Sale of Partnership to another individual

[cherylgolich]

If a partner sells their interest in the partnership, but has a negative capital account, does the adjustment to the capital account to make it zero show as a capital gain to the partnership with a special allocation to the partner that is selling their interest?

[George4Tacks]

The sale has no impact on the partnership. The seller needs to deal with their negative capital account on their Schedule D.

[cherylgolich]

Which makes sense to me but what incentive does partner have to report capital gain if not reported on K1. Especially in the situation of a disgruntled partner.

[sjrcpa]

Put a note on the K-1 along the lines of: At the time of the sale of your interest in this partnership you had a negative capital account of XXXX. This may result in taxable income to you. Consult your tax advisor. Also you're filing Form 8594 8308, right?

[cherylgolich]

great suggestion regarding note on K-1; thanks sjrcpa! I wasn't going to file the 8594 because I'm not doing the partners returns. This should be filed with the individuals returns correct?

[George4Tacks]

Yes  8594 would be part of the 1040 forms to be filed. The partnership may have to file 8308.

[sjrcpa]

I  meant Form 8308. Sorry.