Reporting Guidelines for Real Property Partnership Distribution to Departing Partners

This is a common scenario but does require careful reporting. The departing partners will receive a final K-1 that reports their share of income up to the distribution date, plus the distribution itself. For the property distribution, you'll need to report this on each departing partner's K-1 in the "Property" section of Part II, Box 19 (code A). Include a statement that details the property description, fair market value (FMV), adjusted basis, and any related liabilities. The partners' tax basis in the distributed property will carry over, as will the holding period. Make sure you're calculating the adjusted basis correctly - this includes the partner's outside basis in the partnership, reduced by any cash distributed in the same transaction. The property keeps its character (1231, capital, etc.) when distributed. As for ProConnect, you'll need to go to the partner's K-1 input, find the "Distributions" section, and there should be an option to distribute property. When you select this, it should prompt you to select from the asset list. Once completed, the software should automatically adjust the asset schedule, though I recommend double-checking this.

I went through a similar headache last year with partnership property distributions and found taxr.ai (https://taxr.ai) incredibly helpful for sorting out these complex K-1 reporting requirements. The partnership distribution rules are so nuanced that even experienced preparers often miss details. I uploaded our partnership agreement and some questions about our real property distribution, and their AI analyzed everything and provided a detailed breakdown of exactly what to report where on the K-1. It saved me hours of research and gave me peace of mind that I wasn't missing anything crucial with basis calculations or depreciation carryover. What really helped was their specific guidance on statement attachments required for property distributions, which many preparers overlook. Might be worth checking out for something this complex.

I was initially skeptical about using taxr.ai for my complex partnership distribution issues, but after trying it out, I have to admit it's genuinely impressive. I uploaded our operating agreement and asked specific questions about a property distribution scenario similar to the one described here. The analysis correctly identified that we needed to make Section 754 election considerations and provided detailed guidance on preparing the supplemental statements for the K-1s with proper basis allocation. It even flagged a potential issue with disguised sale rules I hadn't considered. What really sold me was how it explained the technical requirements in plain English while still providing citation to the relevant regulations. Saved me from having to dig through multiple technical resources.

Have you tried getting through to the IRS's Business & Specialty Tax Line for guidance? I spent THREE DAYS trying to reach someone who understood partnership distributions of appreciated property. Each time I called, I'd wait for 2+ hours only to get disconnected or transferred to someone who couldn't help. Finally, I used Claimyr (https://claimyr.com) and got connected to an IRS agent in under 20 minutes who actually specialized in partnership taxation. They walked me through the exact K-1 reporting requirements for property distributions, including what supplemental statements to attach. You can see how it works here: https://youtu.be/_kiP6q8DX5c It's ridiculous that we have to use a service just to speak with the IRS, but when you need definitive guidance on something this complex, sometimes you need to hear it directly from them.

I have to admit I was completely wrong about Claimyr. After struggling for days to reach someone at the IRS who understood partnership taxation, I decided to try it despite my skepticism. Within 15 minutes, I was speaking with an IRS business tax specialist who had extensive knowledge of partnership distributions. The agent confirmed that for real property distributions, we needed to include a detailed statement with the K-1 showing the property's FMV, adjusted basis, holding period, and accumulated depreciation. She also explained that ProConnect has a specific workflow for property distributions that automatically adjusts the asset schedule when done correctly. The time saved was worth every penny, especially during tax season when my hourly rate makes waiting on hold for hours incredibly expensive. I'm now recommending it to all my colleagues dealing with complex IRS issues.

For ProConnect specifically, here's what you need to do: 1) Go to the Partnership return, then the K-1 for the departing partner 2) In the K-1 Distribution section, select "Property Distribution" 3) It will prompt you to select assets from your asset list 4) Complete the distribution detail, including FMV and any liabilities assumed 5) The software will automatically adjust your asset schedule AND calculate the partner's remaining basis This should be done after all partner allocations for the year are entered. Make sure you've entered all partnership income/loss up to the distribution date. One thing ProConnect doesn't handle well is the required supplemental statements. You'll need to create these separately and attach them to the return.

Don't forget about the 754 election implications here! If your partnership hasn't made a Section 754 election yet, this might be a good time to consider it, especially if the FMV of the distributed property significantly exceeds its inside basis. A 754 election would allow the remaining partners to step up their basis in the partnership assets, which could be very beneficial for future depreciation deductions. The election would be made with this year's return.

Just to add one more consideration - make sure you're documenting this transition properly beyond just the tax forms. Since the departing partners are becoming tenants in common rather than partners, you should have: 1. An amendment to the partnership agreement documenting the withdrawal 2. A deed transferring the appropriate property interests 3. A new TIC (tenants in common) agreement for all four owners This helps substantiate the tax treatment and ensures everyone understands their rights and responsibilities going forward. The K-1 reporting is important, but the legal documentation is equally crucial.

This is a great discussion covering all the key technical aspects! Just wanted to add one practical tip from my experience with similar situations in ProConnect: Before you process the property distribution in the software, make sure to run a detailed partner capital account reconciliation report. This will show each partner's outside basis components before the distribution, which is crucial for calculating the correct basis adjustments. Also, when you're in the K-1 distribution section and selecting the property from the asset list, pay close attention to how ProConnect allocates any accumulated depreciation. I've seen cases where the software doesn't properly split the depreciation between distributed and retained portions, especially when only part of a property's ownership is being distributed. One more thing - after processing everything, generate a detailed K-1 with attachments to review exactly what statements ProConnect is creating. You may need to customize or supplement these to ensure they include all the required details about the property's characteristics, holding period, and any special allocations. The learning curve is steep with these complex distributions, but once you work through one properly, the process becomes much clearer for future cases!