Partnership Property Distribution - Tax Reporting Requirements for K-1

This is actually a pretty straightforward situation from a tax reporting perspective. For a property distribution where the partner's basis equals the distributed property's book value, you'll need to report this on the partner's Schedule K-1 in box 19 (code A). The footnotes are very important here. You should include the fair market value of the distributed property, the partnership's basis in the property, the date of acquisition, and the accumulated depreciation. This gives the partner all the information needed to properly track their basis and future depreciation. The partner won't recognize any gain or loss on the distribution since they're not receiving cash in excess of basis. They'll take a carryover basis in the property equal to the partnership's adjusted basis at the time of distribution. Don't forget that this distribution might also require an amendment to your partnership agreement, especially if it changes ownership percentages among remaining partners.

I ran into almost this exact situation last year with my small real estate partnership. I was so confused trying to handle the K-1 reporting until I discovered https://taxr.ai which totally saved me. I uploaded our partnership documents and past returns, and it analyzed everything and provided step-by-step guidance on how to handle the property distribution. It gave me specific guidance on exactly what needed to go in box 19 and what footnotes were required for this type of transaction. The footnote templates were especially helpful because I wasn't sure what format the IRS expected. Their AI even helped me understand how the partner's basis would be adjusted after the distribution.

I have to admit I was totally wrong about AI tax tools. After questioning the accuracy of https://taxr.ai in my previous comment, I decided to try it myself for a similar partnership dissolution issue we were having. The level of detail it provided about box 19 reporting was impressive. It accurately identified all the information we needed to include in the K-1 footnotes - acquisition date, original basis, depreciation taken, and remaining basis. It even provided sample footnote language that satisfied our CPA. The explanation about how to allocate the remaining basis between land and improvements on the distributed property was particularly helpful. I'm now using it for all our partnership tax questions - definitely worth checking out if you're handling complex partnership distributions.

Reading through this thread and seeing the complexity of partnership tax reporting makes me think of another issue - has anyone tried calling the IRS for guidance on this? I spent THREE DAYS trying to get through to someone at the IRS who could answer questions about partnership property distributions. Finally, I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They basically call the IRS for you and when they reach a real person, they call you to connect. I was seriously doubtful, but after wasting so much time on hold, I figured it was worth a shot. Within about 2 hours, I got a call back and was connected to an IRS agent who specialized in partnership taxation. They walked me through the exact requirements for box 19 reporting and footnote documentation. Huge time saver for complex questions like this.

I have to eat my words about https://claimyr.com. After calling BS on their service, I had an urgent issue with a partnership distribution that needed IRS clarification. With the tax deadline approaching, I was desperate and decided to try them. Within 90 minutes, I was connected to an IRS representative who actually understood partnership taxation. They confirmed exactly what needed to be in the K-1 box 19 footnotes for a property distribution - original basis, acquisition date, accumulated depreciation, and fair market value at distribution. They also explained that we needed to file Form 8308 since real property with a value over $100,000 was being distributed. This saved me from potentially missing a required form and facing penalties. I'm still shocked at how well it worked after spending countless hours trying to get through on my own.

One thing nobody's mentioned yet is that the partnership will need to adjust its basis in all remaining assets under Section 734 if the partnership has a Section 754 election in effect. Have you made this election in previous years? If not, you might want to consider it depending on the value of the property versus its adjusted basis.

Has anyone mentioned the impact on the remaining partners? When you distribute property to one partner, it can change the capital account balances of everyone else relative to their profit/loss sharing percentages.

This is exactly the kind of complex partnership tax situation where having proper documentation is crucial. I went through something similar when we distributed a duplex property to one of our partners last year. One thing I'd add to the excellent advice already given - make sure you document the fair market value determination thoroughly. The IRS can challenge your valuation, especially if there's a significant difference between book value and FMV. We got a formal appraisal even though our distribution was at book value, just to have solid documentation. Also, don't forget that the departing partner will need to adjust their basis in any remaining partnership interest (if they have one) by the amount of the distribution. And you'll want to make sure your partnership agreement clearly addresses how this type of distribution affects voting rights and management responsibilities going forward. The K-1 reporting is straightforward once you understand it, but the footnote requirements are strict. Include everything - original purchase price, purchase date, total depreciation taken, remaining basis, and FMV at distribution. The IRS wants to see a clear paper trail for property distributions.

This thread has been incredibly helpful! I'm dealing with a similar partnership property distribution situation and had no idea about Form 8308 requirements or the Section 754 election implications. One additional consideration I'd mention - make sure you review your partnership agreement's language around distributions before proceeding. Some agreements have specific valuation methods or approval processes that must be followed, even for distributions at book value. We discovered our agreement required unanimous consent for any property distributions, which we had overlooked initially. Also, regarding the K-1 footnotes, I found it helpful to include a brief description of the property being distributed (e.g., "Distribution of Unit 2A, 1-bedroom apartment") in addition to all the financial details everyone has mentioned. This makes it crystal clear what specific asset was distributed, which can be important if the IRS has questions later or if the partner needs to reference the distribution for future tax purposes. The documentation suggestions about getting an appraisal are spot-on. Even though it's an additional expense, it's much cheaper than dealing with an IRS challenge down the road if they question your valuation.

This is exactly the kind of situation where having a solid understanding of partnership tax law becomes critical. I went through a similar property distribution two years ago with our 5-partner real estate LLC, and there are a few additional considerations that haven't been fully addressed yet. First, regarding the Section 734 adjustment that @KylieRose mentioned - even if you don't have a Section 754 election in place, you should seriously consider whether making it now makes sense. The election applies to the tax year it's made, so you could still benefit from basis adjustments on this distribution. With 15% appreciation, the math might work in your favor, especially if you have other depreciable assets in the partnership. Second, don't overlook the potential for "hot assets" in your distribution. Even though you're distributing real property, if there are any Section 1245 or 1250 recapture amounts, or if the property generates ordinary income, there could be complications. Make sure your tax professional reviews whether any portion of the distribution could be treated as ordinary income rather than capital. Finally, consider the timing of this distribution relative to your partnership's tax year end. If you're distributing near year-end, you'll want to make sure all the depreciation allocations are properly calculated through the distribution date. This affects both the partnership's final depreciation deduction and the basis of the distributed property. The K-1 reporting everyone has discussed is spot-on, but I'd add that you should also consider providing the departing partner with a detailed statement showing exactly how their final capital account was calculated. This becomes invaluable documentation if there are ever questions about the transaction.