carried to next year forever.

Regards,

Fiona

Ask Your Own Tax Question
Tax Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 1 year ago

Dear Accountant,

I am going to attach several sources for your references. Further investigation is always good for our profession. This topic apparently worth further investigation.

1. IRS audit technique guide for partner's inside and outside bases

https://www.irs.gov/businesses/partnerships/partnership-audit-technique-guide-chapter-3-contribution-of-property-with-built-in-gain-or-loss-irc-section-704-c-revised-12-2007

2. Publication 941, you probably already know

https://www.irs.gov/publications/p541/ar02.html

3. IRS Practitioner's Hotline number.(###) ###-#### ***** first choice is tax law question. Because you have an active taxpayer case, they will be glad to talk with you. They will have someone pre-screen our question first. Then, decide on whom to give to us to talk with. Sometimes, we get someone who is really good. Sometimes, it may not be the person's specialty. There was once I had an employee plan specialist calling me back like after I place the question for one week. You don't have to tell them the taxpayer information when you are asking the tax law question.

4. IRS held tax forums are held in major cities each year. The registration is relatively cheap. If you attend and ask around, it is likely that you will get nationally known experts on the subject. Otherwise, someone will introduce you to others to help us to get the questions answered. That is the purpose of the forum to help the professionals.

5. Find IRS rulings, private rulings on the subject. The authors are attorneys. They are also called, "the national counsel on the subject (IRC Code)." If there are things they don't know, they will research and get back to you. Most of the times, they can find resources for us right a way. This is not something we use all the times. But when we have definitely hard and strong questions, they are the resources we go to. A lot of times, the counsel's name and telephone numbers are placed in the end of the ruling. The reason for their contact information to be right there is for the practitioners to contact them on the subject. These counsels are usually located in Washington, D.C., they are very helpful.

6. Of course, when we are really not sure and the case is relatively important to us, we can always send in request for the IRS to give us private ruling letters.

Hopefully, these resources can help us answer difficult and specific questions. It is nice to have the discussion with you. Keep up with the good work.

Regards,

Fiona

Ask Your Own Tax Question
Tax Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 1 year ago

Dear Accountant,

I am looking at your original question.

Your question was on how to treat the positive balance of M on his taxes. For M, the partnership will be dissolved. He is the owner of this rental property which from now on will be reported on his Form 1040 tax return Schedule E as rental property. If he has had a positive basis, i.e., say 583,000, say this is true, he does not have a tax issue in terms of 583,000. positive basis. The partnership dissolved. Assume that he has reported tax on his tax return. Therefore, there is no tax issue for this positive basis. He does not carry this basis forward any more. It is done.

Hopefully, this part answers your questions. The other discussions a sort of distract from your main question. Hope now, it is cleared up.

Regards,

Fiona

Ask Your Own Tax Question
Tax Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 1 year ago

p.s. My answer to M's tax return responsibility is based on the information that all prior years were correct. And previously I calculated his bases on this newly assumed rental property for this year. That number does not have the issue on depreciation taken prior to this year, etc. Therefore, s/he personally has a basis on the property. His/her personal possible loss or gain on the business is a different issue. They do not come from his.her inside bases but from his/her outside bases. Nevertheless, all these discussions above are assumed that prior year tax liability and calculations were correct.

Regards,

Fiona

Ask Your Own Tax Question
Ask Dr. Fiona Chen Your Own Question
Dr. Fiona Chen
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 482
482 Satisfied Customers
Experience: Former IRS Revenue Agent

Dr. Fiona Chen is online now

A new question is answered every 9 seconds

How JustAnswer works:

  • Ask an ExpertExperts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional AnswerVia email, text message, or notification as you wait on our site. Ask follow up questions if you need to.
  • 100% Satisfaction GuaranteeRate the answer you receive.

JustAnswer in the News:

Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.

What Customers are Saying:

I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response...

T.G.WMatteson, IL

I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight.

BonnieChesnee, SC

Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation.

JohnMinneapolis, MN

Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with.

OrvilleHesperia, California

Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help.

Mary C.Freshfield, Liverpool, UK

This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!!

AlexLos Angeles, CA

Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult.

GPHesperia, CA

< Previous | Next >

Meet the Experts:

Wallstreet Esq.

Wallstreet Esq.

Tax Attorney

586 satisfied customers

10 years experience

Mark D

Mark D

Enrolled Agent

1,300 satisfied customers

MBA, EA, Specializing in Business and Individual Tax Returns and Issues

Richard

Richard

Tax Attorney

4,310 satisfied customers

29 years of experience as a tax, real estate, and business attorney.

Robin D.

Robin D.

Senior Tax Advisor 4

13,695 satisfied customers

15years with H & R Block. Divisional leader, Instructor

Megan C

Megan C

Certified Public Accountant (CPA)

8,651 satisfied customers

Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

jgordosea

jgordosea

Enrolled Agent

2,885 satisfied customers

I've prepared all types of taxes since 1987.

R. Klein, EA

R. Klein, EA

Enrolled Agent

1,839 satisfied customers

Over 20 Years experience

< Previous | Next >

Related Tax Questions
Can I report rental income in my tax return on a property
Can I report rental income in my tax return on a property thar is owned by my father? He does not live in the US is not a US citizen and can sign a document to allow me to receive the rental… read more
Robin D.
Robin D.
Senior Tax Advisor 4
Vocational, Technical or Trade School
13,695 satisfied customers
How to report cancellation of debt on rental property?
I received a 1099-C for my rental property that I held for over 1 year. According to the worksheet provided in IRS Publication 4681 I was insolvent just prior to the debt being canceled. My question i… read more
Dr Arthur Rubin
Dr Arthur Rubin
Doctoral Degree
24 satisfied customers
My question is about depreciation for rental property. My
Hello. My question is about depreciation for rental property. My rental property had no income during one year. In this case, since there was no income, I do not need to claim depreciation for that sa… read more
Fred Rook
Fred Rook
Corporate Controller
BSBA
32 satisfied customers
Figure out how much is my tax liability + my capital gains +
Figure out how much is my tax liability + my capital gains + depreciation recapture tax … read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
Im semi retired ,sold a rental property Ive had for 3 yrs &
Second opinion] Im semi retired ,sold a rental property Ive had for 3 yrs & have a capital gain about 60K . Im single no dependants & will have about 30 k in 1099 income this year. Will I owe 15% tax … read more
Chad CFP ®
Chad CFP ®
Certified Financial Planner(R), Pro
Master\u0027s Degree
736 satisfied customers
Would owning a second home that is used for rental property
Would owning a second home that is used for rental property income affect VA survivors benefits? Would SSDI income?… read more
Barbara
Barbara
Enrolled Agent, Paralegal
3,490 satisfied customers
Are you familiar with Capital Gain taxes on rental property?
Are you familiar with Capital Gain taxes on rental property? … read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
I have an LLP (limited liability partnership) with an
I have an LLP (limited liability partnership) with an operating agreement that indicates it's organized as a general partnership. I am the designated 'tax matters partner'. The *other* partner is resp… read more
abci168
abci168
Principal
27 satisfied customers
My grandma has a rental property held personally since the
Hi Mark, My grandma has a rental property held personally since the year 2000. We want to transfer the house into an LLC. On the date the rental property is transferred into the LLC what is the holdin… read more
socrateaser
socrateaser
1,031 satisfied customers
I sold a rental property at a loss (no capital gains);
I sold a rental property at a loss (no capital gains); however should I pay the $133,000 on the principal of my house I owe 166,000 at 2.8% or buy another rental? … read more
LEV
LEV
Retired
Bachelor's Degree
14,896 satisfied customers
If my Schedule E loss is disallowed for a rental property
If my Schedule E loss is disallowed for a rental property (due to income level), can I take the mortgage interest and real estate taxes paid on Schedule A instead of on Schedule E?The entire expense a… read more
Chad CFP ®
Chad CFP ®
Certified Financial Planner(R), Pro
Master\u0027s Degree
736 satisfied customers
Can individual take residential rental property losses on
Can individual take residential rental property losses on their tax returns … read more
abci168
abci168
Principal
27 satisfied customers
Disposition of Rental Property. Rental property: Gross sale
Disposition of Rental Property.Rental property : Gross sale price: $600K Cost or Other Basis plus Selling Expenses: $300K Depreciation allowed or allowable: $100K (Form 4797 line 22)Adjustment: $300K … read more
emc011075
emc011075
Senior Tax Specialist
Bachelor's Degree
16 satisfied customers
Sell of property tax liability. Ca. Bought home 25 yrs ago
bought home 400,000 selling 2.5 mil. Invested 500,000 owe 800,000… read more
Richard
Richard
Tax Attorney
Doctoral Degree
4,310 satisfied customers
Capital Gains Question: My parents have a rental property
Capital Gains Question: My parents have a rental property they bought for $150,000 several years ago. The property is now worth around $500,000 dollars with a $350,000 mortgage. They want to gift me t… read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
What tax form is filed to report dividends paid by US Corp?
What tax form is filed to report dividends paid by a US Corp which is owned by a Canadian Corp? I think it might be 1042S. I want to know the rate of WH.… read more
abci168
abci168
Principal
27 satisfied customers
I didn't claim depreciation on a rental property for 8
I didn't claim depreciation on a rental property for 8 years. I'm about to sell the property. How many years of the past annual depreciation can I claim? … read more
NPVAdvisor
NPVAdvisor
CFP Licensee and Practitioner
Master's Degree
180 satisfied customers
I sold a rental property and fully depreciated furniture and
I sold a rental property and fully depreciated furniture and fixtures such as refrigerator/oven/doors etc. Would I have to recapture the FF&E depreciated amounts as ordinary income with the sale when … read more
Mark Taylor
Mark Taylor
Certified Public Accountant
Masters
2,230 satisfied customers
Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

Show MoreShow Less

Ask Your Question

x