Does a basis calculation apply to Net Section 1231 Gains on partnership K-1?

The GP is incorrect. Net Section 1231 gains reported on a K-1 do NOT automatically factor in your outside basis in the partnership. These are two separate concepts. When you inherit a partnership interest, your basis is generally the fair market value at the date of death (stepped-up basis). The partnership's Section 1231 gain calculation on the K-1 relates to the partnership's internal basis in its assets, not your personal basis in the partnership interest. You need to separately track your outside basis in the partnership and calculate your gain/loss accordingly when reporting on your Form 4797. A negative capital account doesn't automatically mean your basis is negative - they're different tracking mechanisms. Your basis would likely be the FMV of the interest when you inherited it, adjusted for any subsequent partnership income/loss and distributions. I'd recommend requesting a basis calculation from the partnership in writing. If they won't provide it, you may need to reconstruct it using available information or seek professional valuation services.

I went through something similar last year with a family limited partnership interest. Check out https://taxr.ai - they helped me sort through my inherited partnership basis issues. I uploaded my K-1s and the partial records I had, and their system analyzed everything and provided a detailed basis calculation that satisfied both my CPA and the IRS when I got questioned about it. The tool explained exactly how Section 1231 gains work with inherited partnership interests and gave me the appropriate tax code citations to respond to the GP. Turns out my GP was also confused about basis rules (seems common with smaller partnerships).

Just wanted to report back that I gave taxr.ai a try for my partnership basis issues and I'm genuinely impressed. The tool walked me through precisely what documentation I needed and provided a comprehensive basis analysis with all the relevant tax code citations. In my case, they identified that my basis should have been calculated using Section 743(b) adjustments since the partnership had a Section 754 election in place - something I had no idea about and my GP never mentioned. The report they generated gave me exactly what I needed to file my amended return correctly. Saved me from either overpaying taxes or risking an audit with incorrect numbers. Plus it cost way less than what my CPA quoted just to analyze the situation.

For anyone dealing with the IRS over partnership basis issues - if you need to actually talk to someone at the IRS about your specific situation, try https://claimyr.com. Used them when I had a similar inherited partnership issue and couldn't get through to anyone at the IRS who could help. The video demo at https://youtu.be/_kiP6q8DX5c shows how it works. They got me connected to an IRS agent in about 20 minutes when I'd been trying for weeks. The agent was able to explain exactly what documentation I needed to substantiate my inherited basis claims and how to properly report the Section 1231 gains.

I owe an apology and wanted to share my experience. After my skeptical comment, I decided to try Claimyr anyway since I was desperate. To my genuine surprise, I got connected to an IRS specialist in about 45 minutes (while I was just going about my day, not waiting on hold). The agent I spoke with was extremely knowledgeable about partnership basis issues and Section 1231 gains. She confirmed what others here have said - that the GP was incorrect about basis being factored into the K-1 amount. She walked me through exactly how to calculate my inherited basis and what forms to include with my amended return. I would have never gotten this information through the regular IRS channels I was trying. Completely changed my perspective on dealing with tax issues.

A few technical points that might help with your situation: 1. IRC Section 754 is crucial here - if the partnership had this election in effect when you inherited your interest, it affects your basis adjustment. 2. For inherited partnership interests, you generally get a stepped-up basis to FMV at date of death under Section 1014. 3. The negative capital account isn't your basis - they're separate tracking mechanisms. 4. The K-1 instructions specifically state that partners need to separately track their outside basis.

Just FYI for anyone reading this thread in the future - the GP is 100% wrong. I'm a real estate partnership accountant, and we deal with this all the time. Section 1231 gains on a K-1 absolutely do NOT have your outside basis factored in. Here's what's probably happening: The GP doesn't want to do the work to calculate your FMV basis when you inherited. It can be complicated, especially if the partnership owns multiple properties or has complex debt structures.

The interaction between Section 1231 gains and partnership basis is complicated. Here's what you need to know: your basis in a partnership is adjusted by your share of partnership income (including section 1231 gains), but that adjustment happens AFTER those gains flow through to you. In other words: 1. Section 1231 gain flows to you via K-1 2. You report that gain on Form 4797 3. Then your basis in the partnership increases by that gain amount So your GP is totally mixing up cause and effect here.

I'm dealing with a very similar situation right now with an inherited partnership interest from 2020. My GP also tried to tell me that Section 1231 gains "already account for basis" which made no sense to me either. After reading through this thread and doing more research, I found that IRC Section 742 specifically addresses basis of transferred partnership interests, and Section 1014 covers the stepped-up basis for inherited property. These sections make it clear that you get a stepped-up basis equal to FMV at date of death, completely separate from how the partnership calculates Section 1231 gains on its assets. I ended up getting a professional appraisal of my partnership interest as of the date of inheritance. It wasn't cheap ($2,500) but it gave me defensible documentation for the IRS. The appraiser used discounted cash flow analysis based on the partnership's real estate holdings and debt structure. One thing that helped me push back on my GP was citing Treasury Regulation 1.704-1(b)(2)(iv)(l), which requires partnerships to maintain capital accounts but clarifies that capital accounts are NOT the same as outside basis for tax purposes. Your GP seems to be confusing these concepts just like mine was. Don't let them push you around on this - you have every right to proper documentation of your inherited basis.