The installment sale rules can also apply if there are multiple payments and at least one payment will be received more than one year from the sale date.
If the transaction is structured as an installment sale, the outside basis of the partnership interest is prorated and applied against each payment.
Under the purchase scenario, the terminating partner is treated as having sold his or her partnership interest, usually receiving capital gain treatment.
If the proceeds of the sale include property other than cash, the difference between the FMV and the tax basis of this property is realized as gain at the time of the sale.
If they do, the transaction is treated as a sale as described above. 736(a) payments are for a continuing share of partnership income or for guaranteed payments. 736(a) payments also include payments for unrealized receivables and for goodwill when goodwill payments are not called for in the partnership agreement.
The remaining partners should also be careful in making capital calls so that the substance of the capital calls cannot be construed as being used as a payment to liquidate the partner's interest. This treatment for unrealized receivables and goodwill applies only to general partners in partnerships where capital is not a material income-producing factor.
As with a purchase, the partnership may make the Sec. If the partnership makes the election, payments to the liquidating partner exceeding his or her tax basis capital account will generate a step-up in partnership assets. 754 election, the excess payments create a phantom asset and are nondeductible by the partnership.
The liquidating partner is not considered terminated from the partnership until the last liquidating distribution is made.
These deferred payments are not taxed to the liquidating partner until the payments received exceed his or her outside basis.
The liquidating partner will no longer receive profit and loss allocations of the partnership after the date of termination; however, the partner will still receive a K-1 each year until the final payment is made.
It should also be noted that a liquidation is not considered a sale or exchange that can cause a termination of a partnership interest under Sec. Under both the purchase and liquidation methods discussed above, a partner may have to recognize ordinary income rather than capital gain income.
This item explores the two main methods used when terminating a partnership interest: purchase and liquidation.
A terminating partner may sell his or her interest to one or more of the remaining partners, or the partnership may liquidate his or her interest.