Investment into a Partnership

[AnmarieA]

I have a client who was a partner in an insurance company. He invested $125K to buy out an existing partner several years ago. Now he has dissolved the business and sold his book of clients back to the insurance company which will be paid to the partnership over an 18 month period, My client has a 63% partnership interest in the business and his share is $35K -25% in 2022, $71K -50% in 2023 and the balance of $35K -25% in 2024. The tax preparer of the partnership return told my client that he will prepare a return each year showing the amount received from the insurance company as capital gains and distributions on the K-1 until all the proceeds is received. Allstate is the insurance company in which indicated they would make payments directly in the partnership name. 

My question is the partner (which is my client) able to deduct on his 2022 individual return to offset the capital gains reported on the K-1 for his investment in the partnership on a pro-rata? He will be receiving $142K over the 18 month period so his gain overall should only be $17K ($142 proceeds - $125K investment). Also the partner's basis per the K-1 is still $125K at 12/31/22. 

The other partner which has a 37% ownership interest was one of the original partners and made no investment into the partnership and she currently has only residual basis remaining at 12/31/22 which implies to me that 100% of her K-1 capital gains is in fact taxable 100%

I look forward to some feedback on this situation.

Thanks in advance for your response.

[George4Tacks]

I think your title contains the answer.

The investment was made to buy into the partnership and adjusts your basis in the partnership. Any recovery of that will be offset by the value of the partnership when IT sells or terminates. As the partnership sells off it's assets, the client will be stuck with paying tax on the gains reported by the partnership. In all likelihood the partnership will have zero assets and zero cash when it terminates and that will likely mean a large capital loss on the termination of the partnership. Welcome to $3,000 a year write off for the rest of the client's life. 

[sjrcpa]

"the partner's basis per the K-1 is still $125K at 12/31/22. "

That doesn't sound right. Since he purchased it, there has been no profit or loss and no distributions?