On the sales schedule from Kinder M. I'm to use Form 4797, Part II, Line 10 for 40K of ordinary gain. But using my gross sales price minus the adjusted cost basis produces on the 4797 a gain over 50K. Same problem with the 11.5K capital gain that's to go on the 1040 Schedule D. There's no way to arrive at that number with the sales price and cost basis that I have. Anyone know what to do? So far the IRS has been of no help. And, as I said before, TurboTax requires me to check off boxes with technical terminology re partnerships, capitalization, conversions, etc. that completely elude me.
Thanks in advance to the magician who can help here. (More than one of you must be thinking why I don't have a CPA to solve my problems, but I've done my own taxes for more than half a century now, have had several mail audits which I won, and never knew what the hell I was getting into with the two MLP's that I owned. And I've had oil-royalty trusts and residential and commercial real estate. Now it's too close to tax time to find a knowledgeable accountant who can help me. Yikes!!)
Here's the Feb22 post (from the Partners Capital Account thread)=====================
You don't use the numbers in Box L when you sell; the partnership furnishes a sales schedule which details your adjustment to basis and your ordinary gain. The latter goes on Form 4797. Both are used in conjunction with your original purchase price and sale price to figure your capital gain which goes on Schedule D.
The formula is Capital gain = Sale Price minus (the algebraic sum of the original puchase price and the adjustment to basis) minus the ordinary gain.
Any prior or current year losses in Box 1 of the K1 that you could not take are then totaled and show up on Schedule E. If you had current year earnings in Box 1, that would figure into the total as well. Thats the sum total of it.
My usuual disclaimer about not being a tax expert applies.
Not confusing and thanks. I also have to reeducate myself every year to a point, but am finally getting how this all works. Your discussion of the capital account is good. Best way to not make mistakes in my opinion is to have a good understanding of what is driving changes in the capital account. Makes it clear what is occuring when you liquidate as you point out. If you are going to liquidate it is clear that picking a year in which your income levels are lowest is the time to do it.
Yes, your sum total of unused lossed over the years goes on Sched E when you sell, and yes TT should handle that if you used it faithfully and entered the data correctly over the years. However lets remember what has happened here. Your MLP basis is always increased by any earnings and decreased by distributions, generally speaking. Negative earnings in Box 1 therefore temporarily decrease your basis (since we're adding in a negative number) and when you claim these carryover losses on Sched E when you sell, all you're really doing is offsetting those negatives. You can see this if you look at the Partners Capital Account in Box L. If the tax basis block in Box L is checked, then this represents a fairly good estimate of your true basis before any loss carryover is applied. For example, I've owned EPD for a couple of years, during which time my capital account in Box L has dropped by about one third. Roughly half of that represents distributions and the other half came from negative earnings in Box 1. Now when I sell, thats why I get to add back the carryover losses to Sched E and in effect will be paying tax only on the distributions received (plus Cap gain on any price appreciation, of course).
Hope this is not too confusing, but I think the whole Partnership accounting mess is much understandable if you understand when and why these adjustments are made. Actually, I have to re-educate myself about this every tax season.
Again when you sell, the sum of the items you were taxed on over the years ( Sched E entries, Form 4797, Sched D as well as Interest, Dividends and Cap Gains on the K1, Boxes 5-9) should be roughly equal to the cash you received over the years which would be the sum of distributions received and profit on the sale (sale price - original purchase price).
I apologize for asking this question about expanding your second example. You posted the confirmation to my point raised in this example on 22 February in another thread on this board. I have to hand it to you fellows who are sharp on these tax issues. I know that many of you keep reposting your knowledge from time to time when you have addressed this before. I actually copied your comment from the post on Feb 22nd because I thought it was concise. Have kept three or four posts on the subject over the past few years in my file. I find them as good reference points to keep my on track. Last year I sold a large portion of Suburban Propane, I had owned. Incurred a large ordinary income amount from the sale. Keeping focused on the way taxes work on these, I realize that I should have liquidated all of the holdings so I could have applied accumulated passive losses to the sale. Will not forget this point in the future.
Thankyou for your examples. To expand on your second example, lets say you had held this mlp for eight years and the total of your unused passive losses (block 1) was $5500. On the sales schedule reported by the GP, you are going to have a very large block 7, ordinary gain because of all those tax deferred distributions you received over the years. Then the entire 5500 gets placed on schedule E where one reports passive losses to offset those ordinary gains, correct? Also, I think Abter has the best answer for most of us with Turbo Tax. He is stating that Turbo Tax tallies up all the unused passive losses from prior years and applies them when applicable in the current tax year. That sounds like the best solution for many here and the one I will attempt to apply in my case. I have enough of these that I need the easiest system possible. I have manualy kept all my K-1's sorted by year since I started in these and will have to use them when I finally reach positive distribution totals or sell out as I just started using turbo tax last year and was in these since 2004. Thanks very much and would appreciate your comment only if I have mispoke in expanding your second example. Thanks, Mosh..
You can only deduct a loss (negative number in Box 1) when you are offsetting against income from the same PTP. Example - in 2006, Box 1 was -300. You can't use that on your 2006 return. in 2007 Box 1 was +500. You would report +200 on Sched E.
2. When you sell your entire interst in the PTP, you take unused losses at that time. Eaxample - 2006 - Box 1 was -300. 2007 box 1 was -500 and you sold all of it. You would report -800 on sched E
Read my post to you yesterday. As I understand it, The MLP furnishes the Ordinary gain on your sales schedule. That's the number that goes on Form 4797. The difference between the ordinary gain and the net proceeds of the sale (sale price - purchase price) is your Capital gain and goes on Schedule D. When you enter that on Schedule D, you have to adjust your cost basis on Sched D to make the numbers match your calculated Capital Gain. Your bottom line total sale proceeds for all transactions on Sched D must match to the 1099B sent by your broker or the IRS will want to know why.
Again I'm not a tax expert, so check the above with someone who has knowledge in these matters
Thanks for the reply, PSHONORE.
I'm finally understanding much more than I did a few days ago, after more hours of reading and notetaking than I'd even want to know. Last year, when I actually had the luck to speak on the phone to a friendly IRS auditor who specialized in MPL's, I wasn't sure what she meant when she said that PTP's weren't nearly what most buyers bargained for when they bought. Now that I've sold, I know why leaving it all in the hands of one's accountant is a soothing path to take. And I don't mean solely because of K-1's and the ordeal of attendant forms to be filled out. I refer to distance from how much taxes are charged for "invisible" income when you sell. Beyond the dividends and interest you don't get but are charged taxes for, there's lots more. For my two PTP's an extra grand is being tacked on to what I actually made on their sale. And my accumulated distributions (a tad more than 25K), even after the Sched. E loss deductions, are being taxed at 38K, which means I'm to pay on 13K more than I ever received. Worse yet, for really long-term holders, the adjustments to basis (which you learn about when you sell all) are stunning. For the year and 5 months I held KMP my basis dropped from a purchase price of 146K to 103K. Extrapolate that and you're down to zero in just a few years, at which time you have to pay taxes on the distributions (plus the extras, which confound me)as if they were regular dividends. At that point you're probably locked in forever because a sale makes you liable for (1)all pre-zero distributions, (2)the huge amount of mysterious add-ons, (3) interest and dividends that elude your pocket, and a cap. gains/ordinary income bill for the entire proceeds of your sale because your basis is zero. (That can be some hit!) Now the O.T. part: Better, I think (certainly for me, anyway) is a Canadian oil trust like like the Goliath Penn West Energy, which pays monthly at 15% annually, is as simple as a dividend-paying stock (qualified dividends), is the largest oil trust in Canada with companies in oil sands, natural gas, and regular crude. It's selling on the cheap because in 2011 it'll lose a tax benefit and have to pay like a regular corp. At that point, ironically, it'll probably dodge the bullet, convert to an MLP, and provide a nifty capital gain as I grab my hat and flee. Had I but known.