Sale of Partnership Interests

Price appreciation or depreciation realized by a partner on partnership basis results in a tax consequence upon sale of a partnership interest. A partners basis is equal to the initial contribution of cash and property or initial basis interest plus partnership adjustments from subsequent activities. If a partnership holds unrealized receivables or inventory these items are taxed at ordinary rates, where as capital assets are taxed a capital gains rates - determined by the holding period of the asset.

When sale of a partnership interest occurs mid year, economic activity must be computed as of the day of sale of interest. For example a partner who sells his 25% holding in a partnership on June 30th would receive a K-1 with the partnerships activities for the first two quarters of the year. These amounts would be special allocation determined either by an accounting software P&L as of 6/30 or similar activity. The K-1 would be marked final. The partner would record on his 1040 either a gain or loss from sale of partnership interest - capital gains on Schedule D and sale of hot assets on from 4797. A partnership with real estate would record gain based upon the holding period of the asset and depreciation received by the partner would be ordinary income recapture to beginning ownership basis.

To compute the gain on sale of partnership assets, create a spreadsheet showing adjusted basis in one column and FMV in another with resulting gain in the third column multiplied by adjusting tax rates. The agreement of sale of partnership interest can allocate sale price according to assets (and likely the best) so as obtain the customized tax attributes. In other words, depending upon the asset combination of the partnership, you can sell ordinary gain assets at cost and allocate the gains to capital items.