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Strange K-1 Results

Hi,

My sisters and I own some rentals. The accountants sent a K-1 with the following:

1) 0. 2) 1,729 14a) 0 17A) 1,136 18C) 50 19A) 2,000

The IRS instructions for 18C say:

"Nondeductible expenses. The nondeductible expenses paid or incurred by the partnership are not deductible on your tax return. Decrease the adjusted basis of your interest in the partnership by this amount."

What the heck does that last sentence mean? What do I do about it?

Our tax jumped $892 due to adding the above K-1 including a $468 jump in AMT. Can this be correct?

FWIW, our taxable income was $231,442 including Roth conversions.

Thanks, Gary

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Snowy
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It means in your own records, decrease your investment by this amount. That is, if you initially put $10,000 into the investment and it made $200 in income on line 2 and had deductible expenses of $50, your cost basis if now $10,150. If you were to sell your partnership share to someone for $10,000 you would have a capital loss of $150. BTW, you also decrease your investment by the amount of line 19.

It could be.

Line 2 is rental income of $1,729, and 33% of this is $570. So I expect your normal tax has increased by this amount. The increase in your AGI because of the rental income might also phase out some your itemized deductions a little, medical deduction a little, etc.

Line 17a is additional income for AMT purposes only. It represents the fact that under AMT you cannot take accelerated depreciation. So I suppose the accountants used accelerated depreciation (where you depreciate the asset a lot in the first few years) as opposed to straight-line depreciation. SL would increase line 2 rental income, but eliminate the possibility of AMT income. I think line 17a is the difference between accelerated and SL depreciation amounts.

So expect 28% (the typical AMT tax rate) of $1136 to be added to your tax bill, or $318.

Combined with the 33% on the line 2 income, that's $888.

In addition the added AMT AGI of 1729+1136(65 lowers your AMTI exemption on line 29 of form 6251. This basically means that more your income and property tax deductions are eliminated. The exemption should be lower than before by

0.25 or $716.25, and thus $716.25 of your income tax is subject to AMT, or $200.

So using my numbers your tax should increase by $1,088 whereas you say it increase by $892. So obviously I've made some mistake in my explanation, but it's close -- sort of. And be happy it really is not increased by $1,088.

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