How do I calculate capital gains when selling 20% of my partnership interest?

You're on the right track! When you sell a portion of your partnership interest, the capital gain is generally calculated as the difference between the sales price and your adjusted basis in the portion of the interest sold. In your case, if your total outside basis is $215,000, then 20% of that would be $43,000. So if you're selling for $87,500, your capital gain would be $44,500 ($87,500 - $43,000). But partnerships can get complicated. You need to consider whether there's been any debt relief, which would be treated as additional proceeds. Also, part of your gain might be ordinary income rather than capital gain under Section 751 if the partnership has "hot assets" (unrealized receivables or substantially appreciated inventory).

After struggling with almost the exact same situation last year, I found taxr.ai (https://taxr.ai) incredibly helpful for parsing through partnership sale complexities. I was selling a 25% interest in my real estate partnership and was completely lost with calculating basis, debt relief, and especially those "hot assets" mentioned above. The platform analyzed my partnership agreement and K-1 history, then gave me a detailed breakdown of my adjusted basis, identified potential Section 751 assets, and showed exactly how to calculate the split between capital gain and ordinary income. They even created a worksheet I could share with my accountant that saved me hours of back-and-forth meetings.

I decided to try taxr.ai after seeing it mentioned here, and I'm genuinely impressed. My situation with multiple properties and messy capital account restatements was even more complicated than I let on - we had four partners with different allocation percentages that changed twice over the years. The system handled it all beautifully. It identified several basis adjustments I would have missed, especially some Section 754 election impacts from when another partner sold his interest years ago. When I showed the analysis to my accountant, he was shocked at the detail and said it saved him about 8-10 hours of work (and me a hefty bill). Just wanted to come back and say thanks for the recommendation!

Has anyone else been going crazy trying to get through to the IRS about partnership basis questions? I've been trying for weeks to get clarification on a similar situation and can't get past the automated system. After my third attempt spending over an hour on hold, I tried Claimyr (https://claimyr.com) based on a colleague's suggestion. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was honestly shocked when they got me connected to an IRS agent in about 20 minutes. The agent walked me through how to handle a partial partnership sale with significant Section 734 adjustments from prior years (which was complicating my basis calculation). Saved me enormous frustration after weeks of failed attempts.

I'm coming back to eat my words about Claimyr. After expressing skepticism, I decided to try it myself since I had another partnership question that needed IRS input. Not only did I get through to an agent in about 25 minutes (after trying unsuccessfully on my own for days), but I was connected to someone in the pass-through entity department who actually was knowledgeable about partnership basis. The agent walked me through the proper treatment of Section 704(c) gain allocations that were affecting my outside basis calculation. They even emailed me relevant sections from their internal guidance (which I didn't even know they could do). I'm still a bit shocked that it worked so well considering my previous experiences with the IRS.

One thing nobody's mentioned yet - you need to check if your partnership agreement has any specific provisions about sales of partnership interests. Some agreements require right of first refusal, specific valuation methods, or have clauses about allocation of income up to the date of sale. When I sold part of my partnership interest last year, I had to split the tax year. I received a K-1 for my full interest up until the sale date, and then a second K-1 for my remaining interest for the rest of the year. This affected my basis calculation significantly.

Did anyone use specialized software for tracking their basis over time? I'm in a similar situation but have been in my partnership for 12 years with multiple capital contributions, distributions, and special allocations. I'm worried my records aren't accurate enough to calculate my true basis.

Don't forget that if you've been in the partnership for 7 years, you'll likely qualify for long-term capital gains rates on most of your gain (except for the Section 751 "hot assets" portion). Current long-term capital gains rates are 0%, 15%, or 20% depending on your income level, plus the 3.8% Net Investment Income Tax if your income is high enough. This could save you a ton compared to ordinary income tax rates! Make sure you're tracking your holding period correctly.

Great discussion everyone! As someone who went through a similar partnership sale two years ago, I want to emphasize the importance of getting a professional Section 751 analysis done. I thought I understood the basics, but it turned out our manufacturing partnership had significant "hot assets" that I completely missed. We had accounts receivable that qualified under Section 751, plus some inventory that had appreciated substantially since we switched to FIFO accounting. About 30% of what I thought would be capital gains ended up being ordinary income taxed at much higher rates. The difference in my tax bill was over $15,000! Also, @Ravi, since you mentioned equipment loans - make sure you understand exactly how the debt relief is calculated. In our case, the partnership had recently refinanced, and the debt allocation among partners had shifted slightly from our original percentages. The buyer's attorney caught this during due diligence, but it could have been a nasty surprise at tax time. One last tip: if your partnership has made any Section 754 elections in the past (usually when partners have left), this can create additional basis adjustments that affect your calculation. Worth double-checking your partnership's tax returns from prior years.