K-1 question

[Todd]

I'm looking at a K-1 (form 1065) for a passive partner of a
real estate venture. The partners capital account is
negative $35,000 at the beginning of the period. The amount
in box 2, Net Real Estate Income (Loss) is negative $15,000,
bringing ending net capital to negative $50,000. Is the
taxpayer allowed the loss on her current 1040?

Thanks in advance.

--
Todd
(e-mail address removed)

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[Benjamin Yazersky CPA]

I'm looking at a K-1 (form 1065) for a passive partner of a
real estate venture. The partners capital account is
negative $35,000 at the beginning of the period. The amount
in box 2, Net Real Estate Income (Loss) is negative $15,000,
bringing ending net capital to negative $50,000. Is the
taxpayer allowed the loss on her current 1040?

Maybe.

Does the K1 have an amount on the line for nonrecourse debt?
If so, that would add to the amount of your basis for
deducting losses.

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>

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[Todd]

Maybe.

Does the K1 have an amount on the line for nonrecourse debt?
If so, that would add to the amount of your basis for
deducting losses.

Good, question, I'll ask, but I'm pretty sure sure there is
no nonrecourse debt, in which case?.....

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[Seth]

Maybe.

Does the K1 have an amount on the line for nonrecourse debt?
If so, that would add to the amount of your basis for
deducting losses.

Shouldn't that be "recourse debt"? It's the at-risk amount
that matters, and non-recourse debt isn't at risk.

Seth

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[Benjamin Yazersky CPA]

Shouldn't that be "recourse debt"? It's the at-risk amount
that matters, and non-recourse debt isn't at risk.

The original post mentioned that he/she was a passive
partner. So, I think to a passive (or limited) partner the
non recourse debt will increase basis for deducting losses.

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----

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[Seth]

The original post mentioned that he/she was a passive
partner. So, I think to a passive (or limited) partner the
non recourse debt will increase basis for deducting losses.

Non-recourse debt isn't money at risk, so it shouldn't
increase the amount of deductible losses.

Seth

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[Drew Edmundson]

I'm looking at a K-1 (form 1065) for a passive partner of a
real estate venture. The partners capital account is
negative $35,000 at the beginning of the period. The amount
in box 2, Net Real Estate Income (Loss) is negative $15,000,
bringing ending net capital to negative $50,000. Is the
taxpayer allowed the loss on her current 1040?

There are at least three tests that a partner has to pass in
order to be able to deduct a loss.

1) Basis test - see Sections 704(d), 705, et al
2) At risk test - see Section 465
3) Passive Activity test - see Section 469

So you start with basis. If no loss allowed there then you
can stop. If enough basis then you go to see if enough is
"at risk" to allow the loss. If so then you run the passive
activity test to see if the loss is allowed. Must pass all
three or the loss is suspended. Assuming (and if you didn't
prepare the 1065 then what else can you do?) the nonrecourse
debt was properly allocated to your client on his k-1 then
it is part of his basis. Only qualified nonrecourse debt is
included for the at risk test.

Unfortunately the negative capital account may or may not
have much to do with his basis. Was your client an original
partner? Have any of the basis adjustments of 734(b) and
743(b) been made? Does the partnership follow the rules of
704(c), like it should? Did your partner contribute
property with a different basis than FMV at any point? From
what you have given us there is no way to tell what her
basis is nor can we tell what her at risk basis is.

--
Drew Edmundson, CPA
Cary, NC

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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