What is my tax liability on selling my share of a partnership?

Question

What would be the best way to avoid being over taxed. I walked out on my share of a partnership taking only enough money to cover the tools and equipment I left behind. Should I be taxed on that money I received or would it just be for the sale of my assets.

Answer 1

You would be taxed only on diff between what you received when leaving and your basis (usually your investment) in the partnership.
If what you you received is the same or less than what you put in, then theres no taxable gain.

Answer 2

The best advice you have received is to consult a professional advisor. He or she will ask you enough questions to understand the full picture and give you an answer that is worth something. Everyone here is just assuming one set of facts or not considering all the relevant facts and law.

What do you mean by saying you walked out, for example? The partnership relationship is fragile, in the sense that you can terminate the partnership at any time. However, you may still be responsible for breaching any agreements you made with your former partners, and you may still be responsible for a share of partnership liabilities.

If you contributed the tools and equipment to the partnership and took cash away leaving the tools behind, you may be treated as having sold the tools to the partnership, and may recognize a gain.

Do yourself a favor and get some real advice.

Answer 3

Jin English has a point in that you need to wait for a 2006 K-1 to determine your final "outside" basis. (JQT seems to be confusing your inside basis with your outside basis). The outside basis will be made up of your intital investment plus income that has been reported to you on a Schedule K less losses reported to you on Schedule K plus contributions that you have made less distributions that you've taken plus gains that have been reported on a Schedule K less deductions that are "separately stated" on your Schedule K.....
This just sratches the surface of possibilities because if the partnership was cash basis and you walked away from receivables than you have what is termed a "hot asset" and you have to recognize ordinary income. Also if the partnership was liquidated instead of you selling it "outside" to a new partner there will be other considerations. You may be realizing at this point that sales of partnership interests are most often handled by a true tax professional (not H&R Block) for a reason.

I guess after all this rambling I should just say that TaxGuru probably had the best answer with "consult a professional"

Answer 4

JQT has absolutely no idea what she is talking about.

The difference between your tax basis in the partnership immediately prior to the sale, and the amount you received for your partnership interest is your gain or loss.

You will need to wait until the partnership files its 2006 tax returns before you can determine your tax basis, since you are due a share of the partnership's income or loss from 1/1/06 to the date of sale.

Answer 5

The best thing to do is to speak with the accountant for the business to find out how the partnership was worth at the time of the sell took place. The busines may be worth than what's in the bank. Various equipments and tools have different amortization schedule and residual values.

Contrary to the last answer, this has no relation to your initial investment. Your percentage share of the partnership stays the same, however the total value of the partnership changes over time. If 4 partners contributed $2500 each to a partnership, and the partnership only worth $8000 today. Each partner only has $2000 in the partnership not the initial $2500.

So it is important to know what the value of the partnership at the time of sell. Once you know what the businesss was worth, then it is easy to figure out how to file for tax returns.

For example, if the business was worth $10,000 at the time of sell, and in the partnership agreement you own 25% of the partnership, then you are suppose to receive $2500. If you only got $1500, you can claim the loss on your tax return. If you received more than $2500, then you need to claim the excess as income.

Best wishes.

Answer 6

I believe you should only be taxed on the value of the assets that you are/did receive. The tools and other items are all equiptment costs, however if you did get a substantial amount of money for the tools and equiptment (even though you left them behind) you may want to watch that because you may still be liable for those.

Answer 7

Probably depends on the type of partnership and whether your share was "profit" or "loss".