Excluding Gain on Sale of Property in 1065

[tccpg289]

2 partners owned a property together and lived there together for several years (brothers).

Partner A moved out prior to Partner B. Partner A does not meet the exclusion requirements.

Partner B does meet the exclusion requirements as he lived there 2 of the last 5 years.

Currently, the property is in a 1065 owned by A and B.

Where on the 1040 is the gain entered given that the property is currently under the 1065? 

How do I enter in ProSeries to ensure it flows correctly?

[abctax55]

Does a partnership 'get' to use the exclusion? I don't think so... 

[tccpg289]

No but it will flow through to the individual.

[BobKamman]

Sounds like the same question from earlier this week, from someone whose mind was already made up based on the most insignificant authority, a PLR from a couple decades ago.  And was the property already sold?  By the partnership?  Same thing I said last time, transfer it out to the partners before sale.  

[tccpg289]

It has not yet been sold - can you confirm how to transfer? Where would it all get entered in ProSeries?

[BobKamman]

State law might apply so ask locally.  I would deed it from "A&B Partnership" to "A, a 50% interest" and "B, a 50% interest."  Is the partnership engaged in any business or own other real estate as rentals?  I would not guarantee to the clients that IRS would agree with use of the Section 121 exclusion, and advise them that IRS once said it was OK but then changed its mind in one particular situation.   

[abctax55]

@BobKamman 

And wait two years or not? I'm curious 😊

[sjrcpa]

Is it really owned by a Partnership?

Or is it owned by Person  Brother A and  Person Brother B?

[BobKamman]

@abctax55   In the best of all possible worlds, they would wait two years.  But with real estate values declining, I assume they want to sell now and worry about taxes later.  

[TaxPrep1]

If they used to live in the property, there is no need to file 1065 since it’s not an investment, if one of the partners used it as an investment, then he should have filed it on his 1040 Sch E with 50% ownership and when they sell it he will file it as selling a business property and no exclusion applies, and the brother who is living there can file selling as main home and calculate his gain only.

I 1065 was already filed last year as an investment for both, then I would file it again to calculate the investment profit and loss, issue final K-1s, then do the selling on each 1040 as I mentioned above.

[sjrcpa]

Who legally owns it?

Schedule E is probably not appropriate for a "rental" between co-owner family members.

[BobKamman]

I am not finding where these partners are brothers.

[sjrcpa]

Neither am I. Don't know where I conjured that up. 🙂

[qbteachmt]

The first sentence has "brothers." You're both fine.

The partnership is not a person that has a primary residence. The people don't own the residence personally, apparently. They don't get to treat it as a partnership asset when it is convenient, but then try to claim it is personal just because that is convenient for a different reason.

[sjrcpa]

Bob and I should read more closely. 😀

[sjrcpa]

I asked about legal ownership because many times we have seen real estate reported on a partnership/LLC return when it was owned individually. Conversely, frequently we see people say joint ownership of property makes it a partnership.

OP hasn't answered the question.

[tccpg289]

It is owned jointly by the brothers, thus a multi-member LLC.

[tccpg289]

It is owned jointly by the brothers.

[tccpg289]

It is being sold this year, under contract now, neither brother lives there at the moment, but one of the brothers has lived there 2 of the previous 5 years.

[TaxGuyBill]

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@tccpg289 wrote:

It is owned jointly by the brothers, thus a multi-member LLC.

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If the home is owned by a multi-member LLC, it is not really jointly owned by the brothers.  BIG difference.

[tccpg289]

Got it - thanks for the clarification.

[sjrcpa]

Then WTH was reported on a 1065?

Each brother should report their portion of the sale on their 1040. Sounds like 1 brother is eligible for the 121 exclusion and one is not.

[TaxGuyBill]

He said multi-member LLC.

[sjrcpa]

And he also said the property is owned jointly by the brothers. 

[TaxGuyBill]

Yeah.  He is also asking about it on the TurboTax forum.