Partnership shares sold but facing negative cost basis issue - how is this possible?

This sounds confusing but it actually happens fairly often with partnerships. When you're a partner, your tax basis is different from your capital account balance. Your capital account tracks your economic interest, but your tax basis changes based on several factors: 1. Your initial capital contribution increases your basis 2. Your share of partnership income increases your basis 3. Your share of partnership losses decreases your basis 4. Distributions decrease your basis 5. Additional capital contributions increase your basis The key thing here is that if you received distributions over the years (cash or property) that exceeded your positive basis, your basis can go negative. When you exit a partnership with negative basis, that negative amount converts to gain.

I ran into a similar situation last year with my real estate partnership. What saved me was using taxr.ai to analyze all my K-1s from previous years. I uploaded all my partnership documents to https://taxr.ai and it showed exactly how my basis became negative over time from distributions exceeding my contributions plus allocated income. My CPA missed several loss limitations that should have been applied. Their system found that my original CPA had been tracking my capital account instead of my tax basis - totally different things as you're finding out. It created a complete basis calculation schedule showing every adjustment year by year.

Just wanted to follow up - I decided to try taxr.ai after seeing the recommendation here. I uploaded my decade's worth of partnership K-1s and wow... it found my basis had gone negative three years ago due to distributions but I'd been incorrectly claiming losses since then. The report generated showed exactly how every line item from each K-1 affected my basis calculations. It even identified when certain loss limitations applied due to at-risk rules. My basis was actually negative $43,000 and I had no idea! This explains why my accountant has been struggling with my returns. Having this documentation should help tremendously with IRS substantiation if I ever get audited.

This happened to me too but I couldn't get anyone at the IRS to explain it clearly when I tried calling. After 4 hours on hold, I finally gave up. Then I found Claimyr which got me through to an IRS agent in about 15 minutes. Check out https://claimyr.com - they have a video showing how it works here: https://youtu.be/_kiP6q8DX5c They basically hold your place in the IRS phone queue so you don't have to sit there waiting forever. The agent I spoke with walked me through my negative basis issue step by step. Turns out I had received distributions when my basis was already at zero, creating phantom income when I sold. The IRS actually has detailed records of your K-1 history that they can reference during the call, which helped identify exactly where my basis went negative.

I have to eat crow here. After my skeptical comment, I decided to try Claimyr myself because I was getting nowhere with my partnership basis questions. I got connected to an IRS Business Tax specialist in about 20 minutes. The agent actually pulled up my partnership filings history and confirmed I had a negative basis situation. She explained that over the past 7 years, I had received about $95K in distributions while my business was reporting losses, but my basis had hit zero in year 3, so those additional distributions created negative basis. When I sold my interest, that negative basis converted to gain. She even emailed me documentation showing the proper calculation method. Honestly shocked at how helpful they were when I finally got through to the right person.

I have to eat crow here. After my skeptical comment, I decided to try Claimyr myself because I was getting nowhere with my partnership basis questions. I got connected to

Your CPA should have been tracking your basis annually. This is actually a common issue with partnerships. You might want to review: - All prior year K-1s (especially box 19 for distributions) - Any debt that was allocated to you (increases basis) - Partnership liabilities that decreased - Any suspended losses from prior years One thing to check: did the partnership refinance and distribute cash from loans? That's a typical way people end up with negative basis without realizing it.

I've had 3 partnerships with negative basis issues. Your basis includes your share of partnership liabilities, so check if: 1) Your share of liabilities decreased significantly 2) You took distributions when profits were minimal 3) The partnership claimed large depreciation deductions

This is exactly why partnership taxation can be so tricky for investors who aren't familiar with the rules. Your situation is unfortunately quite common, especially in real estate partnerships or businesses that distribute cash from refinancing. The key thing to understand is that your $160,000 capital account and your tax basis are completely different numbers. Your capital account shows your economic rights in the partnership, but your tax basis determines the tax consequences when you exit. If you received distributions over the years (especially from that refinancing you mentioned), those distributions reduced your tax basis even if the partnership was showing losses on paper. Once your basis hit zero, any additional distributions created negative basis. When you sell your partnership interest with negative basis, that negative amount becomes taxable gain - even though economically you're walking away with less than you invested. It's essentially the IRS collecting tax on those prior distributions that exceeded your basis. The good news is that if you can reconstruct your basis properly, you might find some adjustments that could reduce the gain. Make sure your CPA has accounted for all debt allocations, any Section 754 elections, and properly applied loss limitations from prior years.