sold interest in partnership

[jlew1229]

I have a client who husband was a partner in a campground.  ( 2 partners, 50% each)   He passed away in 2014 and the wife inherited his share of the partnership.   The FMV of the property at the date of death was  848,540.   The depreciated basis in the property at the date of death was 201,777.

Am I correct that the wife's new partnership basis/capital account back in 2014 should have been stepped up to 1/2 of the FMV at the date of death?   ($848,540/2)

In 2020  the wife sold her share of the partnership to the other partner.   This sale would be reflected on the wife's 1040 return with the cost basis being her ending Capital Account balance at the time of the sale?  

The partnership should be final since now there is only one owner and the remaining partner now reports this activity on a 1040 return.  

Thank you in advance  

[sjrcpa]

Wife's basis in the partnership at time of husband's death was the FMV of the 50% interest in the partnership. Most likely this was not equal to 50% of the FMV of the underlying real estate.

Wife's basis at time of sale is initial basis plus or minus all of the items of income, loss, deduction, and distributions up to the date of sale. Most likely not the capital account balance.

[BobKamman]

It's been a long time since I saw one of those and I think it involved a PTP, but as I recall the partnership has to make an election to allow the deceased partner to step up "internal basis."  Or something like that.  And what was the source of the buyout payment?  The partnership itself, or the other partner acting as an individual?  I'm glad it's your return and not mine.  

[qbteachmt]

I believe this is Bob's recollection:

https://www.irs.gov/businesses/partnerships/faqs-for-internal-revenue-code-irc-sec-754-election-and-...

[jlew1229]

The only asset in the partnership is the campground land .    

Should there have been a appraisal of the partnership at the date of death to determine FMV of the 50% interest in the partnership?, which I don't believe there was,  or since the only asset in the partnership is this land, can I use 50% of the FMV at death? If I can't use the FMV of the RE, and no appraisal was completed for the partnership, do I have any options for a stepped up basis?  

The answer the other question, the remaining partner paid as an individual when buying out the partner.  Wrote a check to my client.  

[qbteachmt]

"The only asset in the partnership is the campground land"

Yes; owned by the Partnership; not Inherited by this spouse.

"Should there have been a appraisal of the partnership at the date of death to determine FMV of the 50% interest in the partnership?, which I don't believe there was, or since the only asset in the partnership is this land, can I use 50% of the FMV at death?"

What about liabilities? Basis from years of operation? Money in the bank is also an Asset.

"If I can't use the FMV of the RE,"

The RE is not what was inherited.

"and no appraisal was completed for the partnership, do I have any options for a stepped up basis?"

Did you read the info at that link?

[jlew1229]

Yes, I read the information on the link.  The partnership should have made a 754 election.   If the partnership fails to make the election, it can file for late relief under Treasury Regulation Section 301.9100-2, which is an automatic 12-month extension for IRC Section 754 elections. If more than 12 months have passed, late relief can still be requested but must be approved by the Commissioner.  

One of two triggering events must occur- certain transfers of a partnership interest. Which appears to be when she inherited the partnership shares.   This would allow a partnership to adjust the basis of the property within a partnership.    But wouldn't this adjustment benefit both partners, even the one that did not inherit the shares?   

Real estate - Yes; owned by the Partnership; not Inherited by this spouse.- But the wife inherited his interest in the partnership, which sounds like unless they made a 754 election or request late relief from the Commissioner, the wife' s beginning basis in the partnership is her husband's basis in the partnership at the time of death?  

[sjrcpa]

Wife's basis is the date of death FMV of the 50% partnership interest she inherited, whether or not the partnership made a 754 election.

What value was used for the Probate Inventory?

[qbteachmt]

"What value was used for the Probate Inventory?"

Ding ding ding = winner. This recent sale is based on what was previously reported and what transpired in the meantime. It's been 6 years.

[jlew1229]

Probate valuation was $680,000.00, with outstanding debt of $ 240,000.  Another kink is the land was in the name of the individual, not the partnership, and for some odd reason only in my clients name, not both partners name.      

[sjrcpa]

"land was in the name of the individual" - being your alive client or the deceased spouse?

But the land was on the partnership's books?

"Probate valuation was $680,000.00"  Valuation of what? The partnership interest? Land? Land + improvements?

"outstanding debt of $ 240,000"  Whose debt? What kind of debt? Secured by anything?

[qbteachmt]

"Another kink is the land was in the name of the individual, not the partnership, and for some odd reason only in my clients name, not both partners name."

I can't decide if this topic is the gift that keeps on giving or the topic from hell.

Okay, then...

That makes it all completely opposite of everything earlier, but is along the lines of one of the lines of inquiry.

"Odd reasons" do not define the legal entity.

Let's review:

Someone who died in 2014 owned something.

They have a spouse that inherited something.

There might or might not be a partner in a partnership that might or might not own something, or improved something owned by someone else. It also got operated by someone as something during some time.

At the point of the 2014 death, whatever was owned and inherited got valued at $680k.

Someone owed an amount to someone.

The surviving widow sold something.

That seems like all the details.

🙂

[jlew1229]

land was in the name of the individual" - being your alive client or the deceased spouse?-  Was in the name of the deceased spouse only  than changed to my alive client only.   

Valuation of what? The partnership interest? Land? Land + improvements?- It just states he was part owner of a property valued at $680,000.00 -     

outstanding debt of $ 240,000"  Whose debt? What kind of debt? Secured by anything?- Debt was  a commercial loan, under the name of the other partner.- not sure what was securing the debt.    It is currently paid off.      

[qbteachmt]

Okay, we really need to start over. Let me try. Fix the facts and restate accordingly.

In 2014, a person who died owned Land, and was a partner in a partnership. He owned this land free and clear. His partner had a Personal Loan, and used that to improve the land into a developed campground. So, they both have skin in the game, but separate assets and liabilities.

The Partnership operated the Campground and reported all income. It also reported the land and improvements and personal debt as if they were part of the Partnership, but nothing ever was legally transferred out of the personal names of the individuals.

Your person Dies, so their widow inherits the land and half a partnership. There was no debt in the Estate of the partner who died, and the Probate should never had any debt for this property or operation, because it belonged to the other partner personally.

She later sells the Land. She inherited the land at the time of the probate.

Her share of the partnership is yet to be determined, because they never owned the Land. The partnership reported depreciation on the improvements, but it's tough to tell if they even owned those improvements in the partnership.

Your mission is to determine what was right and wrong starting from 2014, forward, it appears.

Then, go ahead and restate your Facts, once you have them. I'd like to know how this soap opera ends.

[qbteachmt]

Oh, for this part: "The depreciated basis in the property at the date of death was 201,777."

Land never depreciates.

[jlew1229]

I will go with your 2nd option -  definitely not the gift that keeps giving.    

You have it summed up quite nicely.   Now what do I do on the tax return for the sale.   

Again I really appreciate everyone's help. 

Jacquie     

[jlew1229]

The land and improvements were listed in the partnership as assets.   The improvements deprecitated.    

[qbteachmt]

"Now what do I do on the tax return for the sale."

No one on the internet can research the rest of this, even if my description is close to reality. Examples:

Whoever was handling this sale should have determined there were Real Property legality issues. If the deed or title showed the deceased, then this is sold as a separate asset to the other party.

If the partnership share is sold, it doesn't include land it doesn't own. That is going to affect the FMV of the Partnership.