I'm looking at a K-1 (form 1065) for a passive partner of a real estate venture. The partners capital account is negative $35,000 at the beginning of the period. The amount in box 2, Net Real Estate Income (Loss) is negative $15,000, bringing ending net capital to negative $50,000. Is the taxpayer allowed the loss on her current 1040? Thanks in advance.
-- Todd snipped-for-privacy@bellsouth.net
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Maybe.
Does the K1 have an amount on the line for nonrecourse debt? If so, that would add to the amount of your basis for deducting losses. ___________________________________
Good, question, I'll ask, but I'm pretty sure sure there is no nonrecourse debt, in which case?.....
Shouldn't that be "recourse debt"? It's the at-risk amount that matters, and non-recourse debt isn't at risk. Seth
The original post mentioned that he/she was a passive partner. So, I think to a passive (or limited) partner the non recourse debt will increase basis for deducting losses. ___________________________________
-----> real address on hobokeni or hobokenx
Non-recourse debt isn't money at risk, so it shouldn't increase the amount of deductible losses. Seth
There are at least three tests that a partner has to pass in order to be able to deduct a loss.
1) Basis test - see Sections 704(d), 705, et al 2) At risk test - see Section 465 3) Passive Activity test - see Section 469So you start with basis. If no loss allowed there then you can stop. If enough basis then you go to see if enough is "at risk" to allow the loss. If so then you run the passive activity test to see if the loss is allowed. Must pass all three or the loss is suspended. Assuming (and if you didn't prepare the 1065 then what else can you do?) the nonrecourse debt was properly allocated to your client on his k-1 then it is part of his basis. Only qualified nonrecourse debt is included for the at risk test. Unfortunately the negative capital account may or may not have much to do with his basis. Was your client an original partner? Have any of the basis adjustments of 734(b) and
743(b) been made? Does the partnership follow the rules of 704(c), like it should? Did your partner contribute property with a different basis than FMV at any point? From what you have given us there is no way to tell what her basis is nor can we tell what her at risk basis is.-- Drew Edmundson, CPA Cary, NC
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