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Ok so I purchased a piece of land. for 1 million in 2004 with 2 other partners in a LLC. In 2016 1 partner and I bought out the 3rd at a loss for 400k. Then in 2018 we sold it at another loss for 350k to a party never involved. My CPA is saying I can't take any of the losses from the original purchase amount. is this correct?

Submitted: 4 months ago.Category: Tax
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3/17/2018
Tax Professional: emc011075, Tax adviser replied 4 months ago
emc011075
emc011075, Tax adviser
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Satisfied Customers: 3,866
Experience: IRS licensed Enrolled Agent and tax instructor
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Hi. My name is ***** ***** I will be happy to help you.

I would have to review all your K1s to be sure but if you claim large loses than yes, it is possible that you cannot take any more loses. Your loss deduction is limited by your investment. If 3 of you purchased a land for 1M, each of you got 333K in basis. Every time you claim partnership income or contribute more cash or property to the partnership you are increasing your basis. Every time you claim loses or take a distribution of cash or property from your partnership, you are reducing your basis. Once your basis fall below 0 you cannot claim any losses any more. And when the partnership dissolves or other partners will buy you out, your negative basis will become your income.

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Customer reply replied 4 months ago
This is what my tax guy sent me
Tax Professional: emc011075, Tax adviser replied 4 months ago

I see. He is referring to related party transactions.

Certain sales or exchanges of property with respect to controlled partnerships

(1)Losses disallowed

No deduction shall be allowed in respect of losses from sales or exchanges of property (other than an interest in the partnership), directly or indirectly, between—(A)

a partnership and a person owning, directly or indirectly, more than 50 percent of the capital interest, or the profits interest, in such partnership, or

(B)

two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests

https://www.law.cornell.edu/uscode/text/26/707

Who was the partner that was never involved? The one you sold the partnership to?

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Customer reply replied 4 months ago
Originally. There were 3 partners. I owned 50% the others 25 each. One of the 25 partners wanted to be bought out. So I bought him out at a valuation of 400k. So at this point I owned 75% and the 3rd partner still had 25%. The following year we decided to sell for another loss of 350k when we put it on the market that’s the best offer we got. So basically the tax guy is saying we can only claim the last 50k loss. Not the losses from the original price of 1 million.
Tax Professional: emc011075, Tax adviser replied 4 months ago

Unfortunately he is correct. The first loss is disallowed because of related party transaction. You cannot buy out your own partner and claim a loss. The disallowed loss is incorporated into your basis and claimed within allowed limits when you sell your interest in the partnership.

Ask your accountant how did he figured out your basis. Here is a worksheet he and you can use to make sure your basis are correct: http://www.thetaxbook.com/updates/TheTaxBook/Client%20Tax%20Tools/Partners_Adjusted_Basis_Worksheet.pdf

Partnership basis are often miscalculated when you or the company switch an accountant or your accountants.

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