Under the purchase scenario, the terminating partner is treated as having sold his or her partnership interest, usually receiving capital gain treatment.
If the proceeds of the sale include property other than cash, the difference between the FMV and the tax basis of this property is realized as gain at the time of the sale.
This item explores the two main methods used when terminating a partnership interest: purchase and liquidation.
A terminating partner may sell his or her interest to one or more of the remaining partners, or the partnership may liquidate his or her interest.
The partnership may use its assets to liquidate the partner's interest, or it can take on debt to liquidate the partner's interest.
The remaining partners cannot fund the liquidation, nor may these partners make the liquidating payments on behalf of the partnership.
Partnerships must be careful when using the purchase scenario.
The sale of 50% or more of the partnership's capital and profits interests within a 12- month period terminates the partnership under Sec. The second method this item will discuss is where the partnership liquidates the terminating partner's interest.
Likewise, if there is a stepdown, the book deduction will be reduced.
In theory, if all the assets were disposed of, the acquiring partner's interest would end up back at book basis. 754 election, the incremental value of the partnership interest purchased will stay on the acquiring partners' books until the partnership interest is terminated. 754 election will create additional accounting work to maintain the two sets of books necessary to track the adjusted assets and their disposal. 754 election, the partnership must attach a statement to Form 1065, U. Return of Partnership Income, for the year of the sale, which should include the partnership name, address, and tax year in effect.
Unrealized receivables and substantially appreciated inventory are considered "hot assets" under Sec. If the partnership holds hot assets at the time of sale or liquidation, the portion of the gain attributable to these assets will be considered ordinary income.