Sale of Partnership Interest


J

James

I have a partnership (2 partners) that owns and leases a
building, which is depreciated out. One of the partners sold
his partnership interest to his son . Shouldn't the son get
depreciation on the building based on his cost of buying the
partnership interest? Is that depreciation reflected on the
partnership 1065, or is it a separate calculation on the
son's 1040?
 
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D

David Woods

James said:
I have a partnership (2 partners) that owns and leases a
building, which is depreciated out. One of the partners sold
his partnership interest to his son . Shouldn't the son get
depreciation on the building based on his cost of buying the
partnership interest? Is that depreciation reflected on the
partnership 1065, or is it a separate calculation on the
son's 1040?
Depreciation is not a separately stated item on a K-1.
Depreciation is a partnership deduction not a partner
deduction unless the partner put the building in the entity,
which clearly the new partner could not have done.
 
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G

Gene E. Utterback, EA

James said:
I have a partnership (2 partners) that owns and leases a
building, which is depreciated out. One of the partners sold
his partnership interest to his son . Shouldn't the son get
depreciation on the building based on his cost of buying the
partnership interest? Is that depreciation reflected on the
partnership 1065, or is it a separate calculation on the
son's 1040?
Depreciation is done at the entity level. Once the building
is fully depreciated there is usually no more depreciation -
for the original partners or any new partners. I say
usually because I do seem to recall something about a
Section 754 Basis adjustment on a departing partner. I'd
advise you seek professional help for several reasons. This
is one of them. The other is that you may also have a
Section 751 Hot Asset issue with respect to the departing
partner and it is also possible that you may have terminated
the partnership when your partner sold out to his son.

You really do need to see a pro for this.

Good luck,
Gene E. Utterback, EA, RFC
 
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T

Taxbert

James said:
I have a partnership (2 partners) that owns and leases a
building, which is depreciated out. One of the partners sold
his partnership interest to his son . Shouldn't the son get
depreciation on the building based on his cost of buying the
partnership interest? Is that depreciation reflected on the
partnership 1065, or is it a separate calculation on the
son's 1040?
There is an election that the partnership can make that
would step up the basis of the new partner's portion of the
partnership assets to FMV. This is called a Section 754
election. It has to be made by the partnership. Then the
partnership would calculate the additional depreciation to
the new partner and report this additional amount on his
Schedule K-1.
 
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D

David Woods

There is an election that the partnership can make that
would step up the basis of the new partner's portion of the
partnership assets to FMV. This is called a Section 754
election. It has to be made by the partnership. Then the
partnership would calculate the additional depreciation to
the new partner and report this additional amount on his
Schedule K-1.
One CANNOT make a 754 election when one partner buys the
interest of the other partner. The partnership terminates
at the point, hence the partnership no longer exists to make
any election, nor can any additional depreciation be
allocated. Quite simply, the activity then is simply
reported on whatever schedule is applicable to the remaining
owner.
 
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D

David Woods

Depreciation is done at the entity level. Once the building
is fully depreciated there is usually no more depreciation -
for the original partners or any new partners. I say
usually because I do seem to recall something about a
Section 754 Basis adjustment on a departing partner. I'd
advise you seek professional help for several reasons. This
is one of them. The other is that you may also have a
Section 751 Hot Asset issue with respect to the departing
partner and it is also possible that you may have terminated
the partnership when your partner sold out to his son.

You really do need to see a pro for this.
Gene, I agree he needs help, but this isn't a hot asset
issue unless any of the former partnership assets were
contributed by the selling partner.
 
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G

Gene E. Utterback, EA

Gene, I agree he needs help, but this isn't a hot asset
issue unless any of the former partnership assets were
contributed by the selling partner.
Drew - you may well be right on this. I don't run across a
lot of these types of partnership exchanges. The OP didn't
include enough information to make a determination about who
contributed what to the partnership. I know there CAN be
751 Hot Asset issues when a partner departs under the right
circumstances and I believe that with a 751 issue there is
also frequently a 754 issue. But again, I don't get enough
751 or 754 issues to remember all the rules off the top of
my head.

Thanks,
Gene E. Utterback, EA, RFC
 
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Taxbert

One CANNOT make a 754 election when one partner buys the
interest of the other partner. The partnership terminates
at the point, hence the partnership no longer exists to make
any election, nor can any additional depreciation be
allocated. Quite simply, the activity then is simply
reported on whatever schedule is applicable to the remaining
owner.
You are correct that the partnership terminates when one
partner buys the interest of the other partner and now owns
100%, but that was not the facts in this question. (also,
the now sole owner would get up a step up in basis upon
termination equal to his outside basis.)

While we are on the subject, if the partner who sold his
interest to his son owned 50% or more of the partnership,
then the partnership technically terminates and a new
partnership is created.

Jack Grater, CPA, MST
 
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