Form K-1 and the Gain / Loss Schedule

If you sold a publicly traded partnership (PTP) during the year your K-1 will include a sales schedule that provides two important pieces of information.  If you don’t know to look for it, you might miss these two items:

  1. Basis Adjustments.  “Basis” is the sum of the amount you paid to buy the PTP, plus your share of the company’s activity (which is reported on the K-1 every year your own the PTP), less the amount of distributions you received.  Your share of the company activity over your period of ownership is probably not the same amount that you received in distributions.  The difference is the adjustment.
  2. Ordinary Gain.  Stocks are simple.  When you sell you have a capital gain.  It could be short term or long term, but its still a capital gain.  When you sell a PTP, the IRS does not see the partnership interest like it sees shares of stock.  To the IRS, it is not one whole company.  Instead, it is a collection of pieces and the question is, “what would be the tax result if the partnership sold those pieces?”  Not every gain would be capital, some of it would be ordinary.  Therefore, the same treatment applies to the owners of the PTP.

So what does this information mean to you?  The basis adjustment impacts the amount you report on form 8949.  The ordinary gain or loss shows up on form 4797 and you have to attach a statement to your tax return called a “Section 751 Statement”.

If you are not careful, you will end up reporting the ordinary piece of the gain twice.  In order to avoid that, it is recommended that you add the amount of ordinary gain to the basis that you report on form 8949.  That way, your capital gain (or loss) will be reduced (or increased) and you wont pay tax on the same thing twice.

For more information, contact our office.

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