How to handle final basis amount on 1065 K-1 - potential capital loss?

Thanks for the info! But how do we know if the partnership is actually "completely liquidated" vs just inactive? My K-1 has a final box checked but doesn't specifically say "liquidated" anywhere. Does that matter for tax purposes?

If the K-1 has the "final" box checked, that's generally sufficient indication that the partnership has terminated for tax purposes. The partnership wouldn't check that box unless they were dissolving the entity completely. The IRS doesn't necessarily require specific "liquidation" language. What matters is that the partnership has ended its existence and you will no longer receive any distributions or allocations from it. Since you mentioned this is definitely the final K-1 you'll ever receive from them, that supports treating this as a complete disposition of your interest.

Did it actually help you figure out the code to use on Form 8949? My accountant is charging me extra for "complex partnership dissolution" and I'm wondering if this could help me do it myself next time.

I'm always skeptical of these AI tax tools. How does it handle state-specific rules? I'm in California and they have all sorts of extra requirements for reporting partnership dissolutions.

Yes, it actually provided the correct codes for Form 8949 - in my case it was code F since my partnership interest was held more than a year. It also explained where to attach explanatory statements. It definitely handles state-specific rules. I'm actually in New York which also has special requirements, and it correctly identified the additional state forms I needed. The system asks about your state and then tailors the information accordingly. It specifically mentioned California has extra reporting requirements and provided guidance for those too.

How exactly does this work? Do they somehow jump you ahead in the IRS phone queue? That seems impossible given how the IRS phone system works.

Yeah right. I've been trying to reach the IRS for THREE MONTHS about a partnership issue. No way something like this actually works. Sounds like a scam to me.

It's not about jumping ahead in the queue - they use an automated system that continually calls the IRS for you and only connects when a real human answers. So instead of you personally waiting on hold for hours, their system does the waiting and calls you when an agent is on the line. No, definitely not a scam. I was pretty desperate after spending days trying to get through. The way it works is their system keeps dialing until it gets through, then connects you immediately. Think of it as having someone else wait on hold for you. I was skeptical too, but when I actually got connected to an IRS agent who walked me through my K-1 questions in detail, I was convinced. They don't promise any special treatment from the IRS - just a way to avoid the hold time.

Wait, now I'm confused. How would I know if I have negative basis? My K-1 just shows a positive amount in the ending basis box. Is there something else I need to check from prior years?

If your final K-1 shows a positive ending basis amount, then you don't have a negative basis issue. You would only have negative basis if you had taken distributions or losses in excess of your basis in previous years. Since your K-1 shows a positive ending basis, you're in the situation we've been discussing - you can claim that amount as a capital loss on your return. It's a straightforward case of reporting it on Form 8949 with the appropriate code for a fully disposed partnership interest. The loss will offset other capital gains or up to $3,000 of ordinary income per year.

I haven't gotten a notice, but my accountant always makes me get a copy of the partnership's final Form 1065 to keep with my records specifically to avoid this situation. Might be worth contacting the former partnership to make sure they actually filed a final return.

This is really helpful advice! I'm wondering about the holding period calculation - do I count from when I first invested in the partnership, or from some other date? My original investment was about 3 years ago, so I'm assuming that would make it long-term, but I want to make sure I'm doing this right since it's my first time dealing with a partnership dissolution.

Yes, you count from when you first acquired your partnership interest, so if you invested 3 years ago, that would definitely qualify as long-term capital loss treatment. This is beneficial because long-term capital losses can offset long-term capital gains dollar-for-dollar, and any excess can offset up to $3,000 of ordinary income per year. One thing to add to what @d95f093627ea mentioned about record keeping - make sure you also have documentation of any additional contributions you made to the partnership over the years, as these would have increased your basis. The IRS likes to see a clear paper trail showing how you arrived at your final basis amount, especially in partnership dissolutions where the numbers can get complicated.

This is excellent advice about double-checking all the basis adjustments! I'm curious though - how do you determine if any portion might qualify as ordinary loss treatment? My dissolved partnership was involved in a small manufacturing business, so it wasn't just a passive investment. Would Section 1244 apply even if it was structured as a partnership rather than a corporation? I always thought Section 1244 was only for corporate stock losses.

You're absolutely right to question the Section 1244 application - that provision only applies to qualifying small business corporation stock, not partnership interests. I should have been more precise in my earlier comment. For partnerships, the ordinary loss treatment would more likely come under different provisions. If this was an active business partnership where you materially participated, you might be able to argue for ordinary loss treatment under the "abandonment" theory rather than treating it as a capital asset sale. This requires showing that the partnership interest became completely worthless and was abandoned. However, this is a complex area and the IRS scrutinizes these claims heavily. The safer and more straightforward approach is usually to treat it as a capital loss from disposition of the partnership interest, which is what most tax professionals recommend unless there are compelling facts supporting ordinary loss treatment. I'd suggest consulting with a tax professional if the loss amount is significant, since they can evaluate whether your specific facts might support ordinary loss treatment based on your level of participation and the nature of the business.

Great point about the timing! I'm actually in this exact situation right now and wasn't sure which tax year to report the loss in. My partnership dissolved in December 2024 but I just received the final K-1 this month. So I should report the capital loss on my 2024 return, not 2025, correct? Also, regarding the written confirmation of dissolution - is there a specific format this should take, or would something like an email from the managing partner suffice? I want to make sure I have proper documentation but the partnership was pretty informal and I'm not sure they'll provide anything too official-looking. Thanks for mentioning the Section 754 elections too - I honestly have no idea if our partnership had any of those in place. This is all pretty overwhelming for someone who just thought they were making a simple investment a few years ago!