Sale of partnership interest with PY unallowed losses

[kaitlincpa]

Hello (and help!) 🙂

Client sold his interest in his partnership (the partnership merged with a company).

He had prior year unallowed losses and a negative capital account at the time of sale.  (essentially partner had made an initial capital contribution and all future contributions has been recorded as a company note payable to the partner vs. capital contributions).

Upon merger/sale, Proseries is recording a large capital gain on Schedule D (makes sense).

But then the prior year unallowed losses are being released on Schedule E, thus creating a large Schedule E loss. 

I'm not sure this is correct?

I think Proseries Schedule E, Line 28, column (e) 'Basis Comp' needs to be checked and the instructions for this imply I may need to make some kind of manual entry but I'm lost on this. 

So in the end it nets out on the partner's personal tax return...but shows a large capital gain offset by a large Schedule E loss. 

Is this correct? I just feel like something is off here.

Numbers below if helps:

240K Sales Price

50K partner's initial capital contribution

190 partner's recourse liability per K1

(190) prior year suspended losses

= 50K parter's adjusted basis in partnership before sale

240K (sales proceeds) - 50K (basis) = 190K gain on sale (capital gain/Schedule D)

THEN IN Proseries, Schedule E it is releasing the prior year suspended losses of 190K

So the two net each other out on the partner's 1040. 

If anyone out there specializes in partnerships I'm happy to pay for help on this also...just let me know.  Thank you!

[Accountant-Man]

Why were the prior years' losses suspended? Were any other prior losses from the beginning ever used?

Was the 190k note paid off at sale? Did he receive the 190k back?

Capital account +50 - 190 = -140?