Discussion:Sale of Apartment Building held in Partnership
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Discussion Forum Index --> Tax Questions --> Sale of Apartment Building held in Partnership
| 11 October 2006 | |
| What do I need to be aware of if the client had an apartment building which was held through a partnership and then disposed of? I have a final K-1 from the partnership but it does not seem that the sale of the building is reflected through the K-1 which only reflects nominal rental revenue and some distributions to bring my client's basis to $0. Is it correct that I need to reflect the sale of the apartment separately on 4797, page 2, as a sale of Section 1250 property? I've never run into this before. I assume the selling price is my client's share of the proceeds (which includes an assumption of the liabilites) and the basis is whatever his stepped up basis was when he inherited the property. Any guidance on this would be greatly appreciated, as always !! | |
| 11 October 2006 | |
| You need to talk to whoever prepared the partnership return. There is no guarantee that a 754 election was made when your client inherited the partnership interest and apparently you have only a K-1 that shows this interest was terminated. Under no circumstance would you be expected to show the sale of the building separate from the k-1. | |
| 11 October 2006 | |
| One e-mail communication I received from the tax accountant who handles the partnership mentions that a step up in basis was added to the depreciation schedule in 2002. But you are right. Why wouldn't the sale of the one asset in the parnership be included on the final 2005 K-1? Is this a reasonable question to ask her? | |
| 11 October 2006 | |
| The worst that can happen is that you will find out either why the K-1 doesn't show a sale or that it was there all along, perhaps included in paperwork your client forgot to bring you. | |
| 14 October 2006 | |
| It turns out that the building itself was not sold, but rather, that 2 of the LLC members bought out the other 3 (one of whom is my client). I'm not quite sure where to report this on the 1040. I have the client's inherited basis from the probate documents and I have the amount he received as well as his share of depreciation on the building. I don't think I need anything else, do I? | |
| 14 October 2006 | |
| I got it -- I'll report on Schedule D unless I hear otherwise. Enjoy the weekend! | |
| 16 October 2006 | |
| Hi I assume you know to recalculate the current basis from date of death plus/minus all partnership activity thru date of sale. Then your gain will be characterized as to LTCG, section 1250 or ordinary section 751 assets from the partnership. bye | |
| 16 October 2006 | |
| I don't know, Wes. §754 election is in place. I would think inside and outside basis are the same...and I just can't see §1250 recapture on sale of partnership interest. I think the acquiring partners pick up all the extra depreciation allowed. | |
| 16 October 2006 | |
| Hi Dennis not sure on your in and out stmt being the same but if 754 in place your comment may be correct. Irregardless of that, I was getting at bringing the D of D fmv up to current basis with k-1 adjustments. That needs to be done. Then the character of the gain is just not CG because this partner got depr (unrecaptured 1250 better terminology) allocated to him/her since D of D plus you still have to ask about "hot" assets. ok? bye | |
| 16 October 2006 | |
| No hot assets - he already filed. Riley concurs with Dennis.
[[1]] | |
| 16 October 2006 | |
| Hi although I dont have time to review but riley noted exception to inheritance, plus in this case we have a partner (beneficiary) who has gotten the benefit of extra plus normal depr and on the sale of any partnership interest one has to deal with 1250 so I respectfully will disagree at the moment with riley/dennis until I can look up on wednesday. I think these facts are different. gotta go. bye | |
| 16 October 2006 | |
| Wes - you will glad to know he did file after the manner you suggested. | |
| 16 October 2006 | |
| Hi there: Since I started this topic, I had better chime in. He has not filed yet but will be doing so today. WesR, what specific adjustments on the K-1 adjustment are you referring to that would be used to adjust D of D basis? Also, I have accounted for the depreciation attributable to my client as a 1250 adjustment on the tax return on the Schedule D for now. Thanks. | |
| 17 October 2006 | |
| You know there is a partnership return out there with a §754 basis adjustment on the building and accumulated depreciation relating to that adjustment. Do you really think retiring partner's regognition is going to have any effect on them. Reg. 1.731-1. | |
| 17 October 2006 | |
| The other area of concern is the treatment of a sale of a partnership interest per the 1.1(h) regs whereby we need to treat the sale of the partnership interest as if all of the partnership assets were sold. I am not too familiar with this area but I calculated my client's 1250 recapture both ways: 1) using the depreciation that I received from the partnership's CPA for my client and then 2) I calculated the 1250 recapture using the rules at 1.1(h) and amazingly the numbers were not too different. Any comments on this would be appreciated. | |
| 17 October 2006 | |
| How do you know the fmv of the 1250 assets to calculate under 1.1(h)? Also, the example in that Reg. is for a sale to an outside party. Would that give credence to the opinion of Dennis and Riley that the transferor in this case does not take into account the 1250 depreciation? Sec. 736(b)(1). | |
| 17 October 2006 | |
| I received the FMV of the assets from the partnership at the time of the sale of the partnership interest. It was the document which was attached to the partnership tax return. I'm going to look into 736(b)(1) now. | |
| 17 October 2006 | |
| 736(b)(1) seems to relate to retiring or deceased partners, not members who are bought out. I'm still checking on this. | |
| 17 October 2006 | |
| Note the difference in treatment between inherited interests that terminate and those that continue as successor in interest. Also note the journal entries required at the partnership level for deemed sale of assets. If the additional depreciation account is going to be closed out I would think it has to flow to the K-1. | |
| 17 October 2006 | |
| Here is an example of one under Reg. 1.1h
Sale Partner Interest. It covers the calculation of 1250 and residual LTCG. It is old so LTCG rates are 20% but principle the same. | |
| 17 October 2006 | |
| This is the example that I used as well. However, in my calculation, I was not clear what basis I should have used to compute the overall gain. The client's inherited basis was around $64K but if I took his 3% share of the A/B of the entire building (including the land) at the time of the sale, his basis is only around $38K. I used inherited basis of $60K to calculate total gain.
In my client's case, the cost of the building is $1M (excluding land to calculate 1250 depreciation) with Section 754 addition of $75K. A/B of the buidling at the time of the sale was approx. $610K. Depreciation recapture, using the example, is $14,260 (share = 3.0625). Total proceeds received by client $101K, so total gain calculated at $37, of which $14K was recapture. I may need to amend this client's return if I'm way off base here. Your thoughts? | |
| 18 October 2006 | |
| If 1250 depreciation is 390,000, then would not client's portion be 11,943 (3.0625% X 390,000)? This would leave 29,057 as residual LTCG. Amount realized 101,000-60,000-11,943 = residual LTCG. I forgot the 75k. 1250 depreciation of 465,000 X 3.0625% = 14,240. Amount Realized 101,000-60,000-14,240 = 26,760 residual LTCG. | |
| 18 October 2006 | |
| I don't know, guys. Reg. 1.1(h)-1(b)(3) specifically does not apply to redemptions. | |
| 18 October 2006 | |
| The partnership ATG distinguishes between a redemption by the partnership and a sale to another partner. | |
| 18 October 2006 | |
| Okay. For some reason I've been looking at this as a buyout by partnership rather than partners. Still, (b)(3) says (3) Section 1250 capital gain—(i) Definition. For purposes of this section, section 1250 capital gain means the capital gain (not otherwise treated as ordinary income) that would be treated as ordinary income if section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent. | |
| 18 October 2006 | |
| Wes appears to be on the right track here. I have recently changed my position on this issue. The look-through rules on Sec. 1(h) are similar to the hot asset rules for Sec. 751.
The unrecaptured 1250 gain allocable to 1250 property owned by the partnership must be reported by the seller of the partnership interest – even if he is selling his partnership interest at a loss. This means that the unrecaptured 1250 gain reported by the partner which is attributable to the sale of his partnership interest is offset by a “phantom” capital loss (equal to the unrecaptured 1250 gain) from the sale of his partnership interest. This phantom capital loss is subtracted from the otherwise reportable capital gain from the sale of the partnership interest. See Preamble to TD 8902, 9/20/2000 and Reg. 1.751-1(g), Ex 1. | |
| 18 October 2006 | |
| Hi good morning leave for a day and need to spend two hours reading to catch up only kidding my eyes are blurring over. So I will address the basis issue calculation. Chase you start with $64K and need to add all income post death on the k-1s to the bene and subtract all distributions, nondeductible items, charity, etc to get your basis for gain determination. Now you compare to proceeds and have total gain. Then your character of the gain is determined from info from the partnership ie hot assets or the section 1250 depreciation/ extra 754 depreciation allocated to your bene. You seem to be getting too involved with all these numbers and partnership asset basis. Get the partnership's CPA to give you total (sorry edited not limited to post death depr) depreciation calcs and then apply your clients %. The section 754 depreciation should have separately reported to you on the k-1s. bye | |
| 18 October 2006 | |
| Yeah. Don't know why I got fixated on redemption here. Here is a pretty good article Janet W. Tillinger, Ph.D., CPA | |
| 18 October 2006 | |
| Good morning to all: Thank you so much for all of this help. The article, above, is excellent,as is the TD explanation. After reading all of this, I seem to have reported too much in residual capital gain, as I did not subtract out the 1250 gain from that. I do have the total depreciation from partnership's CPA so I can easily calulate the total 1250 depreciation -- I used only the amount of depreciation given to me by the CPA attributable to my client post D of D. With regards to the Section 754 basis and depreciation, is the 754 basis to be added to the cost basis of the building and is the 754 depreciation to be included (part of ) total Section 1250 depreciation taken? Looks like I'll amend because I want to get this right. Well, I've certainly learned a lot on this one!! | |
| 18 October 2006 | |
| I added it to my calculation because you did but thought it did not effect your client as this election could have been done if chosen by partnership after the sale by your client - but not certain. | |
| 19 October 2006 | |
| Hi Chase without looking up an example, the 754 adjustment may not wipe out the original cost basis for the decedent's %. It just steps up the increase in FMV. You would have "two" assets on the books attributable to the decedents interest, one for the original % which continues to depreciate and one for the 754 adjustment which starts depr at death. Therefore I dont believe the pre death 1250 depreciation just "disappears". You would have to account for the pre death 1250 gain as well. The section 754 basis does get added to the decedents original basis if I am correct. I dont have time to review a partnership in our office for the correct method of calculating the 754 but the partnership's CPA should tell you the pieces of the puzzle as to how they did it. bye | |
| 19 October 2006 | |
| We used to replace original basis with date of death value and set up new asset. Certainly pre-death depreciation is wiped out if partner is sole owner, no?♫ | |
| 19 October 2006 | |
| Reg. 1.743-1 | |
| 19 October 2006 | |
| Hi 743 says what I thought the adjustment is the INCREASE or EXCESS only which is allocated to the assets ie in our case the bldg. The transferee partner does not "lose" his original % of the initial partnerships cost. Therefore one must still account for the "old" 1250 depr allocated to the deceased partners share plus the "new" 1250 depr on the 754 increase. So Dennis the original cost is not "replaced", one just adds the 754 increase basis to the particlular assets on the depr sch and go from there (which is what we do at our office). At any rate I need to go. Dennis agree you avoid the old depr of a single owner at death full step up but appears from this am only look it is different for a partnership step up. Any other thoughts bye | |
| 19 October 2006 | |
| Then using Chase's numbers would it be about what he said. Cost 1,000,000 + 75,000(754 increase) = 1,075,000 - 610,000(adjust basis) = 465,000(depreciation). 465,000 X 3.0625%(partner share) = 14,240(partner 1250 depreciation). Amount realized 101,000 minus 64,000(inherited basis) minus 14,240(1250 depreciation) = 22,760 residual long term gain. | |
| 19 October 2006 | |
| I agree that the calculation would look like Solomon's numbers above. In fact, I noted two problems last night with my original calculation: 1) I had only considered the depreciation allocable to my client provided by the partnership's CPA rather than the total depreciation adjusted by the client's % and 2) I did not reduce the total gain by that amount of 1250 depreciation (which happens to be a higher amount than I had originally been given.) Can we e-file amended returns or do they have to be paper filed? | |
| 19 October 2006 | |
| Whoa. The exact wording is "increase in adjusted basis." That has to include accumulated depreciation. A journal entry that artificially inflates market value to keep the old depreciation account does not makes sense to me. You are in effect depreciating accumulated depreciation. | |
| 19 October 2006 | |
| Granted but from Chase's post the adjusted basis was unknown prior to the 754 addition - only adjusted basis of 610k after the addition - so the 14,250 unrecaptured 1250 and residual LTCG should be the same either way. Ideally, as Wes suggested,(I think) there would have been two assets with accumulated depreciation on the 754 increase and the original asset. I understood the 465,000 accumulated depreciation being the total of the two. | |
| 19 October 2006 | |
| I have a depreciation schedule which shows the 754 cost basis and related depreciation separately from the cost basis and A/D depreciation of the original assets. Unfortunately, I don't have all the paperwork in front of me because I'm away from my office. But there is a separate line item on the depreciation schedule for this. | |
| 19 October 2006 | |
| Chase - post your final numbers as I will have one like this next year. Thanks. | |
| 19 October 2006 | |
| No problem. This evening I will post the actual numbers per the source documents and then show you the calculations I made for tax. Thank you to everyone who has helped in sorting this whole thing out! | |
| 19 October 2006 | |
| The overall gain is the same, but should there be a 25% rate applied both to pre-death accumulated depreciation and post death depreciation of that same amount? | |
| 19 October 2006 | |
| If the 610k adjusted basis was the original asset only, then depreciation from that would be 390,000 I believe and the A/D from the 754 increase would have to be added to that and that number taken times 3.0625% to get 1250 unrecaptued depreciation. The calculation would be the same to arrive and LTCG. | |
| 19 October 2006 | |
| I finally see what you mean Dennis. I don't recall TD 8902 addressing that. | |
| 19 October 2006 | |
| We used to keep the accounts separate. Original partners would continue to depreciate and successor partner would have his own schedule where depreciation would start all over again. Long time ago. | |
| 19 October 2006 | |
| Guess the only way Chase would know would be by looking at the K-1's subsequent to the inheritance. | |
| 19 October 2006 | |
| I have the K-1's subsequent to the inheritance also. Seems that I have all of the pieces -- just not quite sure how to put them all together. There is Section 754 depreciation on the K-1's subsequent to inheritance. | |
| 19 October 2006 | |
| Possibly TD 8902 did not address the question by Dennis because under the new rule all of the 1250 A/D must be applied and calculated as Chase did. For sure that is what it says. As I recall reading, prior to Reg. 1.1h everyone did pretty much what they thought should be done and the new Reg. and TD 8902 set forth clear guidance. | |
| 19 October 2006 | |
| The journal entries on this are driving me nuts. Suppose we have a partnership with two indentical buildings, each fully depreciated with $400,000 in accumulated depreciation. Fair market value is $700,000. One partner dies. Partnership distributes one building to each. Are you guys saying that inheriting partner gets dr building 1,100,000 cr accumutlated depreciation 400,000? | |
| 19 October 2006 | |
| Liquidating or Redemption by Partnership and Sale Differences. Reg. 1.1h would apply only to sale to another partner or partners. | |
| 19 October 2006 | |
| Okay. So what is journal entry for successor as continuing partner?
My problem here, which I am apparently not stating well, is that the journal entry for new partner who has purchased his interest should be the same as the entry for a new partner who has inherited. | |
| 20 October 2006 | |
| Would not Reg. 1.743-1(b)(1) or (2) apply? Assuming a 754 election were made. | |
| 20 October 2006 | |
| This is where I'm getting lost. The regs make no distinction between outright sale and inheritence. That means the entry has to be the same for both cases and I can't see transferee picking up 1250 liability on a purchase. Transferror is recognizing that liability. | |
| 20 October 2006 | |
| I agree transferee does not pick up 1250 liability. In Chase's case, the partner bought out his client for 101k. The only adjustment I see for the partnership is the one in either (b)(1) or (b)(2) of Reg. 1.743-1. Transferee basis Reg. 1.742-1. If there was not one before, I would assume it will create a different inside and outside basis. | |
| 20 October 2006 | |
| Now I'm even more lost. Is Chase's client picking up decedent's accumulated 1250 depreciation or not? Wes seems to be saying yes and I can't see it. | |
| 20 October 2006 | |
| TD 8902 and Reg. 1.1h-1 say in effect yes as I read them. The client picks up 3.0625% of the total 1250 A/D on partnership books at the time of the sale of his client to the purchasing partner. | |
| 20 October 2006 | |
| But why is decedent's accumulated 1250 depreciation on the books? You are in effect saying that despite the regs making no distinction between sale and inheritence that a distinction exists. | |
| 20 October 2006 | |
| I had not been thinking of the decedent - only the starting point of the 64k stepped up basis for his client and what happens upon the sale of his client's interests. However, I would assume that whatever 1250 A/D on the books of the decedent's part in effect was offset by the 754 election of 75k at that time. As I understand it - a big question - is that the 1250 A/D on partnership books would never go away or be adjusted (other than for normal depreciation) until the partnership terminated or sold out or something of the like. The only adjustments as I see it would result from Reg. 1.1743-1 and or Sec. 754. | |
| 20 October 2006 | |
| My point is basically that if accumulated 1250 depreciation goes away on sale because of transferror recognition it has to go away on inheritance because of step up. The journal entry for the 754 election has to be the same in both cases. There is no distinction in the regs. If decedent's 1250 depreciation remains on the books than so does that of the partner who sells and recognizes. | |
| 20 October 2006 | |
| Now back to the journal entry. If accumulated depreciation stays on the books (back to my example of fully depreciated building with fmv of 700,000) successor partner, whether he buys or inherits, is depreciating 1.1 million? And further, if building is sold two years later and successor partner's share of sale is 1.1 million the entire gain is taxed at 25%? | |
| 20 October 2006 | |
| Let me do Chase's. Assume buying partner has an adjusted basis of 81,000 prior to purchase of client's interest. He pays 101,000 and his outside basis goes to 182,000. Regarding the partnership that elected 754, the JE as I see it, would be debit a new depreciable asset account for 20,000 per Reg. 1.743-1(b)(1) and credit the capital account. The example you posed a few posts ago I do not believe would be analagous to Chase's because you said the partnership distributes a building to a partner. Partner will have zero basis. Will have to look up Sec. 731(b). All capital gain when he sells it? | |
| 20 October 2006 | |
| I give up. We're talking past each other. From my perspective your interpretation creates a situation where through continuous succession you end up with a million dollar building with 10 million dollars in accumulated depreciation. Further, you treat a partner completely differently than an individual tenant in common. | |
| 20 October 2006 | |
| I am ready to post amounts & details that we can all work with -- please remember that this is a sale from an existing partner to remaining partners (my client was the one bought out). As soon as I figure out how to post my external document, I will post it...all the best .. | |
| 20 October 2006 | |
| here is the excel file. It's been cut off a bit at the bottom -- the calculation of residual capital gain is missing but basically it's the total gain that I calculated less the 1250 gain attributable to my client. Hope this link works! User:Chase/Document
Here goes ... | |
| 20 October 2006 | |
| Thanks. In your 1250 section you show A/D of 882,514. Believe it should be 816,611 which would give 25,008 1250 A/D and 13,225 residual LTCG. May be I am missing something. | |
| 21 October 2006 | |
| Good catch: I prepared my excel file after having dinner with a client last night :)I've updated my spreadsheet. Other than that, I think it works, right? | |
| 21 October 2006 | |
| Lone voice in the wilderness votes for 1250 recapture limited to benefit actually received by successor partner. Somewhere around 14,250. | |
| 21 October 2006 | |
| I still stick with Reg. 1.1(h)-1(b)(3)(ii). | |
| 21 October 2006 | |
| in determining the partner's unrecaptured section 1250 gain the amount of section 1250 capital gain that would be allocated (taking into account any remedial allocation under §1.704–3(d)) to that partner (to the extent attributable to the portion of the partnership interest transferred that was held for more than one year)
We do agree on the section. | |
| 21 October 2006 | |
| How do you calculate the $14K recapture, Dennis? Not sure I understand. | |
| 21 October 2006 | |
| Nor I. If nothing else, this discussion created many views. I understand what Dennis is saying, but I do not see the Reg. permitting anything other than using the full 1250 A/D. If there is a way around the Reg., you would have to know the A/D at the date of death and subtract that from the A/D on the date of sale which I would think would create a very low 1250 for your client as he held it for only two or three years. | |
| 21 October 2006 | |
| According to the CPA from the partnership, A/D attributable to my client was only $7,000 (since he inherited)so I have that figure. I'm trying to read & understand how Dennis's remedial allocation fits in here. That would certainly be a better answer for the client if I can use it. | |
| 21 October 2006 | |
| As I read the reg "allocated to that partner" should not include any amounts allocated to former partners who previously held that particular interest. The calculation was rough based on assumption of 19 year property from 2002-2004, percentage cob on the improvements and all of the 754. | |
| 21 October 2006 | |
| On the date of decendent' death and the 754 election of 75k was booked by the partnership, would not depreciable assets been debited and a capital account been credited? If so, the decendent's A/D is still on the books. If the capital account was not the offsetting entry, then what would it have been? If Chase's client does not account for it on the sale, then who does? The transferee doesn't. Or would the 75k been a net adjustment after debiting A/D of an additional amount for the decedent. | |
| 22 October 2006 | |
| The provision regarding step up on death is kind of a recognition equivilant...remember there is no distinction drawn bewteen sale and inheritance. The journal entries have been giving me fits because apparently accumulated depreciation stays on the books. In its simplest terms, the §754 adjustment is the difference bewteen transferor's book capital and transferor's capital restated at fmv. This seems to mean that all previous 754 adjustments and their related depreciation stay on the books as well. Must make for a funny set of financials. GAAP | |
| 22 October 2006 | |
| Wish the article you cited showed the JE's. Then are you saying Chase's calculation is pretty much on target? | |
| 22 October 2006 | |
| No. Just that the accumulated depreciation doesn't go away because the transaction is happening outside the partnership and has no internal effect on the partnership books. 754 adjustment is completely artificial. As near as I can tell to adjust for tax effects under GAAP they make contra accounts. Previously charged depreciation or something like that. I stand with my opinion that transferring partner recaptures only 1250 depreciation he has benefited from. | |
| 22 October 2006 | |
| Thanks for posting the article. I'm planning to spend more time on this tomorrow. I think we're down to whether the seller accounts only for the Section 1250 since he became part of the partnership (2003) or his share of all of the 1250 pre and post? I still read the regs to state all of the 1250 but I'm going to dig into a couple of other sources as well tomorrow. Remember my client would only be taking his allocable share of the 1250 (even though his share is calculated using all of the Section 1250.) | |
| 22 October 2006 | |
| I don't know. I just can't stand the concept of eventually recapturing more 1250 depreciation than was ever taken. (start with a 400,000 building with 200,000 a/d. FMV 450. two partners.
building increases in fmv 50,000 per year Transfer the same interest over and over gain and see what happens.) | |
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