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Hello all, thanks for reading this question, I'll try to be as succinct as possible it is my first time here.
I have a RRE rental partnership with a 85/15 (related, son 90% / father 10%) split across capital, losses, profits, liabilities etc. 2016 is the last year for the partnership as the two of them agreed to wind it up as of 12/31, with one carrying on the activity of renting the houses. The 10% father walked away with about a 30k positive capital account (equating to his outside basis), and relief from his share of the liabilities. The 90% son walked away with the properties, a small amount of cash (~$3k), related mortgages, escrow accounts and a negative capital account of about 15k . Son has eroded some of his debt basis and has no equity basis. We can assume there is no partnership agreement.
I kept the books on a tax basis, very straight forward accounting so that I could best match outside basis making tracking a little easier, and I have schedules that show any erosion of debt basis that tie back to the books. Technically, the business or investment however you want to call it, is still running. My first thought on this is that 10% partner should have a capital loss, but then how would this this be reflected on the books going forward? Also, does their relationship disallow such loss to begin with? How then do I close out the father's equity?
On a slightly different note, what about making a 754 election to step up basis? I'm looking at the 754 question now, but that would mean partner B would have a gain, correct? Could this gain be offset by the loss on his basis in the partnership? Please pardon my questions if I am way off base here, my gut tells me something is wrong with the 754 thing, but I'd rather look stupid than miss an opportunity. I feel like I have these two things confused and I'm hoping someone can shed some light.
I have a RRE rental partnership with a 85/15 (related, son 90% / father 10%) split across capital, losses, profits, liabilities etc. 2016 is the last year for the partnership as the two of them agreed to wind it up as of 12/31, with one carrying on the activity of renting the houses. The 10% father walked away with about a 30k positive capital account (equating to his outside basis), and relief from his share of the liabilities. The 90% son walked away with the properties, a small amount of cash (~$3k), related mortgages, escrow accounts and a negative capital account of about 15k . Son has eroded some of his debt basis and has no equity basis. We can assume there is no partnership agreement.
I kept the books on a tax basis, very straight forward accounting so that I could best match outside basis making tracking a little easier, and I have schedules that show any erosion of debt basis that tie back to the books. Technically, the business or investment however you want to call it, is still running. My first thought on this is that 10% partner should have a capital loss, but then how would this this be reflected on the books going forward? Also, does their relationship disallow such loss to begin with? How then do I close out the father's equity?
On a slightly different note, what about making a 754 election to step up basis? I'm looking at the 754 question now, but that would mean partner B would have a gain, correct? Could this gain be offset by the loss on his basis in the partnership? Please pardon my questions if I am way off base here, my gut tells me something is wrong with the 754 thing, but I'd rather look stupid than miss an opportunity. I feel like I have these two things confused and I'm hoping someone can shed some light.