In a partnership, when are capital account and outside basis the same

[removeps-groups]

In a partnership, can the capital account and outside basis be the
same?

For example, if you contributed 10k cash to a partnership, your
capital account is 10k, and your outside cost basis is 10k. If the
partnership assumes no liabilities, then your capital account and
outside basis should be the same, right? So if the partnership makes
a profit and the partner's share is 2k, your capital increases to 12k,
and if you sell your interest for 15k, you have 3k of profit.

If the partnership takes on liabilities (like a loan) and the
partner's share of this liability is 1k, then the capital account
would still be be 10k, right? If the partnership makes a profit and
the partner's share is 2k, the capital account is now 12k. If you
sell your interest for 15k, is the capital gain 3k or 4k?

 

[lotax]

In a partnership, can the capital account and outside basis be the
same?

For example, if you contributed 10k cash to a partnership, your
capital account is 10k, and your outside cost basis is 10k. �If the
partnership assumes no liabilities, then your capital account and
outside basis should be the same, right? �So if the partnership makes
a profit and the partner's share is 2k, your capital increases to 12k,
and if you sell your interest for 15k, you have 3k of profit.

If the partnership takes on liabilities (like a loan) and the
partner's share of this liability is 1k, then the capital account
would still be be 10k, right? �If the partnership makes a profit and
the partner's share is 2k, the capital account is now 12k. �If you
sell your interest for 15k, is the capital gain 3k or 4k?

--

The gain's the same, $3K. Whenever a partner's tax basis in a
partnership interest includes a share of the partnership's debt, the
amount realized [selling price] from a sale of that partnership
interest will include the amount of the partnership's debt that is
included in the partner's tax basis. The tax rules consider the
partner's share of the partnership debt to be "relieved" in the sale
and therefore it gets included in the selling price. Sort of like
debits and credits, you can't have one without the other.

 

[removeps-groups]

On Apr 5, 10:50 pm, "(e-mail address removed)" <removeps-

The gain's the same, $3K. Whenever a partner's tax basis in a
partnership interest includes a share of the partnership's debt, the
amount realized [selling price] from a sale of that partnership
interest will include the amount of the partnership's debt that is
included in the partner's tax basis. The tax rules consider the
partner's share of the partnership debt to be "relieved" in the sale
and therefore it gets included in the selling price. Sort of like
debits and credits, you can't have one without the other.

So if you invested 10k for 5% of a partnership, and the partnership
took on liabilities and your share of the liabilities is 1k, and the
partnership made 2k in profit, then would the capital account be 11k
or 12k? The rule at http://www.1065accountant.com/basis.htm suggest
it will be 11k because

Additions to Basis: Taxable income of partnership including capital
gains.
Capital Accounts: This represents the partners’ share of partnership
equity (partnership assets minus partnership liabilities).

But above sentence seems to contradict a sentence later in the same
paragraph "The capital account does not include a partner’s share of
partnership liabilities". So the question is whether the capital
account needs to decrease by 1k to include the partner's share of
liabilities.

 

[lotax]

When the partnership borrows a bunch of money its cash account goes up
by the amount borrowed and its liabilities also go up by the same
amount and ... and there's no effect on the partnership's net assets
or on the partner's *capital account*. However, since a partner's
*tax basis* in his partnership interest is - by definition - his tax
basis in his capital account *plus* his share of the partnership's
liabilities, the partner's tax basis increases by his share of the
partnership's liabilities, which is $1,000 in your example.

And when the partner sells his interest in the partnership, his
proceeds and his tax basis are *both* higher by his share of the
partnership's liabilities, again this is by definition. The partner's
capital account doesn't move, in your example, except for his share of
the K-1 income, $2K.

Capital account: $10K plus $2K income = $12K.
Tax basis: $10K plus $2K income plus $1K share of debt = $13K.
On the sale: Proceeds are $15K of cash plus $1K of debt relief =
$16K, and tax basis is $12K (capital account) plus $1K (share of debt)
= $13K. Proceeds less basis ($16K - $13K) = taxable gain = $3K.

If the partner's interest sells for $15K cash, it doesn't make any
difference if, or how much, the partnership may have borrowed: The
gain will be the same. For tax purposes, you don't really have to
look inside the partnership, not even peek, to see the assets and
liabilities of the partnership; when it's time for a sale, the
computation of gain is all taken care of by reference to the partner's
"outside" basis, which includes a share of the partnership's debts,
since that same share of debt amount is included in the amount
realized by the partner on the sale of the his interest.

I hate examples; they always have to be *right*...

 

[removeps-groups]

When the partnership borrows a bunch of money its cash account goes up
by the amount borrowed and its liabilities also go up by the same
amount and ... and there's no effect on the partnership's net assets
or on the partner's *capital account*. However, since a partner's
*tax basis* in his partnership interest is - by definition - his tax
basis in his capital account *plus* his share of the partnership's
liabilities, the partner's tax basis increases by his share of the
partnership's liabilities, which is $1,000 in your example.

This kind of makes sense. In my example, he originally contributed
10k to the partnership, and because the partnership borrowed money,
his capital account is still 10k, but his tax basis is 11k. So if he
sells his partnership for 10k now, he has a loss of 1k?

And when the partner sells his interest in the partnership, his
proceeds and his tax basis are *both* higher by his share of the
partnership's liabilities, again this is by definition. The partner's
capital account doesn't move, in your example, except for his share of
the K-1 income, $2K.

Capital account: $10K plus $2K income = $12K.
Tax basis: $10K plus $2K income plus $1K share of debt = $13K.
On the sale: Proceeds are $15K of cash plus $1K of debt relief =
$16K, and tax basis is $12K (capital account) plus $1K (share of debt)
= $13K. Proceeds less basis ($16K - $13K) = taxable gain = $3K.

This doesn't make sense to me. In my original post, I said the
partnership interest was sold for 15k. Are you saying that the
interest should have been sold for 16k? That means anytime we sell
out partnership interest, we should look at our capital account, and
add our share of the partnership's liabilities, to determine the
minimum price we should sell at.

If the partner's interest sells for $15K cash, it doesn't make any
difference if, or how much, the partnership may have borrowed: The
gain will be the same. For tax purposes, you don't really have to
look inside the partnership, not even peek, to see the assets and
liabilities of the partnership; when it's time for a sale, the
computation of gain is all taken care of by reference to the partner's
"outside" basis, which includes a share of the partnership's debts,
since that same share of debt amount is included in the amount
realized by the partner on the sale of the his interest.

I hate examples; they always have to be *right*...

Yeah, but sometimes it's the only way to figure out what's going on.