Your Schedule K-1 Tax Form Guidehousermedia2022-11-23T04:25:44-05:00
How Well Is Your Investment Serving You?
A Schedule K-1 form can be difficult to decode, but it holds valuable data relating to the health of your interest. Find out if your limited partnership interest is working for you with the help of our step-by-step K-1 breakdown. We have a great deal of experience in these matters and can provide an opinion on the taxes associated with the potential selling of an interest, however we do encourage all clients to consult with their personal tax advisors before finalizing any sale.
Frequently Asked Questions
Why do we buy limited partnership interest?housermedia2021-02-22T21:21:20-05:00
Why do we buy limited partnership interest?
The founders of LPE have a long-term investment objective and the ability to absorb phantom income is built into the structuring of the portfolio. We employ a strategy of diversification by investing into hundreds of limited partnership throughout the United States, and it is through this diversification that we are able to lessen the risk associated with owning these interests.
Who is offering to purchase my interest?housermedia2021-02-22T16:25:09-05:00
Who is offering to purchase my interest?
LP Equity, LLC (“LPE”) is a company based in Wilmington, North Carolina whose founders have over 25 years of experience in the industry. We are well aware of the difficulty that limited partners have in finding a buyer for their partnership interests. Our business strategy is to provide a market for limited partners and thereby enhance the value of the partnership interests.
After an agreement to purchase has been reached, how long does it take for me to receive full payment?housermedia2021-02-22T16:27:57-05:00
After an agreement to purchase has been reached, how long does it take for me to receive full payment?
Payment for your interest will be made in full by certified check or wire transfer no later than 30 days after the signed agreements have been returned. Most transactions are closed within 3 days of receiving the signed agreements.
What are the tax implications of selling my limited partnership interest?housermedia2021-02-22T16:27:45-05:00
What are the tax implications of selling my limited partnership interest?
The tax implications depend a great deal on the ending capital account that is reflected on the K-1. If the capital account is negative, then there is recapture tax associated with a sale. In most circ*mstances, we can provide an amount in terms of an offering price that will more than cover these associated taxes. If the capital account is positive, it is possible that the transaction could be tax free. We have a great deal of experience in these types of transactions and can provide an opinion on the taxes associated with the potential selling of an interest. We do, however, encourage all potential sellers to consult with their personal tax advisors. Likewise, we are always happy to discuss any potential offers with tax advisors directly.
I am happy with my investment; why would I want to see an offer?housermedia2021-02-22T16:27:32-05:00
I am happy with my investment; why would I want to see an offer?
By allowing us to make an offer proposal you will gain insight into the potential value of your interest. Even if you decide not to sell your interest at the time the offer is made, you will have a better understanding of what you own and what the future might hold for the partnership you are a part of.
What information do we need to make an offer?housermedia2021-02-22T16:27:19-05:00
What information do we need to make an offer?
We currently have access to databases and information sources that allow us to evaluate interests and make formal offer proposals quite quickly. In most circ*mstances all that is needed to make an offer are the K-1s issued by the partnership over the past two years. The K-1s will allow us to confirm your current ownership percentage and verify any annual distributions the partnership is making so that we can accurately account for them in our offer.
What are the advantages to selling my limited partnership interest?housermedia2021-02-22T16:26:04-05:00
What are the advantages to selling my limited partnership interest?
By selling your interest, you will first and foremost liquidate your investment, realizing its value immediately. Additionally, you will eliminate future K-1 reporting, avoid the unending annual payment of income tax on the investment, and simplify your estate planning.
Let’s discuss your buyout options
Final K-1
If the Final K-1 box at the top of the page is checked it indicates that the K-1 in question is the final K-1 for the partner listed in Box F. If it is indeed the final K-1 it would indicate that ownership was transferred to another entity (the entity would also receive a K-1 in this year), that the partnership interest was sold or that the partnership itself had been dissolved.
Net Rental Real Estate Income
Box 2 displays the limited partners share of the income or loss from the operations of the partnership. This number is used to calculate the income tax the limited partner must pay and is treated as ordinary income. Using the figure listed in our sample K-1 of $12,300, if the limited partner were in the 40% tax bracket (ignoring any other income or tax circ*mstances) the limited partner would owe $4,920 in Federal Taxes.
Distributions
Box 19 is reserved for the total amount in distributions paid to the partner in the year indicated on the K-1. In our example the limited partner has received a distribution in the amount of $3,400. While this is substantial, it is not sufficient to cover the taxes due ($4,920 – see above). In other words, for this year the limited partner would have a net out-of-pocket loss of $1,520 as a result of his or her ownership of the interest.
Partners Share
The figures in Box J, taken together, break down the limited partner’s ownership percentage within the partnership. In a typical partnership all six percentages will be same, however they do occasionally vary, especially in older tax-shelter partnerships. In these limited partnership agreements there was usually included a conversion period where the division of the capital proceeds would change over time; most converting from a 99/1 split to a 50/50 split between the limited partners and the general partner respectively.
Capital Account Analysis
Finally, Box L shows the changes in the limited partners’ capital account for the year in which the K-1 has been issued. The first figure is the beginning capital account from the prior year. The remaining figures represent the effects of income and distributions, a calculus that eventually arrives at the final capital account for the year in question. This final capital account tabulation is a great indicator of what a partner’s taxable gain would be if the interest were sold. From a tax standpoint, a negative capital account is treated as a capital gain upon sale. Conversely, a positive capital account is treated as a capital loss if the interest is sold.
Interested In Learning More?
We ask that you contact Jay Landen or Adam Mcnu*tt (910-509-7202 direct) to discuss how our acquisition program could benefit you and your clients.
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